The Securities and Exchange Commission settled charges today against the Cheesecake Factory Inc. for failing to report significant operating losses and the fact that the chain had just 16 weeks of cash left by March 23 because of the impact Covid-19 had on its business operations and financial condition.

The cease and desist order the SEC issued against the Calabasas Hills, Calif.-based chain, which trades as CAKE on the Nasdaq, is the SEC's first enforcement action against a public company for misleading investors about the financial effects the pandemic has had on its financial condition. The Cheesecake Factory also agreed to pay a $125,000 civil penalty as part of the settlement.

While the restaurant chain stated in disclosures that its restaurants were "operating sustainably" during the Covid-19 pandemic, that information was “materially false and misleading because the company's internal documents at the time showed that the company was losing approximately $6 million in cash per week and that it projected that it had only 16 weeks of cash remaining” even after a $90 million revolving credit facility borrowing, the SEC said in a statement.

"During the pandemic, many public companies have discharged their disclosure obligations in a commendable manner, working proactively to keep investors informed of the current and anticipated material impacts of Covid-19 on their operations and financial condition," SEC Chairman Jay Clayton said. "As our local and national response to the pandemic evolves, it is important that issuers continue their proactive, principles-based approach to disclosure, tailoring these disclosures to the firm and industry-specific effects of the pandemic on their business and operations. It is also important that issuers who make materially false or misleading statements regarding the pandemic’s impact on their business and operations be held accountable,” Clayton added.

While the company omitted its financial condition in SEC filings, it shared the information with potential private equity investors and lenders in connection with an effort to seek $100 million in additional funding, the SEC said.

The SEC also said that although the Cheesecake Factory’s March 23 filing described actions the company had undertaken to preserve financial flexibility during the pandemic, the company did not say that it told its landlords it could not pay rent in April because Covid-19 had harmed business.

"When public companies describe for investors the impact of Covid-19 on their business, they must speak accurately," said Stephanie Avakian, director of the SEC’s Division of Enforcement, in a statement. "The Enforcement Division, including the Coronavirus Steering Committee, will continue to scrutinize Covid-related disclosures to ensure that investors receive accurate, timely information, while also giving appropriate credit for prompt and substantial cooperation in investigations."

While this is the SEC’s first enforcement case against a public company for misleading disclosures, it will probably not be the agency’s last.

According to Clayton’s April public statement detailing Covid-related financial disclosure mandates: “We urge our public companies, in their earnings releases and analyst calls, as well as in subsequent communications to the marketplace, to provide as much information as is practicable regarding their current operating status and their future operating plans under various Covid-19-related mitigation conditions. Detailed discussions of current liquidity positions and expected financial resource needs would be particularly helpful to our investors and markets.”

Clayton’s statement is available here.