SEC Steps Up Enforcement Actions for Insufficient Disclosure

The Cheesecake Factory is famous for pushing the limits of culinary convention – from its massive menus to its trademark desserts to somehow finding space for even more food on diners’ plates. The California-based chain recently broke a more ignominious barrier by becoming the first publicly traded company charged with issuing misleading disclosure related to Covid-19. It also marked the first in a series of SEC enforcement actions this month aimed at insufficient disclosure.

The SEC took issue with disclosure from The Cheesecake Factory in March and April that described the impact of the coronavirus pandemic on its operations. Specifically, the company made multiple public statements that it was operating “sustainably” in the early days of the outbreak as it shifted to take-out and delivery dining. While it was saying that out of one side of its mouth, however, Cheesecake Factory was simultaneously making moves to shore up its cash on hand, including halting rent payments, tapping into its credit, seeking out private-equity capital and furloughing tens of thousands of employees.

Consequently, the SEC tagged Cheesecake Factory for issuing “materially false and misleading” disclosure. The restauranteur agreed to pay a fine of $125,000, according to an order released on Dec. 4.

The alleged reporting indiscretions at Cheesecake Factory look relatively slight as compared to the situation at General Electric Co., which agreed earlier this month to a $200 million penalty for inadequate disclosure. The SEC accused the conglomerate of misleading investors for years about the status of its power and insurance businesses. Among the allegations, the Commission said GE failed to disclose that a significant share of profits from its power business in 2016 and 2017 materialized because it reduced its estimates of future costs. Additionally, the SEC charged GE with neglecting to reveal that increases in industrial cash collections derived from internal receivable sales came at the expense of future collections.

John T. Dugan, an associate director of enforcement at the SEC, indicated that massive companies on GE’s scale “with complexities such as interdivisional transactions and reliance on estimates of future costs and revenues” had to take an especially thorough approach to disclosure.

While Cheesecake Factory and GE didn’t dispute the SEC’s charges of insufficient disclosure, the situation is less clear for another of the agency’s targets. On Dec. 11, the Commission accused Sequential Brands Group Inc. of failing to write down its goodwill in a timely manner. According to the SEC, Sequential ignored its own calculations calling for an impairment to goodwill that the company first discovered near the end of 2016. The New York-based company ultimately took a charge of $304 million in early 2018. The SEC is asking for civil monetary penalties and injunctive relief against Sequential, which is actually undergoing “a broad exploration of strategic alternatives” at the moment, such as a sale to private bidders.

So, here’s an interesting question: Why now? The filing of three similar enforcement actions so close together in the final month of the year could be coincidence, but it feels curious. Perhaps SEC enforcement is prioritizing insufficient disclosure—or perhaps SEC staff wanted to get these cases filed before the current quarter draws to a close. Interestingly, a search of Intelligize reveals that a majority of enforcement actions initiated over the last two years have been filed in the month of September, corresponding with the end of the federal government’s fiscal year.

If the pattern holds, the three actions highlighted here could be one of the biggest enforcement statements the agency makes for another nine months.


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