by T. GormanPosted on Posted in SECActions

The pandemic continues to have a huge impact on restaurants, among others. The initial lock downs earlier this year shuttered many dining and other establishments. Some establishments closed. Many restaurants morphed into takeout establishments and later added outdoor dining. Recent restrictions in some areas such as California have even closed outdoor dining, but not takeout. There is little doubt that many restaurants will unfortunately not survive.

One nationwide chain tried to survive by taking a series of actions which more than suggested it was suffering from financial difficulties. At the same time the company did not disclose some information that would have added to the bleak picture painted by its disclosures. The omissions were later penned into an Order Instituting Proceedings charging false statements. In the Matter of The Cheesecake Factory Incorporated, Adm. Proc. File No. 3-20158 (December 4, 2020).

Cheesecake Factory is a well-known national restaurant chain based in Calabasas Hills, California. The firm’s shares are traded on Nasdaq Global Select Market under the ticker symbol CAKE.

As the pandemic began to unfold Cheesecake Factory and other restaurant chains effectively had their businesses closed by the initial restrictions imposed which were designed to try and contain the virus. By mid-March 2020 Cheesecake Factory and others faced unprecedented challenges. Over the next month Cheesecake Factory took a series of steps to try and survive. Those included:

· Efforts to conserve cash such as a March 18, 2020 letter sent to landlords saying that it would not be paying April rent due to a severe decrease in restaurant traffic from the virus; the firm hoped to resume payments as soon as “reasonably possible,” according to the letter;

· On March 23, 2020 the firm drew down the last $90 million on a revolving line of credit; at the beginning of the second quarter the company had about $65 million in cash and cash equivalents;

· By March 23 the company was actively seeking additional liquidity through either debt or equity investments with the goal of raising at least $100 million;

· Possible private equity investors were told the company would survive at the current negative cashflow rate for about 16 more weeks – documents reflected a negative cash flow rate of $6 million per week;

· In a March 23 Form 8-K filed with the Commission Cheesecake Factory stated that it was withdrawing prior financial guidance due to the virus; the attached press release stated the company was moving to an “off-premise model” or delivery to permit the firm to operate “sustainably;”

· Two days later each restaurant landlord received a letter stating the April rent would not be paid; the letter was reported in the media;

· A March 27, 2020 Form 8-K stated the company was not planning to pay rent in April and that it was in discussions with landlords regarding its ongoing rent obligations and potential resolutions; in addition, executive officers, board members and certain employees would take a pay cut while 41,000 workers were furloughed but allowed to retain certain benefits;

· An April 3, 2020 Form 8-K filing attached an April 2 press release disclosing preliminary Q1 2020 sales noting that the restaurants were operating sustainably using the off-premises model; and

· On April 20, 2020 Cheesecake Factory announced a $200 million subscription agreement for the sale of convertible preferred stock to a private equity investor.

The Order alleges that the March 23 and April 3 Forms 8-K were false and misleading. The Forms did not disclose that the firm was “excluding expenses attributable to corporate operations” from its discussions of “sustainability;” there was no statement that the negative cash flow was $6 million per week or only 16 weeks of cash remained as was stated to certain potential lenders. The Order alleges violations of Exchange Act Section 13(a).

The firm, whose cooperation was considered by the Commission, resolved the matter, consenting to the entry of a cease-and-desist order based on the sections cited in the Order. The firm also agreed to pay a penalty of $125,000 that was transferred to the U.S. Treasury.

Comment

Clearly an issuer cannot make selective disclosure. Cheesecake Factory selectively disclosed the available facts yet painted a bleak picture of the firm’s finances but not bleak enough.

The Commission acknowledged that Cheesecake Factory cooperated with its investigation.

But just what did Cheesecake Factory get for that cooperation? Reduced charges? A reduced penalty? Stated differently, what is the value of cooperation? If the Commission wants to encourage corporate cooperation – and a recent report suggests it is declining (here) – it would be useful if the agency could add specificity to what is considered.

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by T. GormanPosted on Posted in SECActions

A Commission subcommittee recommended that the agency adopt standards requiring disclosure of material environmental, social and governance risks at the beginning of last week. This follows, in part, a report on the impact of climate change on the U.S. economy published by the CFTC in September 2020. That report concluded that climate change could pose systemic risks for American financial system. It also recommended the disclosure of material climate related financial risks (here).

Enforcement filed actions last week centered on offering frauds, market manipulation and the misappropriate of assets by an unregistered investment adviser.

Be safe and healthy this week

SEC

Rule: The agency adopted a new rule under the Investment Company Act on the valuation of asserts. That rule focuses on assessing and managing material risks associated with valuation determinations. It was adopted on December 3, 2020 (here). Commissioner Hester M. Peirce filed a separate statement on the rule (here).

Risk Alert: OCIE – the Commission’s Office of Compliance Inspections and Examinations – published a Risk Alert on November 19, 2020 discussing key issues for registered investment advisers regarding their compliance programs. OCIE: Observations: Investment Adviser Compliance Programs (here). The Alert contains a good discussion of key issues connected with crafting and maintaining an effective compliance program. The Office identified several areas of concern which include: Inadequate resources; lack of authority by the CCO; deficiencies in the annual review; a failure to maintain or establish written policies; portfolio management; not properly supervising advertising; and a failure to employ appropriate safeguards regarding customer privacy (here).

Whistleblowers: Awards of over $6 million were made to joint whistleblowers who rendered substantial assistance to the Commission and another agency by submitting documents, participating in interviews and identifying key individuals involved in the misconduct, according to a December 1, 2020 press release.

SEC Enforcement – Filed and Settled Actions

The Commission filed 4 civil injunctive actions and no administrative proceedings last week, excluding 12j, tag-along proceedings and other similar matters.

False statements: SEC v. SCANA Corp., Civil Action No. 3:20-cv-00882 (D.S.C.) is a previously filed action centered on misstatements by two former senior executives about a project to expand a nuclear power plant was ultimately abandoned. Potential investors had been told that the project would qualify for certain tax credits when in fact it was far behind. The false statements did boost the share price. The complaint alleged violations of Securities Act Section 17(a) and Exchange Act Sections 13(a) and 10(b) by the firm, its subsidiary and its former CEO Kevin Marsh and former EVP Stephen Byrne. To resolve the matter the firm and its subsidiary consented to the entry of permanent injunctions. In addition, those entities agreed to pay $112.5 in disgorgement plus prejudgment interest that will be deemed satisfied by the firms’ settlement payments in related rate payer and shareholder litigation. The parent firm will also pay a $25 million penalty. See Lit. Rel. No. 24976 (Dec. 3, 2020).

Manipulation: SEC v. O’Rourke, Civil Action No. 19-cv-4137 (E.D.N.Y.) is a previously filed action which names as defendants Garrett M. O’Rourke and Michael J. Black. The complaint alleges that Defendants engaged in a pump-and-dump market manipulation. Specifically, the complaint claims that Defendants solicited retail investors and the elderly to purchase shares in select microcap stocks that they had secretly been hired to dump for the owners. Mr. O’Rourke agreed to settle with the Commission, consenting to the entry of a permanent injunction based on Securities Act Sections 5 and 17(a) and Exchange Act Section 10(b). In addition, a penny stock bar was imposed and Mr. O’Rourke directed to pay $5,763,719 in disgorgement and prejudgment interest. Defendants were charged in a parallel criminal action. See Lit. Rel. No. 24971 (Nov. 30, 2020).

Offering fraud: SEC v. Brothers Investment Group International, Inc., Civil Action No. 1:20-cv-24842 (S.D. Fla. Filed Nov. 24, 2020) is an action that named as defendants the firm and Anson Jean-Pierre. Over a period of just over a year, beginning in August 2017, the firm and its CEO, defendant Anson Jean-Pierre, raised about $794,000 from at least 208 Haitian-American investors through the sale of “membership interest” in Brothers. The investor funds were supposed to be used in development projects in Haiti. In reality a large portion of the investor money was misappropriated. The complaint alleges violations of each subsection of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. See Lit. Rel. No. 24970 (Nov. 30, 2020).

Manipulation: SEC v. Rubin, Civil Action No. 20 Civ 10084 (S.D.N.Y. Filed Dec. 2, 2020). The Defendants in the action are Richard J. Rubin and Thomas J. Craft. Each has a law degree. Defendant Rubin was admitted to practice in New York in 1968. Later he was disbarred under an order from the Appellate Division of the Supreme Court of New York. Mr. Rubin also settled an administrative proceeding with the Commission, consenting to the entry of an order which denied him the privilege of appearing and practicing before the Commission. Richard Jeffrey Rubin, Exchange Act Rel. No. 88258 (Feb. 21, 2020). Defendant Craft is also an attorney, admitted to practice in Florida. On February 25, 2020 he resolved a Commission administrative proceeding by consenting to the entry of an order suspending him from appearing and practicing before the Commission. Thomas J. Craft Jr., Exchange Act Rel. No. 88280 (Feb. 25, 2020). Over a three-year period, beginning in December 2015, Mr. Rubin submitted at least 128 attorney opinion letters to the Commission for the purpose of registering securities for public sale. The letters were also submitted to transfer agents and OTC Markets Group, Inc. for the purpose of removing restrictive legends on share certificates or issuing share certificates without restrictive legends for over 85 million shares of microcap issuers. Mr. Rubin personally singed at least 98 of the letters. Each was fraudulent. During the period Defendant Craft joined with Mr. Rubin in issuing at least 29 of the fraudulent attorney opinion letters. Specifically, Mr. Rubin drafted the letters for the signature of Mr. Craft. He also executed one letter forwarded to OTC Markets that had been drafted by a third party. All were fraudulent. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. A parallel criminal case was filed by the U.S. Attorney’s Office for the Southern District of New York.

Misappropriation: SEC v. Garcia, Civil Action No. 3:20-cv-01682 (D. Puerto Rico Filed Dec. 1, 2020) is an action which names as a defendant, Eugenio Garcia Jimenez, Jr. Over a two-year period, beginning in 2016, Defendant served as an unregistered investment adviser to a Puerto Rico city, Municipio Autonomo de Mayaguez. Defendant induced the city to invest $9 million in unused funds for two years based on a promise of 8 to 10% returns with no risk. Rather than invest the funds, Defendant put the capital into an account and purchased U.S. treasury notes that were margined. He then misappropriated about $4.1 million in client funds. After the broker terminated the account another was opened. An additional $3 million was misappropriated. False documents were given to the city to cover the scheme. At one point, Defendant “advanced” $1.8 million from the account to the City as its returns. Overall, Defendant misappropriated about $7.1 million. The complaint alleges violations of each subsection of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and 206(2). The case is pending.

Offering fraud: SEC v. Lisser, Civil Action No. 2:20-cv-05798 (E.D.N.Y. Filed Dec. 1, 2020) is an action which names as a defendant Mark A. Lisser a/k/a Mark Alan. Over a period of several months, beginning in October 2018, Defendant Lisser, acted as the operator of Knightsbridge Capital Partners, an unregistered fund manager for two Funds. He also operated two boiler rooms. Mr. Lisser instructed those employed in the boiler to solicit investors for the Funds by claiming that they had “pre-IPO” shares of firms about to go public. Investors were told that no commissions were charged but would be collected after the IPOs. The claims were false. In fact, much of the $2.1 million raised was not invested but misappropriated. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending.

UK

Report: The Financial Conduct Authority published its report on the impact of the Retail Distribution Review and the Financial Advice Market Review on December 3, 2020 (here). The Report concludes that the number of UK adults receiving financial advice continues to increase as does the number of advisers. Consistent with those findings the estimated assets under automated advices services increased as did the awareness of consumers of such services.