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Cheesecake Factory's SEC fine is the latest D & O liability from COVID-19 pandemic



The US Securities and Exchange Commission has taken $ 125,000 in civil penalties at the Cheesecake Factory as part of a settlement to resolve the agency's allegations that the company made materially misleading statements to investors about the impact of the COVID-19 pandemic on its operations. Although this is the first case reported by the SEC, it is only one in a series of recent third-party liabilities that companies have faced that involve insurance coverage for board members and executives.

The SEC accepted the Cheesecake Factory settlement offer, which resolves the investigation without acknowledging any error. However, the SEC's order states that the company "faced an unmatched challenge to its operations as a result of the COVID-1

9 pandemic" and made "false and misleading" statements about these financial challenges for investors. In particular, the SEC questioned several revelations about the economic impact of the virus, including statements in the 8-K archive that its restaurants "functioned sustainably" during the pandemic, when in fact the company "lost about $ 6 million in cash per week" and had only 16 weeks left in cash.

From cruise lines to molecular diagnostics companies, we have reported extensively on the new D&O debts that companies will face when the new coronavirus results in a wave of "event-driven" claims. executives and other executives and employees have violated their obligations to the company or violated securities laws in connection with COVID-19 exposure.

The Cheesecake Factory settlement is an example of government investigations stemming from the company's operations in response to the pandemic. SEC Chairman Jay Clayton issued a statement regarding the Cheesecake Factory deal and we stressed the agency's ability to impose "proactive" disclosures as the local and national response to the pandemic develops and suggests that the agency will continue to hold companies accountable for not providing enough information. the impact of the pandemic on their activities and activities.

Even in the absence of coverage for a settlement consisting solely of fines or penalties, companies may incur significant legal fees and costs to defend and ultimately resolve such investigations or enforcement actions, all of which may be covered by D&O insurance. . Too often, these legal fees and costs exceed the actual settlement. Government investigations (and parallel securities cases based on the same alleged false or misleading statements that often accompany them) are just one of many ongoing D&O exposures that companies face, which may include claims from creditors, shareholders and other stakeholders arising from bankruptcy proceedings. ; False Claims Act and qui tam claims related to funds received from state aid programs; and cyber-related claims by shareholders or customers in the event of an intrusion or other fraud committed by hackers exploiting COVID-19-related vulnerabilities. As companies continue to respond and adapt to the ongoing pandemic and the associated impact on their operations and operations, they should pay close attention to D&O insurance as an effective risk reduction tool for dealing with future COVID-19 related losses.


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