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Fan v. StoneMor Partners LP

United States Court of Appeals for the Third Circuit

November 1, 2018, Argued; June 20, 2019, Filed

No. 17-3843

Opinion

 [*713]  OPINION OF THE COURT

RESTREPO, Circuit Judge.

This appeal arises from Plaintiffs' purchase of common units1 in Defendant StoneMor Partners L.P.'s ("StoneMor") business.2 The District Court granted StoneMor's motion to dismiss, primarily because Plaintiffs' allegations of securities fraud were found immaterial in light of Defendants' related disclosures. For the reasons explained below, we will affirm.

StoneMor sells products and services for funerals, [**2]  including burial plots and related products. StoneMor is required by state law to hold in trust a percentage of proceeds from customers who purchase funeral products and services prior to their death. These "pre-need sales" are released to StoneMor when the services are finally delivered to the customer—that is, upon the customer's death. Under Generally Accepted Accounting Principles ("GAAP"), pre-need sales that are stuck in trusts may not be represented as current revenue.

During the Class Period, StoneMor executed successful acquisitions of death-care properties, which in turn increased its pre-need sales. These pre-need sales, however, could not be demonstrated as an increase in current revenue since the proceeds were held in trusts. Thus, as pre-need sales grew, so too did a substantial disparity between StoneMor's overall sales and its accessible cash — cash which would have otherwise been used for quarterly investor distributions.

To address this disparity, StoneMor did three things. First, along with its standard GAAP financials, it issued non-GAAP financials to its investors that represented pre-need sales as a portion of present-day current revenue. Second, it borrowed cash to [**3]  distribute to investors the proceeds of preneed sales in the same quarter the sale was made, rather than waiting until the cash was released from trust. Lastly, it  [*714]  used proceeds from equity sales to pay down the borrowed cash that funded distributions to investors while pre-need sales remained in trust. Thus, a feedback loop was created: cash distributions were funded by borrowed cash, that borrowed cash was paid down through equity proceeds, and equity proceeds were continuously attracted through growing pre-need sales and cash distributions.

This loop was disrupted, however, on September 2, 2016, when StoneMor announced that it would restate about three years of previously-reported financial statements. Under GAAP regulations, StoneMor was temporarily prohibited from selling units and receiving corresponding equity proceeds. Plaintiffs allege that this prohibition caused StoneMor's October 27, 2016 unit distribution to fall by nearly half; StoneMor blamed the distribution cut on salesforce issues. Regardless, once the news of StoneMor's reduced distributions broke, its unit price dropped by 45%. Shortly thereafter, Plaintiffs filed suit on November 21, 2016, alleging violations of [**4]  section 10(b) of the Securities and Exchange Act of 1934, 48 Stat. 881, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5.

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927 F.3d 710 *; 2019 U.S. App. LEXIS 18520 **

PETER FAN; ROYAL ESTATE MANAGEMENT LLC; FREMONT HOTEL INC, Individually and on behalf of all others similarly situated, Appellants v. STONEMOR PARTNERS LP; STONEMOR GP LLC; STONEMOR GP HOLDINGS LLC; AMERICAN CEMETERIES INFRASTRUCTURE INVESTORS LLC; LAWRENCE MILLER; SEAN P. MCGRATH; ROBERT B. HELLMAN, JR.; WILLIAM R. SHANE; TIMOTHY YOST

Prior History:  [**1] On Appeal from the United States District Court for the Eastern District of Pennsylvania. (D.C. Civ. Action No. 2-16-cv-06111). District Judge: Honorable Eduardo C. Robreno.

Anderson v. Stonemor Partners, L.P., 296 F. Supp. 3d 693, 2017 U.S. Dist. LEXIS 179959 (E.D. Pa., Oct. 31, 2017)

CORE TERMS

investor, distributions, proceeds, disclosures, misstatements, misleading, sales, borrowed, pre-need, scienter, funded, offering, alleged misrepresentation, immaterial, cash distribution, district court, state of mind, pay down, fraudulently, risks

Civil Procedure, Appeals, Standards of Review, De Novo Review, Defenses, Demurrers & Objections, Motions to Dismiss, Failure to State Claim, Securities Law, Express Liabilities, Misleading Statements, Elements of Proof, Securities Exchange Act of 1934 Actions, Implied Private Rights of Action, Postoffering & Secondary Distributions, Heightened Pleading Requirements