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Fan v. Stonemor Partners LP

United States Court of Appeals, Third Circuit

June 20, 2019

PETER FAN; ROYAL ESTATE MANAGEMENT LLC; FREMONT HOTEL INC, Individually and on behalf of all others similarly situated, Appellants

          Argued: November 1, 2018

          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

          James W. Johnson David J. Goldsmith [ARGUED] Michael H. Rogers Claiborne R. Hane James T. Christie Labaton Sucharow LLP Naumon A. Amjed Ryan T. Degnan Kessler Topaz Meltzer & Check LLP Counsel for Appellant

          James H. Steigerwald Robert M. Palumbos Brian J. Slipakoff Duane Morris LLP Michael C. Holmes [ARGUED] Craig E. Zieminski Amy T. Perry Merriwether T. Evans R. Kent Piacenti Vinson & Elkins LLP Counsel for Appellee

          Before: SMITH, Chief Judge, McKEE, and RESTREPO, Circuit Judges.



         This appeal arises from Plaintiffs' purchase of common units[1] 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, 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 distribute to investors the proceeds of pre-need sales in the same quarter the sale was made, rather than waiting until the cash was released from trust. Lastly, it 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 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.

         In short, Plaintiffs alleged that Defendants made false or misleading statements, with scienter, which Plaintiffs relied on to their financial detriment. Defendants filed a motion to dismiss the Complaint, which the District Court granted for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), and for failure to satisfy the heightened pleading standards of the Private Securities Litigation Reform Act (PSLRA), 15 U.S.C. § 78u-4. For the reasons discussed below, we will affirm.


         The District Court had jurisdiction under 28 U.S.C. § 1331 and § 78aa. We have jurisdiction under 28 U.S.C. § 1291. "We exercise plenary review of the District Court's grant of a Rule 12(b)(6) motion, and 'we apply the same test as the district court.'" In re Merck & Co., Inc. Sec. Litig., 432 F.3d 261, 266 (3d Cir. 2005). We may affirm a dismissal on any ground ...

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