United States District Court, E.D. Pennsylvania
EDUARDO C. ROBRENO, J.
a consolidated class action arising out of Plaintiffs'
purchase of common units in StoneMor, L.P.
(“StoneMor”) which provides funeral and cemetery
services and products. Defendants include StoneMor; StoneMor
G.P.; StoneMor GP's parent company, American Cemeteries
Infrastructure Investors, LLC (“ACII”); and the
(“Defendants”). CAC ¶ 25-37, ECF No. 67.
Plaintiffs are investors who purchased common units of
StoneMor between March 15, 2012 and October 27, 2016 (the
“Class Period”). Id. at 1. The Amended
Complaint contains two counts. Count One alleges violations
of Section 10(b) of the Securities Exchange Act and SEC Rule
10(b)5 promulgated thereunder. Id. at 101. Count Two
alleges violations of Section 20(a) of the Securities
Exchange Act. Id. at 102.
February 21, 2017, the Court appointed Fremont Investor Group
(“FIG”) as lead counsel, and approved FIG's
selection of counsel. ECF No. 64. On April 24, 2017, FIG
filed an amended consolidated class action complaint
(“Complaint”). ECF No. 67. On June 8, 2017,
Defendants moved to dismiss. ECF No. 68. For the reasons that
follow, the Court will grant the motion to dismiss.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
alleges the following facts, all of which are presumed to be
true for purposes of resolving the motion to dismiss. During
the Class Period, Defendants issued materially false and
misleading statements regarding its business and financial
performance. Id. at ¶¶ 130-31, 136,
209-10. The alleged purpose of these statements was to create
the appearance that Defendants were economically able to meet
“their primary corporate purpose: the regular,
quarterly distribution” of available cash to investors.
Id. at ¶ 1 (emphasis in original). Plaintiffs
claim that, unbeknownst to investors, StoneMor was actually
“severely cash-strapped” during the Class Period,
and only able to pay its generous distributions through
“an elaborate financial ruse.” Id. at
¶ 2. In essence, the “ruse” was that
StoneMor paid the distributions from its revolving credit
facility, which in turn was paid down through the proceeds
from a series of equity offerings. Id.
argue that they were misled into believing that the primary
source of distribution funds was “operating cash flow,
” when, in reality, cash to fund distributions was
“almost entirely dependent” on StoneMor's
“ability to sell equity in the capital markets.”
Id. at ¶¶ 1-2. StoneMor's business
plan was to aggressively acquire cemeteries and immediately
build a “pre-need” sales program by selling to
customers who are still alive, but want to pre-arrange their
own funeral arrangements. Id. at ¶ 11. However,
state law requires that the majority of the total pre-need
sales proceeds be kept in trust until the actual burial
services are performed. Id.
StoneMor could not access most of the cash from pre-need
sales until after the customer died. Id. Because
pre-need sales were such a large portion of StoneMor's
business strategy, the inaccessibility of cash from them
created a substantial disparity between overall sales and
actual incoming cash. Id. at ¶ 12. Under
principles, cash from pre-need sales would not be represented
as assessable cash. Id. at ¶ 11. However,
StoneMor did not rely solely on GAAP metrics to court
investors. Id. at ¶ 12. Instead, StoneMor also
presented investors with non-GAAP figures it had created,
which showed sales and costs for each period, but did not
subtract the cash in trust. Id. at ¶¶ 3,
7, 11-12, 14. According to the Plaintiffs, the difference
between the actual available cash and the non-GAAP measures
of apparently available cash (that was still in trust) was
unknown to investors. Id. at ¶ 14. Plaintiffs
further claim that the difference between the GAAP and
non-GAAP measures “intentionally gave the impression
that StoneMor was generating sufficient operating cash flow
to justify . . . the cash distributions” and concealed
the “material divergence between the cash distribution
payments and the amount and timing of revenue and cash flows
generated from operations.” Id. at ¶ 14,
69. But, accurate GAAP measurements consistently appeared
alongside the non-GAAP ones. Id. at ¶ 69.
Plaintiffs allege that StoneMor's financial “house
of cards” came down when StoneMor issued corrective
disclosures concerning previously publically-filed financial
statements. Id. at ¶¶ 17-19. The
corrections stated that recent auditing had revealed
“material weaknesses” in certain sets of internal
controls. Id. at ¶ 198. This curtailed
StoneMor's access to capital markets, which caused
StoneMor to cut its distribution by approximately half.
Id. at ¶¶ 201-06. Plaintiffs claim that
because StoneMor slashed its distribution, StoneMor's
unit price dropped by almost forty-five percent. Id.
at ¶¶ 202-204.
Plaintiffs allege that Defendants concealed how
StoneMor's distributions were, indirectly, funded with
the use of debt/equity, which allegedly concealed the risk
that distributions would be cut significantly if
StoneMor's access to the capital markets was ever
impaired. Id. at ¶¶ 136, 166. The
allegedly false and misleading statements can be broken down
into four categories:
Category A: Statements lauding StoneMor's strength or
health in connection with a particular quarter's
Category B: Statements regarding the connection between
operations and distributions;
Category C: Statements that equity offerings were used to pay
down StoneMor's debt facility; and
Category D: Certification statements required by statute.
now move to dismiss the Complaint, pursuant to Federal Rule
of Civil Procedure 12(b)(6), and the heightened pleading
standard of the Private ...