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Anderson v. Stonemor Partners, L.P.

United States District Court, E.D. Pennsylvania

October 31, 2017

JUDSON ANDERSON, et al., Plaintiffs,
v.
STONEMOR PARTNERS, L.P., et al., Defendants.

          MEMORANDUM

          EDUARDO C. ROBRENO, J.

         This is a consolidated class action arising out of Plaintiffs' purchase of common units[1] 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 controlling shareholder-executives (“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.

         On 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.

         I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

         Plaintiff 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.

         Plaintiffs 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.

         Thus, 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 GAAP[2] 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.

         Next, 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.

         In sum, 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 distribution announcement;
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.

         Defendants now move to dismiss the Complaint, pursuant to Federal Rule of Civil Procedure 12(b)(6), and the heightened pleading standard of the Private ...


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