Peter Fan v. Stonemor Partners Lp

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________
No. 17-3843
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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
______________
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
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Argued: November 1, 2018
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Before: SMITH, Chief Judge, McKEE, and RESTREPO,
Circuit Judges.
(Filed: June 20, 2019)
__
James W. Johnson
David J. Goldsmith [ARGUED]
Michael H. Rogers

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Claiborne R. Hane
James T. Christie
Labaton Sucharow LLP
140 Broadway
New York, New York 10005
Naumon A. Amjed
Ryan T. Degnan
Kessler Topaz Meltzer & Check LLP
280 King of Prussia Road
Radnor, Pennsylvania 19087
Counsel for Appellant
James H. Steigerwald
Robert M. Palumbos
Brian J. Slipakoff
Duane Morris LLP
30 South 17th Street
Philadelphia, Pennsylvania 19103
Michael C. Holmes [ARGUED]
Craig E. Zieminski
Amy T. Perry
Merriwether T. Evans
R. Kent Piacenti
Vinson & Elkins LLP
2001 Ross Avenue, Suite 3700
Dallas, Texas 75201
Counsel for Appellee
______________
OPINION OF THE COURT
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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.
I.
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
1 StoneMor is a master limited partnership whose publicly
traded securities are referred to as “units,” which are traded
similarly to shares of stock.
2 Plaintiffs are Peter Fan, Royal Estate Management LLC, and
Fremont Hotel Inc., who propose to represent a putative class
of similarly situated individuals and entities that purchased
StoneMor units between March 15, 2012 and October 27,
2016 (the “Class Period”). Defendants include StoneMor,
StoneMor G.P., StoneMor G.P. Holdings and its majority
owner American Cemeteries Infrastructure Investors, LLC,
and the controlling shareholder executives (“Defendants”).

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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.

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II.
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 supported by the record. Hassen v. Gov’t of Virgin
Islands, 861 F.3d 108, 114 (3d Cir. 2017).
III.
Under 17 C.F.R. § 240.10b-5(b), when selling securities
it is illegal for any person “[t]o make any untrue statement of a
material fact or to omit to state a material fact necessary in
order to make the statements made, in the light of the
circumstances under which they were made, not misleading.”
In order to state a claim under Rule 10b-5, a plaintiff must
demonstrate:
(1) A material misrepresentation (or omission);
(2) scienter (a wrongful state of mind);
(3) a connection between the misstatement and the
purchase or sale of a security;
(4) reliance upon the misstatement;
(5) economic loss; and
(6) loss causation.
See City of Cambridge Ret. Sys. v. Altisource Asset Mgmt.
Corp, 908 F.3d 872, 879 (3d Cir. 2018). Because they allege
fraud, Plaintiffs “must state with particularity the
circumstances constituting fraud or mistake.” Fed. R. Civ. P.
9(b).
Moreover, in this securities fraud action, the PSLRA
imposes greater particularity requirements concerning alleged
material misrepresentations and scienter. A complaint must
“specify each statement alleged to have been misleading, the
reason or reasons why the statement is misleading, and, if an
allegation . . . is made on information and belief . . . all facts on
which that belief is formed.” 15 U.S.C. § 78u-4(b)(1).
Concerning scienter, a complaint must “state with particularity
facts giving rise to a strong inference that the defendant acted
with the required state of mind.” 15 U.S.C. § 78u-4(b)(2)(A).
The PSLRA’s heightened standard exists “to curb frivolous,

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lawyer-driven litigation, while preserving investors’ ability to
recover on meritorious claims.” Tellabs, Inc. v. Makor Issues
& Rights, Ltd., 551 U.S. 308, 322 (2007).
A.
Plaintiffs base their claim of fraud on three categories3
of alleged misstatements by Defendants. First, Plaintiffs claim
that StoneMor fraudulently lauded its financial strength or
health in connection with the release of certain quarterly
distributions. For example, in a press release discussing
distribution increases in September of 2012, StoneMor stated:
We determine the distribution
based on the operating
performance of the company and
the resultant Available Cash at the
end of the quarter. StoneMor has
consistently paid quarterly
distributions since its initial public
offering in September 2004 using
this distribution policy and intends
to continue this policy into the
future. Given the solid
performance this year so far and
what we expect will be continued
good performance, we are
comfortable with affirming our
distribution of at least $0.585 per
unit through the end of the year.
J.A. 335. Plaintiffs allege that this statement is false and
misleading because StoneMor “could not, and never intended
to fund the distributions from the performance of the business,
i.e., from day-to-day business operations.” Consolidated Class
Action Complaint (“CCAC”) ¶ 139. Plaintiffs argue that
StoneMor fraudulently omitted that its “ability to fund cash
3 Plaintiffs alleged a fourth category of statements in their
Complaint—certification statements required by statute.
CCAC ¶¶ 196-97. Plaintiffs have not, however, appealed the
District Court’s finding that these statements were not false
and misleading. Appellant Br. 15 n. 8.

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distributions was contingent on its access to the capital
markets.” Id.
The second category of alleged misstatements relate to
the connection between StoneMor’s operations and
distributions. For example, StoneMor stated in a press release
that its “primary source of cash from which to pay partner
distributions . . . is operating cash flow.” Id. ¶ 134 (emphasis
omitted). Plaintiffs argue that statements such as this
misrepresented the fact that StoneMor’s primary source of
liquid cash for distributions was equity proceeds.
The third category of alleged misstatements concern
StoneMor’s ability to pay down its debt facility using equity
proceeds. For example, a StoneMor press release stated that
“StoneMor intends to use the net proceeds from the common
units it is offering to pay down the borrowings outstanding
under its existing credit facility.” Id. ¶ 143 (emphasis omitted).
Plaintiffs allege that this statement is misleading because
StoneMor allegedly omitted the fact that its cash distributions
were funded through borrowings from its credit facility.
1. Falsity and Materiality
In this securities fraud case, these statements are only
actionable if, “when read in light of all the information then
available to the market or a failure to disclose particular
information, [they] conveyed a false or misleading
impression.” In re Bell Atl. Corp. Sec. Litig., No. 91-0514 et
al., 1997 WL 205709, at *23 n.86 (E.D. Pa. Apr. 17, 1997),
aff’d, 142 F.3d 427 (3d Cir. 1998). A false or misleading
statement, however, is not enough. We must also find that the
alleged misstatement or omission is material.
Materiality may be found when certain information, if
disclosed, “would have been viewed by the reasonable investor
as having significantly altered the total mix of information
available to that investor.” In re Westinghouse Sec. Litig., 90
F.3d 696, 714 (3d Cir. 1996) (internal quotation marks
omitted) (quoting TSC Indus. v. Northway, Inc., 426 U.S. 438,
449 (1976). We conduct this review from the objective
perspective of a reasonable investor. Omnicare, Inc. v.
Laborers Dist. Council Constr. Indus. Pension Fund, 135 S.
Ct. 1318, 1327 (2015). As such, “vague and general statements
of optimism” are non-actionable precisely because they are not
material—a reasonable investor would not base decisions on

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such statements. See In re Advanta Corp. Sec. Litig., 180 F.3d
525, 538-39 (3d Cir. 1999), abrogated on other grounds by
Tellabs, 551 U.S. 308.
Finally, when considering whether an alleged
misstatement is material, we pay particular attention to whether
or not Defendants sufficiently disclosed facts and information
that would render the alleged misrepresentations not
misleading. See Ieradi v. Mylan Labs., Inc., 230 F.3d 594, 599
(3d Cir. 2000). This case turns on Plaintiffs’ allegations that
StoneMor omitted necessary information that would have
alerted investors to its methods for funding its distributions.
For this reason, we focus primarily on the specific disclosures
made by StoneMor that relate to Plaintiffs’ alleged
misstatements. And, as we discuss below, for each category of
alleged misstatements, StoneMor disclosed sufficient
information to render them immaterial.
i.
Plaintiffs’ first category of alleged misstatements
claimed that StoneMor fraudulently lauded its financial health
and misrepresented that its distributions were funded “from the
performance of the business, i.e., from day-to-day business
operations.” CCAC ¶ 139. Indeed, the crux of Plaintiffs’
Complaint is that StoneMor “obscured the fact that [it] paid the
distribution from its revolving credit facility, which was in turn
paid down through the proceeds of a series of equity offerings.”
CCAC ¶ 2. But this information was readily and consistently
disclosed by StoneMor.
In its Form 10-Ks issued during the Class Period,
StoneMor defined its “Available Cash” as consisting of “cash
on hand at the end of that quarter, plus cash on hand from
working capital borrowings made after the end of the quarter .
. . less cash reserves.” J.A. 311. This definition of Available
Cash demonstrates that, at the outset, a reasonable investor
would be informed that StoneMor’s distributions were funded
by more than just its operating revenue. Moreover, StoneMor
repeatedly disclosed the risks it faced in its business, stating in
its 2012 Form 10-K that it “may not have sufficient cash from
operations to continue paying distributions at their current
level, or at all,” and that its “substantial level of indebtedness
could materially adversely affect [its] ability to generate
sufficient cash for distribution to [its] unitholders, to fulfill [its]

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debt obligations and to operate [its] business.” J.A. 347
(emphasis omitted). This disclosure, among others, would
alert reasonable investors to the real business risks facing
StoneMor. Thus, these statements Plaintiffs identify as
fraudulently misleading are rendered immaterial given the
pertinent disclosures. See Ieradi, 230 F.3d at 599-600
(discussing how disclosures present in Defendant’s Form 10-
Qs were sufficient to alert a reasonable investor to the relevant
risks).
ii.
Plaintiffs’ second category of alleged misstatements
concerns the fact that StoneMor’s distributions were funded in
large part through its cash borrowings, and not its day-to-day
operating revenue. But this information was also readily and
repeatedly disclosed.
In each of its annual reports during the Class Period,
StoneMor issued GAAP and non-GAAP financials side-by-
side, which demonstrated the mathematical reality that
StoneMor was not able to fund its distributions primarily from
its day-to-day operations because much of that cash was being
held in state trusts and was unrecognized by GAAP. See e.g.,
J.A. 357; See U.S. Sec. & Exch. Comm’n v. Jensen, 835 F.3d
1100, 1105 n.1 (9th Cir. 2016) (noting that publicly-traded
companies may use non-GAAP reports if presented with at
least equal prominence (citing 15 U.S.C. § 78m; 17 C.F.R. §
229.10)). StoneMor was transparent in this accounting
method, and even used a bar chart at a 2013 investor
presentation that represented its distribution amount and non-
GAAP operating profits towering over its GAAP operating
profit. CCAC ¶ 155. When viewed alongside these
disclosures, Plaintiffs’ allegations that StoneMor fraudulently
concealed the fact that its distributions were not funded
primarily from the current operating revenue fall flat.
StoneMor’s disclosures render any such perceived
misstatement immaterial.
iii.
The third category of alleged misrepresentations relates
to StoneMor’s usage of equity proceeds as a means to pay
down its debt facility from which it borrowed cash for

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distributions. Here too, StoneMor’s disclosures are sufficient
to render these allegations immaterial.
Indeed, Plaintiffs’ own Complaint quotes from
StoneMor press releases that state clearly that “StoneMor
intend[ed] to use the net proceeds from the [equity] offering to
pay down outstanding indebtedness under its revolving credit
facility.” CCAC ¶ 176; accord id. ¶¶ 179, 184, 186 (emphasis
omitted). The Complaint also references a 2016 Quarterly
Report, which describes a successful public offering and
explains that the “proceeds from the offering were used to pay
down outstanding indebtedness under the Credit Facility.”
CCAC ¶ 189 (emphasis omitted). In light of these disclosures,
we cannot conclude that the statements contained in Plaintiffs’
third category of alleged misrepresentations are material
because a reasonable investor would have been aware of the
fact that StoneMor used equity proceeds to pay down its debt.
Overall, for each category of StoneMor’s alleged
misstatements, clear and consistent disclosures were made
available to investors throughout the Class Period. As a result,
we hold that StoneMor sufficiently disclosed facts and
information that render its alleged misrepresentations not
misleading. See Ieradi, 230 F.3d at 599.
2. Scienter
Even if we were to hold that StoneMor’s alleged
misrepresentations were materially misleading, Plaintiffs’
claims would still fail because our review of the record does
not demonstrate the necessary state of mind by Defendants. In
line with its heightened pleading standards, the PSLRA
requires that the plaintiff’s pleadings conjure a “strong
inference” that the defendant acted with the necessary state of
mind, that is, with intent to defraud shareholders. 15 U.S.C. §
78u-4(b)(2)(A). Scienter may also be shown by a “knowing or
reckless state of mind,” which in this securities context would
be demonstrated by pleading “an extreme departure from the
standards of ordinary care.” Institutional Inv’rs Grp. v. Avaya,
Inc., 564 F.3d 242, 252, 267 n.42 (3d Cir. 2009). A strong
inference of scienter “must be cogent and at least as compelling
as any opposing inference of nonfraudulent intent.” Tellabs,
551 U.S. at 314.
Such an inference is clearly not present here. For each
category of statements, as described above, StoneMor’s

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disclosures draw a strong inference that the investors were
appraised of the relevant information regarding StoneMor’s
cycle of equity offerings, cash borrowings, and cash
distributions. These disclosures do not demonstrate an intent
to defraud—rather, they accurately show how StoneMor
leveraged its assets in order to maximize its distributions
despite the state trust requirements attached to its pre-need
sales. StoneMor may have been caught by the risk inherent in
its business strategy, but those risks were disclosed in their
annual Form 10-Ks throughout the Class Period. Thus, we
hold that the pleadings do not demonstrate scienter as the
PSLRA requires.
IV.
While we acknowledge the economic harm suffered by
StoneMor’s investors, we cannot say that it was the result of
fraud. Our holding today simply reaffirms the well-established
rule that, in a securities fraud case, a defendant’s sufficient
disclosure of information can render alleged
misrepresentations immaterial. This is such a case.
StoneMor’s disclosures sufficiently informed the reasonable
investor of the risks inherent in its business, and it is not our
place to correct the cost of doing business when it meets the
requirements of the law.
Given the foregoing, we will affirm the decision of the
District Court.

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