927 F.3d 710
3d Cir.2019Background
- StoneMor, a funeral-services master limited partnership, sold "pre-need" funeral contracts whose proceeds are held in state trusts and are not recognized as current GAAP revenue until services are delivered.
- During the Class Period (Mar. 15, 2012–Oct. 27, 2016) StoneMor increased distributions to unitholders while presenting GAAP and non-GAAP financials that treated pre-need sales differently; it also funded distributions with short-term borrowings and used equity-offering proceeds to pay down that borrowing.
- Plaintiffs allege StoneMor misrepresented its financial health and funding sources for distributions, concealing that distributions depended on access to capital markets and borrowings rather than operating cash flow.
- After StoneMor announced a restatement in Sept. 2016 and was temporarily barred under GAAP from selling units, its distribution dropped and unit price fell; Plaintiffs then sued under §10(b)/Rule 10b-5 alleging material misstatements/omissions and scienter.
- The District Court dismissed under Rule 12(b)(6) and the PSLRA pleading standards for failure to plead material misstatements and a strong inference of scienter; the Third Circuit affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether challenged statements/omissions were materially false or misleading | StoneMor lauded financial health and omitted that distributions depended on borrowings and equity offerings, which would alter the investor "total mix" | StoneMor disclosed Available Cash definition, GAAP vs non-GAAP results, risks about insufficient cash from operations, and statements that equity proceeds would pay down indebtedness | Statements were immaterial in light of repeated, specific disclosures; dismissal affirmed |
| Whether plaintiffs pleaded scienter with particularity | Plaintiffs allege scheme (borrow, distribute, repay with equity) and that defendants knew or recklessly disregarded the true funding sources | Disclosures and public reports showed the cycle; no cogent inference of intent to defraud more compelling than innocent explanations | PSLRA scienter requirement not met; no strong inference of intent to defraud |
| Adequacy of disclosure as a defense to Rule 10b-5 claim | Omitted facts about funding sources made prior statements misleading | Prior 10-Ks, 10-Qs, press releases, non-GAAP presentations and offering disclosures made funding sources and risks known to investors | Court emphasized that sufficient disclosure can render alleged misstatements non-actionable; here disclosures were adequate |
| Pleading standards under Rule 9(b) and the PSLRA | Particularized facts and facts supporting inferences of scienter were pled on information and belief | Plaintiffs failed to specify each misleading statement with why misleading and failed to plead facts giving rise to strong inference of scienter | Complaint failed PSLRA/Rule 9(b) particularity; dismissal appropriate |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (PSLRA scienter inference standard must be "cogent and at least as compelling as any opposing inference")
- Ieradi v. Mylan Labs., Inc., 230 F.3d 594 (3d Cir. 2000) (adequate disclosure can negate claim that statements are misleading)
- In re Westinghouse Sec. Litig., 90 F.3d 696 (3d Cir. 1996) (materiality defined by whether disclosure would have significantly altered the total mix of information)
- Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318 (2015) (materiality assessed from perspective of a reasonable investor)
- In re Merck & Co., Inc. Sec. Litig., 432 F.3d 261 (3d Cir. 2005) (standard of appellate review for Rule 12(b)(6) dismissal in securities cases)