Judge tosses suit against private cemetery firm
StoneMore now operated archdiocese facilities
PHILADELPHIA » A federal judge has dismissed a class action lawsuit against burial industry giant StoneMor Partners L.P. and related entities for failure to state a claim upon which relief could be granted.
The opinion filed by U.S. District Judge Eduardo C. Robreno, of the Eastern District of Pennsylvania, found lead plaintiffs Judson Anderson could not show investors were misled or materially harmed by statements StoneMor made between March 2012 and Oct. 2016.
“I think at this point the only thing we can say is we are reviewing the decision and considering our options,” said Jim Johnson of the New York firm Labaton Sucharow, who served as lead counsel for the plaintiffs.
A StoneMor representative declined comment on the outcome but said it was welcome news.
The consolidated shareholder suits alleged chief executives at Trevose-based StoneMor, including former Chief Executive Officer, President, Founder and Board Chairman Lawrence Miller and Chief Financial Officer Sean P. McGrath, misled investors with phony earnings numbers designed to make the company appear more profitable than it actually was.
Anderson claimed unitholders were repeatedly told during the class period to ignore financial metrics based on generally accepted accounting principles and instead measure the company’s success on non-GAAP metrics such as “production-based revenue” and “adjusted operating profits.”
Much of StoneMor’s cash flow comes from “pre-need” funeral service sales, according to the order. While the company does collect on those sales, the cash must go into a trust until the buyer dies. Thus, it is not distributable even though it is on the books.
The complaint alleged StoneMor touted its “adjusted” figures that included those sales while ramping up dividend payments to investors each year. Anderson claimed the company never actually generated sufficient cash flow to make these distributions, however; it simply kept issuing new securities and used those funds to pay off old investors.
The company notified the Securities and Exchange Commission in late 2016 that it would have to restate prior financial statements and later issued a press release indicating it had discovered some internal weaknesses with its accounting. StoneMor also announced quarterly cash distributions would be cut in half for the third quarter of 2016, which Anderson said led to a 45-percent drop in stock prices.
Judge Robreno split the alleged false and misleading statements into four categories: Statements regarding the connection between operations and distributions; statements that equity offerings were used to pay down debt; certification statements required by SEC rules; and statements lauding StoneMor’s financial health.
In the first category, the plaintiffs pointed to an alleged claim to investors that “you can feel comfortable that (StoneMor) generate(s) enough cash flow to pay a distribution in this period.”
However, the judge found that statement referred to the nonGAAP cash flows, which included the cash in trust, and was therefore not false. StoneMor had also revealed that its GAAP-measured cash flows were lower than distributions, meaning those statements were not misleading, the judge found.
The plaintiffs also claimed StoneMor denied that it used funds from equity offerings to pay dividends. But the judge noted the complaint did not actually allege that StoneMor made any payments from equity offerings, only that it relied on those offerings to pay down its credit facility, which in turn paid out distributions. StoneMor explicitly disclosed this multiple times during the class period, according to the order.
The judge likewise found no actionable statements made in having to correct prior SEC filings, which cannot be the basis for a fraud allegation on its own. The plaintiffs offered no proof that the defendants knew at the time that anything they were certifying was false, the order says.
Judge Robreno added that correcting those statements had no material impact on stock prices, which the plaintiffs said came about from the distribution cut, not the refiling of certifications.
The only potentially false or misleading statements identified by the plaintiffs came when StoneMor claimed in a press release that it determines the distribution amount from operation performance and resultant cash on hand at the end of a quarter.
The plaintiffs claimed StoneMor actually relied on equity proceeds to fund distributions indirectly, that its ability to do so was entirely dependent on access to equity in the capital markets and that this information was not disclosed to investors.
But the judge found that even if StoneMor focused investors on the non-GAAP figures, it presented GAAP figures at the same time, reconciled GAAP and nonGAAP figures, and disclosed that GAAP revenues were below distribution levels, according to the order.
Judge Robreno also found the plaintiffs failed to show there was any intent to deceive, manipulate or defraud, as required by pleading standards, and that there was no underlying violation of the Exchange Act to support a separate “controlling persons” claim.
The plaintiffs were given leave to file an amended complaint by Nov. 15.