Fan v. StoneMor Partners LP

StoneMor Partners LP (StoneMor) (defendant) was a limited partnership that provided funeral services and burial products. Some of StoneMor’s customers paid in advance for funeral services and burial products prior to death. State law required StoneMor to hold such pre-need sales in a trust until the customer died. In order to address the problem of inaccessible cash during the period when pre-needs sales remained in the trust, StoneMor borrowed cash to make distributions to shareholders and paid down the debts by using the proceeds of stock sales, allowing StoneMor to continuously attract investors by reporting increased pre-need sales and offering increased cash distributions. In press releases, StoneMor touted its financial health and represented that shareholder distributions came from the company’s operating cash flow, without specifying the need to borrow cash due to the problem of inaccessible cash flow. However, in its annual Form 10-K filings, StoneMor disclosed the risk of cash-flow disruptions and the need to borrow cash in order to pay out shareholder distributions. After StoneMor announced that its previously reported financial statements were being revised, StoneMor was temporarily prevented from selling stock, resulting in a reduction in shareholder distributions and a drop in StoneMor’s stock price. A group of shareholders (the investors) (plaintiffs) sued StoneMor for alleged securities fraud, claiming that StoneMor misled the investors about the company’s financial health and the source of cash for distributions. StoneMor motioned to dismiss. The district court granted StoneMor’s motion. The investors appealed.