## Facts

- Investors bought common units of StoneMor Partners LP, a death-care master limited partnership whose “pre-need” sales required portions of proceeds to be held in trust and not recognized as current GAAP revenue.
- As pre-need sales grew, StoneMor’s reported sales increased faster than accessible cash available for quarterly distributions.
- StoneMor reported non-GAAP metrics treating pre-need sales as present revenue, funded distributions in part through borrowing, and used proceeds from equity sales to reduce that borrowing.
- Investors alleged StoneMor publicly described distributions and financial health in a way that obscured reliance on debt and continued access to capital markets.
- StoneMor’s SEC filings disclosed risks including cash-flow disruption, that distributions were not guaranteed, and that it might need to borrow funds or issue additional units to maintain distributions.
- In 2016, StoneMor announced a restatement of several years of financial statements; during the restatement process it was temporarily unable to sell new units.
- StoneMor later reduced a distribution by nearly half and the unit price dropped substantially; investors alleged the cut reflected the restatement-related loss of equity financing rather than the stated operational explanation.
- Investors filed a putative class action asserting Exchange Act § 10(b)/Rule 10b-5 and § 20(a) control-person liability; the district court dismissed under PSLRA pleading standards.

## Issues

1. Whether the complaint plausibly alleged materially false or misleading statements or omissions about the source and sustainability of distributions when considered alongside the company’s risk disclosures.
2. Whether alleged “optimistic” statements were actionable under Rule 10b-5 or rendered immaterial by publicly available cautionary disclosures forming the “total mix” of information.
3. Whether a § 20(a) control-person claim could proceed absent a viable underlying § 10(b)/Rule 10b-5 violation.

## Decision

- The Third Circuit affirmed dismissal of the complaint.
- The court held that, in context, StoneMor’s disclosures sufficiently informed reasonable investors of the relevant risks, rendering the challenged statements immaterial.
- Because plaintiffs failed to plead an actionable misrepresentation or omission, the court did not need extended analysis of scienter under the PSLRA.
- The § 20(a) claim failed because it was derivative of the unsuccessful § 10(b)/Rule 10b-5 claim.

## Legal Principles

- Materiality is assessed against the “total mix” of information available to a reasonable investor, including risk disclosures in SEC filings.
- Adequate disclosure of the relevant risks can render alleged misrepresentations or omissions immaterial as a matter of law.
- When an issuer discloses that distributions may depend on borrowing or equity issuance and may be reduced if capital-market access is impaired, later cuts may be treated as the materialization of disclosed risks rather than revelation of concealed fraud.
- A § 20(a) control-person claim requires a primary securities-law violation; without it, the control-person claim cannot stand.

## Conclusion

The Third Circuit held that StoneMor’s detailed risk disclosures about trust-restricted cash, possible borrowing and equity issuance to fund distributions, and the possibility of distribution reductions defeated the investors’ theory of material deception, warranting dismissal of the Exchange Act and control-person claims.


Fan v. StoneMor Partners LP, 927 F.3d 710 (3d Cir. 2019)