Anderson v. Stonemor Partners, L.P. et al

MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM

E.D. Pa.June 8, 2017

DM1\7868353.1 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA JUDSON ANDERSON, individually and on behalf of all other similarly situated, Plaintiff, v. STONEMOR PARTNERS L.P.; STONEMOR GP, LLC; STONEMOR GP HOLDINGS, LLC; AMERICAN CEMETERIES INFRASTRUCTURE INVESTORS, LLC; LAWRENCE R. MILLER; SEAN P. MCGRATH; ROBERTS B. HELLMAN, JR.; WILLIAM R. SHANE; and TIMOTHY YOST, Defendants. § § § Civ. A. No. 2:16-cv-6111-ER CLASS ACTION Judge Eduardo C. Robreno ORAL ARGUMENT REQUESTED § § § § § § § § § § § § § § DEFENDANTS’ MOTION TO DISMISS PLAINTIFFS’ CONSOLIDATED CLASS ACTION COMPLAINT Defendants StoneMor Partners, L.P; StoneMor GP, LLC; StoneMor GP Holdings, LLC; American Cemeteries Infrastructure Investors, LLC; Lawrence R. Miller; Sean P. McGrath; Robert B. Hellman, Jr.; William R. Shane; and Timothy Yost (collectively “Defendants”) respectfully request for this Court to dismiss Plaintiffs’ Consolidated Class Action Complaint for the reasons stated in the accompanying memorandum in support of this Motion. Case 2:16-cv-06111-ER Document 68 Filed 06/08/17 Page 1 of 3 2 DM1\7868353.1 Respectfully submitted, /s/ Brian J. Slipakoff____________ Michael C. Holmes* Texas Bar No. 24002307 Craig E. Zieminski* Texas Bar No. 24066331 Amy T. Perry* Texas Bar No. 24068623 Meriwether T. Evans* Texas Bar No. 24087485 Bryan U. Gividen+ Texas Bar No. 24087591 R. Kent Piacenti+ Texas Bar No. 24083660 *Admitted pro hac vice + Motion for admission pro hac vice forthcoming VINSON & ELKINS LLP 2001 Ross Avenue, Suite 3700 Dallas, Texas 75201 Telephone: 214.220.7700 Facsimile: 214.220.7716 mholmes@velaw.com czieminski@velaw.com aperry@velaw.com mevans@velaw.com James H. Steigerwald (PA ID: 82469) Brian J. Slipakoff (PA ID: 91850) DUANE MORRIS LLP 30 S. 17th Street Philadelphia, PA 19103 Telephone: 215.979.1000 Facsimile: 215.979.1020 jsteigerwald@duanemorris.com bslipakoff@duanemorris.com Attorneys for Defendants Case 2:16-cv-06111-ER Document 68 Filed 06/08/17 Page 2 of 3 DM1\7868353.1 CERTIFICATE OF SERVICE I certify that on the 8th day of June, 2017, a true and correct copy of the foregoing document was filed with the Clerk of Court using the CM/ECF system which will send electronic notification of such filing to all counsel of record. /s/ Brian Slipakoff Case 2:16-cv-06111-ER Document 68 Filed 06/08/17 Page 3 of 3 DM1\7868345.1 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA JUDSON ANDERSON, individually and on behalf of all other similarly situated, Plaintiff, v. STONEMOR PARTNERS L.P.; STONEMOR GP, LLC; STONEMOR GP HOLDINGS, LLC; AMERICAN CEMETERIES INFRASTRUCTURE INVESTORS, LLC; LAWRENCE R. MILLER; SEAN P. MCGRATH; ROBERTS B. HELLMAN, JR.; WILLIAM R. SHANE; and TIMOTHY YOST, Defendants. § § § Civ. A. No. 2:16-cv-6111-ER CLASS ACTION Judge Eduardo C. Robreno § § § § § § § § § § § § § § [PROPOSED] ORDER AND NOW, this ___ day of ________, 2017, upon consideration of Defendants’ Motion to Dismiss, the response thereto, if any, and all exhibits and memoranda of law filed therewith, it is hereby ORDERED and DECREED that the Motion is GRANTED. Plaintiffs’ Consolidated Class Action Complaint is dismissed with prejudice. _______________________________ Eduardo C. Robreno, U.S.D.J. Case 2:16-cv-06111-ER Document 68-1 Filed 06/08/17 Page 1 of 1 DM1\7870991.1 IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA JUDSON ANDERSON, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. STONEMOR PARTNERS L.P.; STONEMOR GP, LLC; STONEMOR GP HOLDINGS, LLC; AMERICAN CEMETERIES INFRASTRUCTURE INVESTORS, LLC; LAWRENCE R. MILLER; SEAN P. MCGRATH; ROBERT B. HELLMAN, JR.; WILLIAM R. SHANE; and TIMOTHY YOST, Defendants. § § § Civ. A. No. 2:16-cv-6111-ER CLASS ACTION Judge Eduardo C. Robreno ORAL ARGUMENT REQUESTED § § § § § § § § § § § § § § ___________________________________________________________________________ BRIEF IN SUPPORT OF DEFENDANTS’ MOTION TO DISMISS PLAINTIFFS’ CONSOLIDATED CLASS ACTION COMPLAINT ___________________________________________________________________________ James H. Steigerwald (PA ID: 82469) Brian J. Slipakoff (PA ID: 91850) DUANE MORRIS LLP 30 S. 17th Street Philadelphia, PA 19103 Michael C. Holmes (Admitted pro hac vice) Craig E. Zieminski (Admitted pro hac vice) Amy T. Perry (Admitted pro hac vice) Meriwether T. Evans (Admitted pro hac vice) Bryan U. Gividen (Motion for admission pro hac vice forthcoming) R. Kent Piacenti (Motion for admission pro hac vice forthcoming) VINSON & ELKINS LLP 2001 Ross Avenue, Suite 3700 Dallas, TX 75201 June 8, 2017 Attorneys for Defendants Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 1 of 50 DM1\7870991.1 TABLE OF CONTENTS I. SUMMARY OF THE ARGUMENT ..................................................................................1 II. BACKGROUND .................................................................................................................5 A. StoneMor..............................................................................................................................5 B. “Pre-Need” Sales .................................................................................................................5 C. StoneMor’s sources and uses of cash ...................................................................................8 D. Distributions .........................................................................................................................8 III. LEGAL STANDARD ..........................................................................................................9 IV. ARGUMENTS AND AUTHORITIES ..............................................................................10 A. The Complaint fails because the allegedly concealed facts were disclosed. .....................10 1. StoneMor disclosed that it could not maintain distributions without its credit facility and that proceeds from equity offerings were used to pay down the credit facility. .........................................................................................................12 2. Plaintiffs concede that the “truth” of the supposed “scheme” was evident from GAAP financial metrics that StoneMor disclosed several years ago. ...........13 3. The Complaint confirms that market analysts and investors have known the supposedly concealed information for years. .........................................................17 B. Plaintiffs fail to identify any actionable, false or misleading statements. .........................18 1. Category A: The alleged statements that StoneMor was a “strong” or “healthy” company are not actionable or misleading. ...........................................19 2. Category B: The alleged statements regarding the connection between operations and distributions are not misleading or actionable. ..............................24 3. Category C: The alleged statements about what StoneMor intended to do with money raised in equity offerings are not false. ..............................................26 4. Category D: The allegedly false certifications are not actionable or false and are immaterial as a matter of law. ..........................................................................28 C. Plaintiffs fail to plead a strong inference of scienter. ........................................................29 1. Plaintiffs cannot establish scienter through “group pleading.” ..............................30 2. Plaintiffs’ boilerplate scienter allegations do not meet the PSLRA’s heightened burden. .................................................................................................32 D. Plaintiffs do not adequately plead loss causation. .............................................................36 1. Plaintiffs allege loss resulting from poor business performance, not from the revelation of any prior misrepresentation. .............................................................37 2. Plaintiffs’ materialization-of-risk theory fails as a matter of law. .........................39 Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 2 of 50 ii DM1\7870991.1 E. Plaintiffs’ secondary liability claim for violation of section 20(a) fails. ...........................41 V. CONCLUSION ..................................................................................................................41 Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 3 of 50 iii DM1\7870991.1 TABLE OF AUTHORITIES Cases Arnlund v. Smith, 210 F. Supp. 2d 755 (E.D. Va. 2002) ....................................................................................... 22 Ashcroft v. Iqbal, 556 U.S. 662 (2009) .................................................................................................................... 9 Bartesch v. Cook, 941 F. Supp. 2d 501 (D. Del. 2013) .......................................................................................... 39 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) .................................................................................................................... 9 Brody v. Transitional Hosps. Corp., 280 F.3d 997 (9th Cir. 2002) .................................................................................................... 21 Buck v. Hampton Twp. Sch. Dist., 452 F.3d 256 (3d Cir. 2006) ....................................................................................................... 5 City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651 (6th Cir. 2005) ........................................................................................ 20, 25, 26 City of Roseville Employees’ Retirement System v. Horizon Lines, Inc., 713 F. Supp. 2d 378 (D. Del. 2010) .......................................................................................... 32 City of Roseville Emps.’ Ret. Sys. v. Horizon Lines, Inc., 442 F. App’x 672 (3d Cir. 2011) .................................................................................. 30, 31, 36 City of Roseville Emps.’ Ret. Sys. v. Horizon Lines, Inc., 686 F. Supp. 2d 404 (D. Del. 2009) .......................................................................................... 34 D.E.&J. Ltd. P’ship v. Conaway, 133 F. App’x 994 (6th Cir. 2005) ............................................................................................. 39 Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) ............................................................................................................ 36, 40 Eisenberg v. Gagnon, 766 F.2d 770 (3d Cir. 1985) ..................................................................................................... 22 Glover v. DeLuca, No. 2:03-cv-0288, 2006 WL 2850448 (W.D. Pa. Sept. 29, 2006) ........................................... 40 Gold v. Ford Motor Co., 577 F. App’x 120 (3d Cir. 2014) .............................................................................................. 35 Graff v. Prime Retail, Inc., 172 F. Supp. 2d 721 (D. Md. 2001) .................................................................................... 22, 25 GSC Partners CDO Fund v. Washington, 368 F.3d 228 (3d Cir. 2004) ..................................................................................... 4, 30, 33, 36 Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 4 of 50 iv DM1\7870991.1 Ieradi v. Mylan Labs., Inc., 230 F.3d 594 (3d Cir. 2000) ......................................................................................... 10, 13, 29 In re Adolor Corp. Sec. Litig., 616 F. Supp. 2d 551 (E.D. Pa. 2009) ........................................................................................ 36 In re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir. 1999) ............................................................................................... 20, 33 In re Amarin Corp. PLC., No. 13-CV-6663 FLW TJB, 2015 WL 3954190 (D.N.J. June 29, 2015) ............................................................................... 31 In re Astea Int'l Inc. Sec. Litig., No. CIV.A. 06-1467, 2007 WL 2306586 (E.D. Pa. Aug. 9, 2007) .......................................... 33 In re Bank of Am. AIG Disclosure Sec. Litig., 980 F. Supp. 2d 564 (S.D.N.Y. 2013) ...................................................................................... 30 In re Bell Atl. Corp. Sec. Litig., 142 F.3d 427 (3d Cir. 1998) ..................................................................................................... 22 In re Bell Atl. Corp. Sec. Litig., No. CIV. A. 91-0514, 1997 WL 205709 (E.D. Pa. Apr. 17, 1997) .......................................... 22 In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410 (3d Cir. 1997) ....................................................................................... 20, 26, 29 In re Calpine Corp. Sec. Litig., 288 F. Supp. 2d 1054 (N.D. Cal. 2003) .................................................................................... 16 In re Dell Inc. Sec. Litig., 591 F. Supp. 2d 877 (W.D. Tex. 2008) .................................................................................... 40 In re Discovery Labs. Sec. Litig., No. 06-1820, 2006 WL 3227767 (E.D. Pa. Nov. 1, 2006) ................................................. 10, 11 In re DVI, Inc. Sec. Litig., No. 2:03-cv-05336, 2010 WL 3522090 (E.D. Pa. Sept. 3, 2010) ....................................... 38, 40 In re Ford Motor Co. Sec. Litig., 381 F.3d 563 (6th Cir. 2004) .................................................................................................... 20 In re Impac Mortg. Holdings, Inc. Sec. Litig., 554 F. Supp. 2d 1083 (C.D. Cal. 2008) .................................................................................... 28 In re Initial Pub. Offering Sec. Litig., 399 F. Supp. 2d 261 (S.D.N.Y. 2005) ................................................................................ 39, 41 In re Intelligroup Sec. Litig., 468 F. Supp. 2d 670 (D.N.J. 2006) ........................................................................................... 36 In re Merck & Co., Inc. Sec. Litig., 432 F.3d 261 (3d Cir. 2005) ............................................................................................... 10, 17 In re NutriSystem, Inc. Derivative Litig., 666 F. Supp. 2d 501 (E.D. Pa. 2009) ........................................................................................ 31 Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 5 of 50 v DM1\7870991.1 In re Phillips Petroleum Sec. Litig., 881 F.2d 1236 (3d Cir. 1989) ................................................................................................... 26 In re Radian Sec. Litig., 612 F. Supp. 2d 594 (E.D. Pa. 2009) ........................................................................................ 35 In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198 (3d Cir. 2002) ................................................................................................. 9, 30 In re Silicon Storage Tech., Inc., Sec. Litig., No. C-05-0295PJH, 2007 WL 760535 (N.D. Cal. Mar. 9, 2007) ............................................. 28 In re Stonepath Grp., Inc. Sec. Litig., No. CIV.A. 04-4515, 2006 WL 890767 (E.D. Pa. Apr. 3, 2006) .......................................................................... 31, 34 In re Tellium, Inc. Sec. Litig, No. 02-cv-5878-FLW, 2005 WL 2090254 (D.N.J. Aug 26, 2005) .................................... 37, 38 In re Tyson Foods, Inc., 155 F. App’x 53 (3d Cir. 2005) ................................................................................................ 30 In re USF&G Corp. Sec. Litig., No. B-90-2928, 1993 WL 740188 (D. Md. Feb. 11, 1993) ...................................................... 22 Ind. Elec. Workers’ Pension Trust Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527 (5th Cir. 2008) .................................................................................................... 21 Ironworkers Local 580-Joint Funds v. Linn Energy, LLC, 29 F. Supp. 3d 400 (S.D.N.Y. 2014) ........................................................................................ 16 Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161 (2d Cir. 2005) ..................................................................................................... 39 Lighthouse Fin. Grp. v. Royal Bank of Scotland Grp., PLC, 902 F. Supp. 2d 329 (S.D.N.Y. 2012) ...................................................................................... 34 Marsh Grp. v. Prime Retail, Inc., 46 F. App’x 140 (4th Cir. 2002) ............................................................................................... 22 McCabe v. Ernst & Young, LLP, 494 F.3d 418 (3d Cir. 2007) ..................................................................................................... 36 McKowan Lowe & Co., Ltd. v. Jasmine, Ltd., No. Civ. 94-5522-RBK, 2005 WL 1541062 (D.N.J. June 30, 2005) ....................................... 38 Messner v. USA Techs., Inc., No. CV 15-5427, 2016 WL 1466543 (E.D. Pa. Apr. 13, 2016) ............................................................................ 35 Nat’l Junior Baseball League v. Pharmanet Dev. Grp., Inc., 720 F. Supp. 2d 517 (D.N.J. 2010) ..................................................................................... 38, 39 Nathenson v. Zonagen Inc., 267 F.3d 400 (5th Cir. 2001) .................................................................................................... 20 Payne v. DeLuca, 433 F. Supp. 2d 547 (W.D. Pa. 2006) ....................................................................................... 37 Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 6 of 50 vi DM1\7870991.1 Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 898 F. Supp. 2d 673 (S.D.N.Y. 2012) ...................................................................................... 40 Rabinovits v. USF & G Corp., 16 F.3d 411 (4th Cir. 1994) ...................................................................................................... 22 Rahman v. Kid Brands, Inc., 736 F.3d 237 (3d Cir. 2013) ..................................................................................................... 32 Se. Pa. Transp. Auth. v. Orrstown Fin. Servs., Inc., No. 1:12-CV-00993, 2015 WL 3833849 (M.D. Pa. June 22, 2015) ......................................... 20 Shapiro v. UJB Fin. Corp., 964 F.2d 272 (3d Cir. 1992) ..................................................................................................... 41 Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353 (5th Cir. 2004) .................................................................................................... 31 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) ...................................................................................................... 20, 29, 30 TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438 (1976) .................................................................................................................. 27 Weiner v. Quaker Oats Co., 129 F.3d 310 (3d Cir. 1997) ..................................................................................................... 26 Wielgos v. Commonwealth Edison Co., 892 F.2d 509 (7th Cir. 1989) .................................................................................................... 27 Winer Family Trust v. Queen, 503 F.3d 319 (3d Cir. 2007) ......................................................................................... 21, 31, 33 WM High Yield Fund. v. O’Hanlon, No. Civ. A. 04-3423, 2013 WL 3230667 (E.D. Pa. June 27, 2013) ......................................... 39 Wozniak v. Align Tech., Inc., 850 F. Supp. 2d 1029 (N.D. Cal. 2012) .................................................................................... 34 Statutes 15 U.S.C. § 78u-4(b)(1) ................................................................................................................ 10 15 U.S.C. § 78u-4(b)(2) ............................................................................................................ 4, 32 15 U.S.C. § 78u-4(b)(2)(A)........................................................................................................... 10 Rules 17 C.F.R. § 240.13a-1417 ............................................................................................................. 28 17 C.F.R. § 240.15d-14 ................................................................................................................. 28 Fed. R. Civ. P. 12(b)(6)................................................................................................................... 9 Fed. R. Civ. P. 9(b) ......................................................................................................................... 9 Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 7 of 50 1 DM1\7870991.1 Defendants StoneMor Partners L.P. (“StoneMor”), StoneMor GP, LLC (“StoneMor GP”), StoneMor GP Holdings, LLC (“StoneMor Holdings”), American Cemeteries Infrastructure Investors, LLC (“ACII”); Lawrence R. Miller (“Miller”), Sean P. McGrath (“McGrath”), Robert B. Hellman, Jr. (“Hellman”), William R. Shane (“Shane”), and Timothy Yost (“Yost”) (collectively, the “Individual Defendants,” and together with StoneMor, StoneMor GP, StoneMor Holdings, and ACII, the “Defendants”) respectfully file this Memorandum of Law in support of their Motion to Dismiss Plaintiffs’ Consolidated Class Action Complaint for Violation of the Federal Securities Laws (the “Complaint” or “CAC”). I. SUMMARY OF THE ARGUMENT This lawsuit was filed on the heels of StoneMor’s October 2016 announcement that it would be reducing its quarterly distribution to its equity-holders. Like any publicly traded partnership, StoneMor is obligated under its partnership agreement to pay a quarterly distribution to the extent it has the cash to do so. While StoneMor had paid a quarterly distribution of $0.60- 0.66 per unit in the three years before the October 2016 announcement, StoneMor had also repeatedly warned investors that it might not be able to sustain its distribution depending on various factors, including the salesforce issues that led to the October 2016 reduction. Despite StoneMor’s repeated warnings, Plaintiffs claim that Defendants committed securities fraud by creating the false appearance that StoneMor “was capable of paying a large quarterly distribution well into the future.” CAC ¶ 81. But StoneMor, of course, never promised that distributions would continue unabated in perpetuity, and it repeatedly disclosed—years ago—the allegedly concealed information that is at the heart of the Complaint. Plaintiffs allege that (1) StoneMor’s quarterly distributions from 2012 through 2016 exceeded StoneMor’s cash flows from operations (measured under generally accepted accounting principles (“GAAP”)); (2) StoneMor thus depended on a revolving credit facility to have sufficient Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 8 of 50 2 DM1\7870991.1 cash to sustain its quarterly unitholder distributions; and (3) StoneMor repeatedly paid down the balance on this credit facility with equity offerings. According to Plaintiffs, Defendants’ representations during this time period “obscured” these alleged facts, which “concealed [the] risk that distributions would be cut significantly if the Company’s access to the capital markets was ever impaired.” CAC ¶¶ 2, 136, 166. The Complaint fails as a matter of law for four primary reasons, each of which provides an independent basis for dismissal by the Court: Nothing was concealed. StoneMor’s disclosure of the allegedly concealed information defeats Plaintiffs’ case in its entirety. As for Plaintiffs’ allegation that “Defendants obscured the fact that the Company paid the distribution from its revolving credit facility, which was in turn paid down through the proceeds of a series of equity offerings” (CAC ¶ 2), StoneMor repeatedly disclosed that it could not maintain its distribution levels without its revolving credit facility and that it used proceeds from equity issuances to pay down this credit facility. Plaintiffs also allege that StoneMor used non-GAAP metrics to conceal its “true then-existing profitability and cash flows from operations.” Id. ¶ 87. Again, in direct contradiction to this allegation, StoneMor always disclosed a full reconciliation of its GAAP and non-GAAP financial metrics, and StoneMor’s financial statements (and other publicly disclosed materials) clearly showed that its cash distributions exceeded its GAAP operating profits and cash flows. In fact, the Complaint includes a diagram copied from a presentation StoneMor made in 2013 showing (like many of StoneMor’s other disclosures) that its GAAP operating profits (orange) were significantly lower than its distributions (grey): Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 9 of 50 3 DM1\7870991.1 Id. ¶ 155. Remarkably, the Complaint concedes that market analysts and investors have known for years the very information that Plaintiffs allege was “concealed” until StoneMor cut its distribution. Id. ¶¶ 155, 182, 191-92. There are no actionable false or misleading statements. The Court need not analyze each allegedly false or misleading statement because Plaintiffs’ Complaint is defeated in its entirety by StoneMor’s public disclosures. However, even if the Court undertook such an analysis, it should dismiss the Complaint on the basis that Plaintiffs have not pled an actionable false or misleading statement. The alleged false and misleading statements fall into four categories: (a) statements lauding StoneMor’s strength or health in connection with a particular quarter’s distribution announcement; (b) statements regarding the connection between operations and distributions; (c) statements that equity offerings were used to pay down StoneMor’s credit facility; and (d) statements made in StoneMor’s Sarbanes Oxley certifications. Plaintiffs do not identify anything objectively false in these statements. Rather, Plaintiffs argue that they are misleading, but this argument is premised on Plaintiffs’ untenable interpretations of the representations, such as Plaintiffs’ theory that they were promises that StoneMor’s GAAP-based cash flows were high enough (and would always be high enough) to “fully fund” distributions. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 10 of 50 4 DM1\7870991.1 CAC ¶ 130. Further, many of the alleged misrepresentations are inactionable because they are “puffery” and/or not objectively verifiable. There is not a strong inference of scienter. Plaintiffs’ allegations fall far short of the heightened pleading standard for scienter required under the Private Securities Litigation Reform Act (“PSLRA”), which requires that “the complaint shall, with respect to each act or omission alleged to violate this chapter, 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) (emphasis added). There is not a single well-pled allegation in the Complaint that any of the Defendants exhibited “an extreme departure from the standards of ordinary care, . . . which present[ed] a danger of misleading buyers or sellers that [was] either known to the defendant or [was] so obvious that the actor must have been aware of it.” GSC Partners CDO Fund v. Washington, 368 F.3d 228, 239 (3d Cir. 2004). Rather than pleading particularized facts showing an extreme departure from the standards of ordinary care as to each of the Defendants, Plaintiffs impermissibly lump the “Defendants” together and rely on a number of boilerplate scienter allegations, e.g., that Defendants acted recklessly because of their positions at (and control of) StoneMor, access to unidentified internal reports, and personal financial motivations to pay out large distributions. Courts in this and other circuits have rejected nearly identical scienter allegations at the pleadings stage because (among other things) such allegations, if accepted, would allow scienter to be pleaded against nearly every officer or director of nearly every publicly traded entity. There is no loss causation. Plaintiffs must, but fail to, allege facts sufficient to show that Defendants’ false or misleading statements proximately caused Plaintiffs’ loss. To do so, Plaintiffs must allege that StoneMor’s unit price declined because the market learned a previously concealed truth about Defendants’ past misrepresentations. Plaintiffs point to the decline in StoneMor’s unit Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 11 of 50 5 DM1\7870991.1 price after its distribution cut on October 27, 2016, but they do not adequately allege that this price drop was the result of the market “discovering” Defendants’ supposed fraud. Indeed, Plaintiffs concede that (1) market analysts and investors learned the allegedly concealed information several years ago, and (2) StoneMor’s unit price dropped because of a distribution cut, not the revelation of a fraud. II. BACKGROUND A. StoneMor StoneMor, a publicly traded partnership (a “Master Limited Partnership” or “MLP”), is “the second-largest owner and operator of cemeteries and funeral homes in the U.S.” CAC ¶ 48. Throughout the Class Period, StoneMor operated over 250 cemeteries (most of which it owned) and owned and operated approximately 100 funeral homes. StoneMor sells its products and services—e.g., burial lots, grave markers, and installation of caskets—both at the time of death (“at-need”) and prior to the time of death (“pre-need”). Id. ¶ 49. B. “Pre-Need” Sales As disclosed in StoneMor’s annual reports and referenced in the Complaint, StoneMor is required under state laws to contribute a percentage of its “pre-need” sales “into a merchandise trust until such time that the Partnership meets the requirements for releasing trust principal, which is generally delivery of merchandise or performance of services.” Ex. 23, 2015 Form 10-K (Feb. 29, 2016) at 13.1 Also, “pursuant to GAAP,” certain “pre-need sales cannot be recognized as current revenue until the service or product associated with the contract has been delivered.” CAC 1 The Court can consider StoneMor’s SEC filings and press releases in determining this motion to dismiss because they are matters of public record and relied on by Plaintiffs in their Complaint. See Buck v. Hampton Twp. Sch. Dist., 452 F.3d 256, 260 (3d Cir. 2006) (“In evaluating a motion to dismiss, we may consider documents that are attached to or submitted with the complaint, and any ‘matters incorporated by reference or integral to the claim, items subject to judicial notice, matters of public record, orders, [and] items appearing in the record of the case.’” (citation omitted)). Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 12 of 50 6 DM1\7870991.1 ¶ 71. Thus, StoneMor’s financial statements reported in accordance with GAAP do not fully reflect the sales and cash that StoneMor has generated in any given period; instead, StoneMor’s GAAP-based financial statements depend on how many pre-need sales from prior quarters were delivered in a given quarter (in addition to at-need sales, which can be recognized at the time of sale). For investors who preferred to analyze StoneMor’s present-day generation of revenues, therefore, StoneMor also provided its investors with clearly-marked “non-GAAP” financial metrics. CAC ¶ 73. The non-GAAP metrics provide a “production based view” of StoneMor’s business and include the revenue recognized “at their contract value at the point in time in which the contract is written, less a historic cancellation reserve.” Ex. 4, 2011 Form 10-K (Mar. 15, 2012) at 54. For each of its segments, StoneMor provides clearly demarcated non-GAAP revenues, non-GAAP costs and expenses, and non-GAAP segment operating profit. See Ex. 11, 2012 Form 10-K (Mar. 15, 2013) at 55-58; Ex. 15, 2013 Form 10-K (Mar. 17, 2014) at 46-49; Ex. 19, 2014 Form 10-K (Mar. 16, 2015) at 52-56. In each of its annual reports, StoneMor includes a chart reconciling these non-GAAP results to GAAP results: Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 13 of 50 7 DM1\7870991.1 See Ex. 11, 2012 Form 10-K (Mar. 15, 2013) at 69; see also Ex. 15, 2013 Form 10-K (Mar. 17, 2014) at 50; Ex. 19, 2014 Form 10-K (Mar. 16, 2015) at 57. StoneMor’s quarterly earnings press releases also offered a step-by-step reconciliation between GAAP metrics (such as net loss) and non-GAAP metrics (such as distributable cash flow and adjusted EBITDA): Ex. 24, StoneMor Press Release (Aug. 5, 2016) at 10. Note three in this chart explained that this line item added “revenues and related expenses deferred in accordance with GAAP because certain delivery and performance requirements have not yet been met.” Id. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 14 of 50 8 DM1\7870991.1 C. StoneMor’s sources and uses of cash StoneMor’s “primary short-term liquidity needs are to fund general working capital requirements, repay our debt obligations, service our debt, make routine maintenance capital improvements and pay distributions.” Ex. 11, 2012 Form 10-K (Mar. 15, 2013) at 73. Its “primary sources of liquidity are cash flow from operations and amounts available under [its] Credit Facility,” a revolving credit facility that currently provides a $210 million line of credit. Id.; Ex. 24, StoneMor Press Release (Aug. 5, 2016) at 1. StoneMor has also increased its “liquidity through long-term bank borrowings and the issuance of additional common units and other partnership securities….” Ex. 11, 2012 Form 10-K (Mar. 15, 2013) at 73. As with any company that has multiple sources and uses of cash, StoneMor’s liquidity inputs and outputs are dependent on each other, and StoneMor has repeatedly disclosed that its ability to sustain distributions depends on (among other things) the success of its sales efforts and the availability of funds in its revolving credit facility. See Ex. 11, 2012 Form 10-K (Mar. 15, 2013) at 12.2 D. Distributions As a publicly traded partnership, StoneMor’s partnership agreement obligates it to pay quarterly distributions provided that it has the cash to do so. StoneMor’s quarterly distribution grew from $0.51/unit in 2005 to $0.66/unit for the second quarter of 2016.3 However, on October 27, 2016, StoneMor announced a quarterly distribution of $0.33/unit for the third quarter of 2016, representing a 50% reduction from the prior quarter. CAC ¶ 202. In the press release announcing the reduced distribution, StoneMor explained that the reduced distribution was due to issues with its sales force: “As previously discussed, we are working to re-grow our sales force, 2 See also Ex. 15, 2013 Form 10-K (Mar. 17, 2014) at 10; Ex. 19, 2014 Form 10-K (Mar. 16, 2015) at 12; Ex. 27, 2015 Form 10-K/A (Nov. 9, 2016) at 4. 3 See StoneMor Partners L.P., Distribution History, http://www.stonemor.com/investors/Distribution- History/default.aspx (last visited June 8, 2017). Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 15 of 50 9 DM1\7870991.1 increasing both its quality and size. . . . However, previous efforts to accomplish our salesforce goals have meaningfully lagged our expectations, resulting in a negative impact on our revenue.” Ex. 25, StoneMor Press Release (Oct. 27, 2016). As would be expected from any dividend or distribution cut, StoneMor’s announcement was followed by a drop in StoneMor’s unit price.4 CAC ¶ 203; see Ex. 11, 2012 Form 10-K (Mar. 15, 2013) at 12.5 III. LEGAL STANDARD To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A court must identify those pleadings that “because they are no more than conclusions, are not entitled to the assumption of truth,” and upon identifying any “well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 678. Because Plaintiffs’ allegations sound in fraud, each alleged misrepresentation must also meet the heightened pleading standards of Rule 9(b), which requires Plaintiffs, among other things, to identify the speaker for each statement and explain why each statement was fraudulent. Fed. R. Civ. P. 9(b); In re Rockefeller Ctr. Props., Inc. Sec. Litig., 311 F.3d 198, 217 (3d Cir. 2002). 4 The Complaint references StoneMor’s announcement of its intention to restate certain of its financial statements. However, neither of Plaintiffs’ causes of action are based on StoneMor’s misstated financial statements. Instead, Plaintiffs likely include the restatement in their lawsuit so that they can include irrelevant, inflammatory insinuations regarding the restatement. See, e.g., CAC ¶ 117. Plaintiffs most likely do not assert any actual claims based on the restatement because it is expected to result in improved earnings for each of the periods being restated. See Ex. 26, Form 8-K (Nov. 9, 2016). 5 See also Ex. 15, 2013 Form 10-K (Mar. 17, 2014) at 10; Ex. 19, 2014 Form 10-K (Mar. 16, 2015) at 12; Ex. 27, 2015 Form 10-K/A (Nov. 9, 2016) at 4. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 16 of 50 10 DM1\7870991.1 Plaintiffs’ claims are also subject to the heightened pleading standard of the PSLRA, which requires the Complaint to “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). The heightened pleading standard of the PSLRA also requires the Complaint to “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Id. § 78u-4(b)(2)(A). IV. ARGUMENTS AND AUTHORITIES The Complaint fails to satisfy any of the elements necessary to plead a claim for violation of Section 10(b): “(1) the defendant made a materially false or misleading statement or omitted to state a material fact necessary to make a statement not misleading; (2) the defendant acted with scienter; and (3) the plaintiff’s reliance on the defendant’s misstatement caused him or her injury.” In re Merck & Co., Inc. Sec. Litig., 432 F.3d 261, 268 (3d Cir. 2005). First and foremost, all of the allegedly “concealed” information was, in fact, disclosed and known to the market (infra § IV.A). Further, Plaintiffs’ claims fail because they have not pled an actionable false or misleading statement or omission (infra § IV.B), a strong inference of scienter (infra § IV.C), or an injury caused by any of the alleged misstatements or omissions (infra § IV.D). A. The Complaint fails because the allegedly concealed facts were disclosed. StoneMor repeatedly and clearly disclosed the very information Plaintiffs allege was concealed from the market, which is fatal to Plaintiffs’ claims. See, e.g., Ieradi v. Mylan Labs., Inc., 230 F.3d 594, 599 (3d Cir. 2000) (dismissing Rule 10b-5 claims where allegedly omitted information was disclosed); In re Discovery Labs. Sec. Litig., No. 06-1820, 2006 WL 3227767, at *11 (E.D. Pa. Nov. 1, 2006) (dismissing claims and observing that “prior public disclosure negates a finding that material information was withheld”). Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 17 of 50 11 DM1\7870991.1 Plaintiffs’ entire case is premised on allegations that various of StoneMor’s representations were false or misleading because these representations “obscured the fact that the Company paid the distribution from its revolving credit facility, which was in turn paid down through the proceeds of a series of equity offerings.” CAC ¶ 2. According to Plaintiffs, this “sleight of hand was furthered by reliance on arcane, non-GAAP accounting methods,” which purportedly concealed the fact that under GAAP accounting, StoneMor “actually generated only a small fraction of the revenue needed to pay the cash dividends it promised.” Id. ¶¶ 3-9 (footnote omitted). By engaging in this supposed misconduct, StoneMor allegedly “concealed [the] risk that distributions would be cut significantly if the Company’s access to the capital markets was ever impaired.” Id. ¶¶ 136, 166. However, all of this allegedly concealed information was repeatedly disclosed. On numerous occasions, StoneMor disclosed (1) that its ability to pay distributions depended on its revolving credit facility, which was paid down using equity offerings (infra § IV.A.1); and (2) its GAAP financials, a reconciliation between GAAP and non-GAAP financials, and the fact that GAAP revenues and operating cash flows were lower than cash distributions (infra § IV.A.2). Indeed, Plaintiffs concede that the “truth” of the supposed “scheme” was recognized by investors long ago based on publicly available information (infra § IV.A.3). These disclosures defeat Plaintiffs’ claims as a matter of law. See Discovery Labs., 2006 WL 3227767, at *11 (“[A] motion to dismiss may be granted if the company’s SEC filings or other documents disclose the very information necessary to make their public statements not misleading.” (citations and internal quotation marks omitted)). Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 18 of 50 12 DM1\7870991.1 1. StoneMor disclosed that it could not maintain distributions without its credit facility and that proceeds from equity offerings were used to pay down the credit facility. Contrary to the central premise of Plaintiffs’ lawsuit, StoneMor repeatedly disclosed that it (a) could not maintain its current distribution levels without its credit facility, and (b) used equity issuances to pay down its credit facility. For example, in StoneMor’s 2012 Form 10-K, StoneMor stated: We expect that we will need working capital borrowings of approximately $22.0 million during the twelve-month period ending December 31, 2013 in order to have sufficient operating surplus to pay distributions at their current level on all of our common units for that period, although the actual amount of working capital borrowings could be materially more or less. Ex. 11, 2012 Form 10-K (Mar. 15, 2013) at 12 (emphasis added). StoneMor made an identical disclosure in each of its Form 10-Ks during the class period, although the requisite amount of working capital borrowings needed to maintain distributions varied, ranging from $21 million to $60 million.6 StoneMor similarly emphasized that:  “[T]he actual amount of cash we will have available for distribution will depend on” various “factors, such as working capital borrowings, capital expenditures and funding requirements for trusts and our ability to withdraw amounts from trusts.” Ex. 4, 2011 Form 10-K (Mar. 15, 2012) at 12 (emphasis added).  “Available cash” for distributions “consists 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 but before the date of determination of available cash for the quarter, less cash reserves.” Id. at 29 (emphasis added).  “Our primary sources of liquidity are cash flow from operations and amounts available under our credit facilities as described below.” Id. at 72. These disclosures appeared in each of StoneMor’s Form 10-Ks.7 6 See Ex. 15, 2013 Form 10-K (Mar. 17, 2014) at 10; Ex. 19, 2014 Form 10-K (Mar. 16, 2015) at 12-13; Ex. 27, 2015 Form 10-K/A (Nov. 9, 2016) at 4. 7 See Ex. 15, 2013 Form 10-K (Mar. 17, 2014) at 10, 24, 60; Ex. 19, 2014 Form 10-K (Mar. 16, 2015) at 12, 30, 68; Ex. 27, 2015 Form 10-K/A (Nov. 9, 2016) at 4, 11, 26, 30. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 19 of 50 13 DM1\7870991.1 In turn, and acknowledged in the Complaint, StoneMor disclosed at the time of each equity offering (and in various other SEC filings) that it was using the proceeds from the equity offering to pay down the balance on its credit facility: “StoneMor intends to use the net proceeds from the offering to pay down outstanding indebtedness under its revolving credit facility.” CAC ¶ 176; accord id. ¶¶ 143, 159, 162, 163, 165, 170, 179, 184, 186, 189 (all containing substantially similar disclosures); see also id. ¶ 55. Additionally, StoneMor disclosed in its annual reports the importance of being able to pay down the credit facility and the effect this could have on distributions: “[o]ur substantial level of indebtedness could materially adversely affect our ability to generate sufficient cash for distribution to our unitholders, to fulfill our debt obligations and to operate our business.”8 These disclosures completely undermine Plaintiffs’ lawsuit because they put the market on notice that StoneMor relied on credit to sustain its distributions and paid down its credit balance with the proceeds from equity offerings. See Ieradi, 230 F.3d at 599 (dismissing complaint because the “public disclosure was more than sufficient to put potential investors . . . on notice” of alleged risk). 2. Plaintiffs concede that the “truth” of the supposed “scheme” was evident from GAAP financial metrics that StoneMor disclosed several years ago. The other pillar of Plaintiffs’ lawsuit—that StoneMor “used the Company’s quarterly non- GAAP financial metrics to obscure the Company’s true then-existing profitability and cash flows from operations”—also fails as a matter of law due to StoneMor’s public disclosures. CAC ¶ 87; accord id. ¶¶ 2-3, 7, 9, 69, 81-86, 88-89. According to Plaintiffs, StoneMor used “non-GAAP metrics” to “conceal” that its quarterly distributions were “unsustainable.” Id. ¶¶ 75, 86-87; accord 8 See also Ex. 15, 2013 Form 10-K (Mar. 17, 2014) at 10; Ex. 19, 2014 Form 10-K (Mar. 16, 2015) at 13; Ex. 27, 2015 Form 10-K/A (Nov. 9, 2016) at 4. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 20 of 50 14 DM1\7870991.1 id. ¶¶ 78-85 & nn. 16-18. By contrast (Plaintiffs contend), GAAP-based financial metrics—i.e., “cash flows from operations” and “net loss[/income]”—revealed that StoneMor’s operations were insufficient to cover quarterly distributions without additional sources of cash (such as debt or equity). See id. ¶¶ 3, 7, 9, 77, 87-97. Indeed, Plaintiffs declare that StoneMor’s supposed fraud is “easily understood by comparing the Company’s GAAP and non-GAAP accounting metrics.” Id. ¶ 89 (emphasis added). The fundamental flaw in Plaintiffs’ theory is that StoneMor fully disclosed, in every quarter during the Class Period, (1) the very GAAP metrics that Plaintiffs reference, (2) a reconciliation between GAAP and non-GAAP metrics, and (3) tables making clear that GAAP-based operating revenues and cash flows were lower than cash distributions. For instance:  StoneMor regularly disclosed GAAP “cash flows from operations” or “operating cash flows.”9  StoneMor regularly disclosed a chart showing—directly next to each other—GAAP net loss, GAAP operating cash flows, and distributions to unitholders, allowing any unitholder to see that StoneMor’s distribution exceeded its operating cash flows: Ex. 4, 2011 Form 10-K (Mar. 15, 2012) at 49.10  StoneMor explicitly disclosed that its non-GAAP financial metrics include pre-need sales “at the point in time in which the contract is written, less a historic cancellation reserve” 9 Ex. 11, 2012 Form 10-K (Mar. 15, 2013) at 50, 81, 90; Ex. 15, 2013 Form 10-K (Mar. 17, 2014) at 42, 67, 75; Ex. 19, 2014 Form 10-K (Mar. 16, 2015) at 47, 75, 84; Ex. 27, 2015 Form 10-K/A (Nov. 9, 2016) at 26, 37; see also CAC ¶¶ 93-94 (creating charts from these publicly disclosed figures). 10 See also Ex. 15, 2013 Form 10-K (Mar. 17, 2014) at 42; Ex. 19, 2014 Form 10-K (Mar. 16, 2015) at 47. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 21 of 50 15 DM1\7870991.1 and explained how this contrasts to GAAP, which “requires that [StoneMor] defer all revenues . . . until [it] meet[s] certain delivery and performance requirements.”11  StoneMor disclosed that “[c]ash and other investments held in merchandise trusts and perpetual care trusts are not treated as available cash until they are distributed to [StoneMor].”12  StoneMor’s annual and quarterly reports included a full reconciliation between its non- GAAP and GAAP metrics.13 Each table clearly shows that GAAP revenues and operating profits are significantly lower than non-GAAP revenues and operating profits. Supra n.13.  StoneMor explicitly disclosed that its GAAP “operating cash flows were less than distributions, but adjusted operating cash flows [a non-GAAP metric] were greater than distributions.” See, e.g., Ex. 3, Form 8-K (Mar. 15, 2012) at 7-8.  In a 2013 investor presentation quoted in the Complaint, StoneMor graphically depicted the difference between its operating profit under GAAP (orange), its distributions (grey), and its non-GAAP adjusted operating profit (green): 11 See Ex. 11, 2012 Form 10-K (Mar. 15, 2013) at 54; Ex. 15, 2013 Form 10-K (Mar. 17, 2014) at 46; Ex. 19, 2014 Form 10-K (Mar. 16, 2015) at 52. 12 See Ex. 11, 2012 Form 10-K (Mar. 15, 2013) at 29; Ex. 15, 2013 Form 10-K (Mar. 17, 2014) at 24; Ex. 19, 2014 Form 10-K (Mar. 16, 2015) at 30. 13 See Annual Reports: Ex. 11, 2012 Form 10-K (Mar. 15, 2013) at 60; Ex. 15, 2013 Form 10-K (Mar. 17, 2014) at 50; Ex. 19, 2014 Form 10-K (Mar. 16, 2015) at 56-57. See also Quarterly Reports: Ex. 6, Q1 2012 Form 10-Q (May 9, 2012) at 35; Ex. 7, Q2 2012 Form 10-Q (Aug. 7, 2012) at 37, 43; Ex. 10, Q3 2012 Form 10-Q (Nov. 6, 2012) at 40, 46; Ex. 12, Q1 2013 Form 10-Q (May 7, 2013) at 35; Ex. 13, Q2 2013 Form 10-Q (Aug. 7, 2013) at 38, 44; Ex. 14, Q3 2013 Form 10-Q (Nov. 7, 2013) at 41-42, 47-48; Ex. 16, Q1 2014 Form 10-Q (May 8, 2014) at 36; Ex. 17, Q2 2014 Form 10-Q (Aug. 8, 2014) at 40-41, 46-47; Ex. 18, Q3 2014 Form 10-Q (Nov. 7, 2014) at 41-42, 47-48; Ex. 20, Q1 2015 Form 10-Q (May 8, 2015) at 35; Ex. 21, Q2 2015 Form 10-Q (Aug. 10, 2015) at 43-44, 50; Ex. 22, Q3 2015 Form 10-Q (Nov. 9, 2015) at 47-48, 54. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 22 of 50 16 DM1\7870991.1 CAC ¶ 155 (quoting StoneMor’s Investor Day Presentation (Nov. 18, 2013)). Any investor reviewing this chart in 2013 would have understood the supposedly “concealed” shortfall between GAAP-based operational results and StoneMor’s distributions. Plaintiffs (perhaps inadvertently) confirm that the crux of their claims—that cash flows from operations were not sufficient to single-handedly sustain distributions—was always known to the public, thereby defeating their claims. The Complaint aggregates several years’ worth of publicly available “cash-flows from operations” figures, which “indicat[e] that there were insufficient funds from current operations to fund all of the Company’s operating costs and expenses during that quarter.” CAC ¶¶ 90-91 (emphasis omitted); see also id. ¶ 92 (stating “it is apparent” based on publicly available data that “StoneMor’s ability to access cash flows from its current operations . . . was deteriorating markedly” (emphasis omitted)); id. ¶ 93 (admitting that “the Company’s inability to fund the distribution simply from . . . operations” was “apparent” based on publicly available data); ¶¶ 90-94, 112-115 (using publicly available data, such as current period “GAAP operating cash flow[s],” to assert that “it was inevitable that the Company’s scheme would eventually collapse”). Plaintiffs attempt to prove their case with charts comparing StoneMor’s distributions to its operating cash flows, but they concede that “[t]he information contained in the tables and charts” was compiled “from publically [sic] available sources” (id. ¶ 54 n.7), which is fatal to their claims. Plaintiffs cannot avoid the dispositive effect of these disclosures by claiming that StoneMor “focused investor and analyst attention on non-GAAP financial measures” to the exclusion of GAAP metrics. CAC ¶ 69. StoneMor disclosed both GAAP and non-GAAP metrics and provided a reconciliation between the two, and Plaintiffs do not allege that anything was misleading in these reconciliations. See Ironworkers Local 580-Joint Funds v. Linn Energy, LLC, 29 F. Supp. 3d 400, 426 (S.D.N.Y. 2014); In re Calpine Corp. Sec. Litig., 288 F. Supp. 2d 1054, 1083 (N.D. Cal. 2003) (noting that “[o]ne would expect that if the use of non-GAAP measures by itself were actionable Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 23 of 50 17 DM1\7870991.1 under the Exchange Act, corporations would have ceased using such measures a long time ago”). Plaintiffs’ protestations about non-GAAP metrics fall woefully short of a securities fraud claim. Plaintiffs do not identify a single non-GAAP metric in the “false and misleading statements” section of the Complaint. CAC ¶¶ 127-200. Nor do Plaintiffs allege that StoneMor violated any SEC regulation concerning the use of non-GAAP metrics. It is simply not plausible for Plaintiffs to suggest that all of StoneMor’s financial data was widely available but that Defendants nevertheless tricked the entire market into focusing exclusively on non-GAAP metrics, particularly given Plaintiffs’ allegation that the market for StoneMor units was efficient—i.e., that the market “promptly digested current information regarding StoneMor from all publicly available sources and reflected such information in StoneMor’s unit price.” CAC ¶ 267 (emphasis added); see In re Merck, 432 F.3d at 271 (affirming dismissal and rejecting plaintiff’s argument that defendants had not adequately disclosed certain information because “[a]n efficient market for good news is an efficient market for bad news”). 3. The Complaint confirms that market analysts and investors have known the supposedly concealed information for years. In light of the foregoing disclosures, it should come as no surprise that market analysts and investors have known the allegedly concealed information for years, as the Complaint confirms. The relationship between StoneMor’s distributions, working capital borrowings, and equity offerings was openly discussed during earnings calls. For example, during StoneMor’s August 7, 2012 earnings call, which is quoted extensively by Plaintiffs in the Complaint, an analyst asked: “if you didn’t have access to capital markets, how would you finance your distribution?” and followed up with “in the near term you’re having to use your bank lines to basically finance the distribution, and I guess my question is, how long can you continue to do that?” Ex. 8, Q2 2012 Earnings Call Transcript (Aug. 7, 2012) at 8-9. Plaintiffs also concede on several occasions that Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 24 of 50 18 DM1\7870991.1 market analysts and certain investors long ago used the publicly disclosed financial metrics discussed above to identify the supposed “fraud” that forms the basis of Plaintiffs’ claims. For instance, the Complaint cites to an article from July 2012 that (in Plaintiffs’ words) “questioned the sustainability of StoneMor’s cash distribution payments, the source of those cash payments given the Company’s weak cash flow, and the misleading non-GAAP accounting StoneMor was emphasizing over its GAAP accounting.” CAC ¶ 220; see also id. ¶ 65 (“[m]arket analysts assessing StoneMor’s securities occasionally asked about the Company’s rapid rate of cash outflows”); id. ¶ 155 (“StoneMor was often asked how it managed to pay distributions well in excess of its (relatively small) operating profit”); id. ¶ 172 (“[o]ne of the questions that comes up a lot” from investors is “how could [StoneMor] possibly make the distributions that [StoneMor] make[s]” in light of its “GAAP revenues”). * * * The bottom line is that StoneMor undisputedly disclosed—years ago—everything that Plaintiffs claim was concealed, i.e., that StoneMor (1) had insufficient cash flows from operations to cover its distributions each quarter; (2) could not have maintained its distribution levels without its revolving credit facility; and (3) paid down this credit facility with equity issuances. Their entire lawsuit, therefore, fails as a matter of law. B. Plaintiffs fail to identify any actionable, false or misleading statements. Because Plaintiffs’ entire lawsuit is predicated on the (incorrect) notion that Defendants’ alleged misrepresentations concealed information that (in reality) was repeatedly and clearly disclosed in various ways, it is unnecessary to examine the alleged misrepresentations on a category-by-category or misrepresentation-by-misrepresentation basis. See supra § IV.A. But even if this exercise were necessary, the Court should dismiss the Complaint in its entirety because Plaintiffs have not alleged any actionable false or misleading statements. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 25 of 50 19 DM1\7870991.1 Plaintiffs allege that Defendants “concealed” the “truth” about StoneMor’s distributions, operating cash flows, and use of debt/equity with four categories of alleged misrepresentations: Category A: Statements lauding StoneMor’s strength or health in connection with a particular quarter’s distribution announcement; Category B: Statements regarding the connection between operations and distributions; Category C: Statements that equity offerings were used to pay down StoneMor’s debt facility; and Category D: Certification statements required by statute. See Appendix A, a chart compiling the alleged misrepresentations from the Complaint. For the reasons set forth below, each category of alleged misrepresentations is not actionable, not false/misleading, or immaterial as a matter of law. 1. Category A: The alleged statements that StoneMor was a “strong” or “healthy” company are not actionable or misleading. The first of Plaintiffs’ failed attacks focuses on statements in StoneMor’s distribution announcements that the partnership was performing well.14 For instance, Plaintiffs allege that Defendants committed securities fraud by stating, in press releases announcing each quarter’s distribution, that “[g]iven the solid performance this year so far and what we expect will be continued good performance, we are comfortable . . . affirming our distribution” and “[t]he pace of our business and our expectations going forward also gave us the confidence, as previously announced, to raise our distribution for the first quarter.” CAC ¶¶ 137 (alterations omitted), 174. None of these statements are actionable under the federal securities laws, nor have Plaintiffs alleged that any of them are false or misleading. 14 This category of statements is identified as Category A in Appendix A. It includes the statements in CAC ¶¶ 128, 133, 137-38, 141, 145, 150, 153, 167, 174, 178. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 26 of 50 20 DM1\7870991.1 a. The alleged statements are inactionable as a matter of law. The statements in Category A are generalized “positive portrayals,” which are not actionable under the federal securities laws. In re Advanta Corp. Sec. Litig., 180 F.3d 525, 529, 538 (3d Cir. 1999), abrogated in part on other grounds by Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007). “[V]ague and general statements of optimism ‘constitute no more than puffery and are understood by reasonable investors as such.’” Id. (quoting In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1428 n.14 (3d Cir. 1997)); see also Nathenson v. Zonagen Inc., 267 F.3d 400, 419 (5th Cir. 2001) (explaining that “‘broad, general statements’ are ‘precisely the type of puffery that this and other circuits have consistently held to be inactionable’” (citation omitted)). Similarly, “statements not subject to verification by proof,” such as those lacking “a standard against which a reasonable investor could expect them to be pegged,” cannot be the basis of liability. City of Monroe Emps. Ret. Sys. v. Bridgestone Corp., 399 F.3d 651, 671, 674 (6th Cir. 2005); see also In re Ford Motor Co. Sec. Litig., 381 F.3d 563, 570-71 (6th Cir. 2004) (explaining that “rosy affirmation[s]” and “loosely optimistic statements” are so “numbingly familiar to the marketplace” that “no reasonable investor could find them important”). The “puffery” doctrine extends to statements, such as those in Category A, that generally reference a company’s performance as a basis for a dividend. Advanta, 180 F.3d at 529, 538 (dismissing a securities fraud claim premised on the company’s statement that “this dividend increase reflects management’s confidence in the company’s earnings momentum and . . . continuing commitment to enhancing shareholder value”). Additionally, business buzzwords and “[p]hrases such as ‘strong financial performance,’…are vague to the point of immateriality.” Se. Pa. Transp. Auth. v. Orrstown Fin. Servs., Inc., No. 1:12-CV-00993, 2015 WL 3833849, at *39 (M.D. Pa. June 22, 2015) (brackets omitted). Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 27 of 50 21 DM1\7870991.1 The statements in Category A fall within these legal principles. These statements, in general, describe StoneMor as having had a “solid performance” or “strong performance” in a particular quarter and laud various aspects of StoneMor’s business (e.g., “our ability to successfully implement these strategies”) in connection with a distribution announcement. CAC ¶¶ 137, 145, 167. Such representations are the epitome of inactionable puffery. b. The alleged statements are not false or misleading. Even if the statements in Category A were actionable, they are not adequately alleged to be false or misleading. Securities claims require a statement to be materially “misleading or untrue.” Winer Family Trust v. Queen, 503 F.3d 319, 330 (3d Cir. 2007). Statements that are “simply incomplete” cannot be the basis for a fraud claim. Id. “Often, a statement will not mislead even if it is incomplete or does not include all relevant facts.” Brody v. Transitional Hosps. Corp., 280 F.3d 997, 1006 (9th Cir. 2002) (quoted by Winer Family Trust, 503 F.3d at 330). To be misleading, the statement “must affirmatively create an impression of a state of affairs that differs in a material way from the one that actually exists.” Ind. Elec. Workers’ Pension Trust Fund IBEW v. Shaw Grp., Inc., 537 F.3d 527, 541 (5th Cir. 2008). Plaintiffs contend that StoneMor’s statements were misleading, but they do so by impermissibly misreading the representations as implying various unspoken promises. First, Plaintiffs contend that these statements gave the impression that StoneMor’s distributions were not (and would never be) “contingent on its access to the capital markets” and that it did not (and would never) “use[] the proceeds of equity offerings to pay the distribution.” CAC ¶168. For example, Plaintiffs complain that: [Representations] suggesting that the distribution was based on “the operating performance of the company,” its “solid performance,” or “the strength of our underlying business,” . . . were false and misleading [because StoneMor] could not, and never intended to fund the distributions from the performance of the business, i.e., Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 28 of 50 22 DM1\7870991.1 from day-to-day business operations, and the revenues and profits those operations generated. Instead, . . . StoneMor omitted to state that its ability to fund cash distributions was contingent on its access to the capital markets and that it used the proceeds of equity offerings to pay the distribution. CAC ¶ 139; see also id. ¶¶ 151, 154, 168, 175, 180 (containing nearly identical allegations regarding nearly identical representations). But StoneMor’s representations were not a promise— express or implied—that StoneMor could sustain its distributions without access to the capital markets. Statements lauding one particular aspect of StoneMor’s business are not a representation that everything else (i.e., financing) is irrelevant, and statements about historical performance do not imply future performance, especially where (as here) the statements are corporate cheerleading.15 Further, as previously demonstrated, Defendants contemporaneously presented unitholders with information about the relationship between distributions, working capital borrowings, and equity offerings. See supra § IV.A. And “a reasonable investor understands that the declaration of dividends is dependent upon the company’s financial ability to do so.” Arnlund v. Smith, 210 F. Supp. 2d 755, 768 (E.D. Va. 2002). Second, and similarly, Plaintiffs portray the statements as assurances that the entire amount of every distribution came from specific sources and only those sources. For example:  StoneMor represented that it determined the amount of a distribution after “evaluat[ing] recent operating results, the impact of [its] capital restructuring, and…recent acquisitions.” CAC ¶ 128. Plaintiffs allege that this representation was misleading because StoneMor “could not fully fund the distribution payments it was making” from those sources. Id. ¶ 130 (emphasis added). 15 Graff v. Prime Retail, Inc., 172 F. Supp. 2d 721, 729 (D. Md. 2001) (“Plaintiffs’ argument that the third-quarter release was misleading because it failed to reveal the risk to the fourth-quarter dividend is similarly unconvincing. Prime Retail’s statement was not about the prospects for a dividend in the fourth quarter, and nowhere did Defendants discuss the fourth quarter.”), aff’d sub nom. Marsh Grp. v. Prime Retail, Inc., 46 F. App’x 140 (4th Cir. 2002); In re Bell Atl. Corp. Sec. Litig., No. CIV. A. 91-0514, 1997 WL 205709, at *23 (E.D. Pa. Apr. 17, 1997) (failure of the predictions to come true is not proof of fraud or lack of a reasonable basis) (citing Eisenberg v. Gagnon, 766 F.2d 770, 775 (3d Cir. 1985)), aff’d., 142 F.3d 427 (3d Cir. 1998); In re USF&G Corp. Sec. Litig., No. B-90-2928, 1993 WL 740188, at *6–7 (D. Md. Feb. 11, 1993) (concluding that statements regarding anticipated dividends are not actionable), aff’d sub nom. Rabinovits v. USF & G Corp., 16 F.3d 411 (4th Cir. 1994). Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 29 of 50 23 DM1\7870991.1  StoneMor represented that a “distribution increase is a reflection on” its “growth strategies.” CAC ¶ 145. Plaintiffs allege that this representation was misleading because StoneMor was not “funding its distributions due to the success of its growth strategies alone.” Id ¶ 146 (emphasis added); see also id. ¶¶ 133, 135, 154. StoneMor’s statements did not imply that the source of certain cash inflows or the lauded aspects of its business made up the entire distribution (let alone that they would always make up the entire source of future distributions). Reporting positive performance in one aspect of a business does not mean that the entire distribution came from only that development, especially in light of StoneMor’s disclosures on needing working capital borrowings to sustain its distributions. Third, Plaintiffs accuse Defendants of “creat[ing] the false impression that [StoneMor’s] merchandise trust funds were accessible and capable of being used to fund the near-term distributions” (CAC ¶¶ 130, 135, 157) through representations about StoneMor’s “substantial buildup in [its] liquid net asset position as compared to prior periods” (id. ¶¶ 128, 133). StoneMor has not represented—either explicitly or implicitly—that it could immediately remove money from its merchandise trusts or that its distributions were funded with such withdrawals. Rather, StoneMor has explained since the very first page of its IPO prospectus that “[w]hen we sell pre- need products and services, we are required by state law to deposit a portion of the total sales price into a merchandise trust to ensure that we will have sufficient cash in the future to purchase the products and perform the services.”16 Its annual reports contained similar disclosures.17 StoneMor also warned investors that there would be “timing lags created by cash flows into our merchandise 16 Ex. 1, Form S-1/A, Amendment No. 6 to Registration Statement (Sept. 3, 2004) at 1. 17 See Ex. 23, 2015 Form 10-K (Feb. 29, 2016) at 5; Ex. 19 2014 Form 10-K (Mar. 16, 2015) at 6; Ex. 15, 2013 Form 10-K (Mar. 17, 2014) at 5; Ex. 11, 2012 Form 10-K (Mar. 15, 2013) at 6; Ex. 4, 2011 Form 10-K (Mar. 15, 2012) at 6. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 30 of 50 24 DM1\7870991.1 trusts.”18 Further, Defendants identified the merchandise trusts whenever they were part of a financial metric.19 2. Category B: The alleged statements regarding the connection between operations and distributions are not misleading or actionable. Plaintiffs also fail in their attack on alleged misrepresentations by StoneMor concerning the connection between operations and distributions.20 According to Plaintiffs, StoneMor misled investors to believe that it paid distributions using only its GAAP-based operating profits with statements such as “we always have a significant amount of coverage over the amount that we distributed during the quarter” and “we are clearly in [every] period earning well in excess of the distribution that we make.” CAC ¶¶ 155, 172. a. The alleged statements are not false or misleading. For several reasons, Plaintiffs do not adequately allege that any of the statements in Category B were false or misleading. Plaintiffs attribute falsity to statements about “earnings” and “cash flows” only by ignoring portions of the representations in which the speaker explained that he was referring to non-GAAP earnings and cash flows. According to Plaintiffs, StoneMor’s statements—e.g., that it “generat[ed] enough cash flow to pay a distribution” and was “earning well in excess of the distribution that we make” (CAC ¶¶ 155, 172, 182)—were false because StoneMor’s GAAP-based earnings and cash flows were lower than its distributions. Id. ¶¶ 157, 173, 183. However, the speakers prefaced these representations by explaining that they were based on non-GAAP metrics, and a presentation accompanying one of the representations clearly illustrated the divide between GAAP earnings, non-GAAP earnings, and distributions. Id. ¶¶ 155, 18 Ex. 3, Form 8-K (Mar. 15, 2012) at 6. 19 See, e.g., Ex. 3, Form 8-K (Mar. 15, 2012) at 3; Ex. 5, Form 8-K (May 9, 2012) at 3-5. 20 These statements are identified as Category B in Appendix A. They include the statements in CAC ¶¶ 129, 134, 155, 172, 182. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 31 of 50 25 DM1\7870991.1 172, 182. Based on the disclosed non-GAAP metrics, StoneMor’s representations were undisputedly true—i.e., StoneMor was earning more than it distributed. And, as explained above, StoneMor also disclosed that its GAAP-based cash flows and earnings were lower than its distributions. See supra § IV.A.2. Unable to adequately allege that anything is factually inaccurate about these representations, Plaintiffs contend that the representations were misleading because they failed to disclose that StoneMor relied on financing to make distributions. See CAC ¶¶ 130-31, 136, 157, 173, 183. Like the statements in Category A, none of the representations in Category B implied (directly or by omission) that StoneMor could sustain its distributions without financing. See supra § IV.B.1.b. Additionally, Plaintiffs’ allegations were raised and rejected in Graff, where the plaintiff contended that the defendant did not disclose that it “had been able to pay its third-quarter dividend only after securing a short-term $20 million loan under onerous terms, which bode poorly for the company’s ability to pay a dividend in the future.” Graff, 172 F. Supp. 2d at 728. The court rejected that theory, concluding that disclosure of the loan was sufficient to avoid liability. See id. at 729. Here, the Complaint acknowledges that all of StoneMor’s debt and equity activities were disclosed to the public. See supra § IV.A. And StoneMor even explicitly disclosed that it could not sustain its distributions without working capital borrowings. Id. b. One of the alleged statements is immaterial as a matter of law. One of the statements in Category B is immaterial as a matter of law because it is “untethered to anything measurable.” City of Monroe, 399 F.3d at 671; see supra § IV.B.1.a (collecting cases). Plaintiffs allege that Defendants committed securities fraud by stating that StoneMor “intended” to fund distributions from “the business.” CAC ¶ 129. But this representation is “too squishy, too untethered to anything measurable, to communicate anything that a reasonable person would deem important to a securities investment decision.” City of Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 32 of 50 26 DM1\7870991.1 Monroe, 399 F.3d at 671. No investor could interpret this statement as making a concrete representation that distributions would only consist of GAAP-based profits. The Third Circuit has found similar, if not more definite, statements of intent immaterial as a matter of law. See Weiner v. Quaker Oats Co., 129 F.3d 310, 320-21 (3d Cir. 1997) (concluding that a statement that a company was “confident” of “7% [growth] over time” was immaterial as a matter of law). Further, Plaintiffs have not met the onerous burden for alleging an actionable statement of intent. “[A] statement of intent need only be true when made; a subsequent change of intention will not, by itself, give rise to a cause of action under Section 10(b) or Rule 10b–5.” In re Phillips Petroleum Sec. Litig., 881 F.2d 1236, 1245 (3d Cir. 1989). Plaintiffs have not alleged any facts that indicate that the speaker, McGrath, did not hold this intent at the time of his statements.21 3. Category C: The alleged statements about what StoneMor intended to do with money raised in equity offerings are not false. Next, Plaintiffs complain that Defendants made actionable misstatements about how StoneMor intended to use funds from various equity offerings.22 For instance, Plaintiffs allege that Defendants committed securities fraud by saying that “StoneMor intends to use the net proceeds from the offering first to pay the purchase price of certain assets to be acquired from [a seller] and to use the remainder of the net proceeds to pay down borrowings outstanding under its existing credit facility” (CAC ¶¶ 143, 165) and, similarly, by denying that StoneMor paid distributions using the funds obtained from its equity offerings (CAC ¶¶ 191-92). 21 Plaintiffs allege that Defendants were under a “duty to correct” the intent statement and the statement that StoneMor’s “primary source of cash from which to pay partner distributions and make routine capital expenditures is operating cash flow.” CAC ¶ 134; see also CAC ¶¶ 144, 149, 158, 160, 164, 166, 171, 177, 181, 185, 187, 190. The duty to correct only applies to a “narrow set” of statements: (a) statements which were wrong at the time defendants made the statement and (b) forecasts which were based on information that was incorrect at the time of the forecast. See In re Burlington Coat Factory, 114 F.3d at 1431. Plaintiffs have not alleged that the statements were actually false at the time they were made, so no duty to correct applies. 22 These statements are identified as Category C in Appendix A. They include the statements in CAC ¶¶ 143, 148, 156, 159, 162-63, 165, 170, 176, 179, 184, 186, 189, 191-92. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 33 of 50 27 DM1\7870991.1 The statements in Category C were not misleading as a matter of law. Plaintiffs do not (and cannot) contend that StoneMor actually paid the money obtained from equity offerings as quarterly distributions. In fact, Plaintiffs concede that StoneMor used the proceeds of its equity raises exactly as represented (e.g., to pay down debt or acquire assets). See CAC ¶¶ 96, 148, 170, 179. Instead, Plaintiffs assert that these representations were misleading because StoneMor’s equity offerings indirectly facilitated distributions by freeing up cash from other resources: Defendants’ statement about the intended use of equity sale proceeds was misleading because those proceeds were ultimately used to fund the cash distributions, and the Company was unable to do so from cash flow from current operations. Although the distributions were primarily funded from the Company’s credit facility, those borrowings could not have been repaid absent the proceeds from equity sales; the Company could not pay future distributions by borrowing on the credit facility unless the balance outstanding on that facility had been reduced using proceeds from equity sales. CAC ¶¶ 144, 149, 158, 160, 164, 166, 171, 177, 181, 185, 187, 190. But StoneMor explicitly disclosed, on numerous occasions, that (1) it relied on its credit facility to sustain its distributions, and (2) it used the proceeds from these equity offerings to pay down its credit facility. See supra § IV.A.1; supra n.22. Further, StoneMor was not required to disclose commonsense economic principles, such as the fact that its use of equity offerings for certain purposes (e.g., paying down debt, acquiring assets) resulted in StoneMor having more money available for other purposes (e.g., distributions). Cf. TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 448-49 (1976) (explaining that the securities laws should not be interpreted in a manner that exacerbates “management’s fear of exposing itself to substantial liability,” which would cause companies “simply to bury the shareholders in an avalanche of trivial information.”); Wielgos v. Commonwealth Edison Co., 892 F.2d 509, 515-18 (7th Cir. 1989) (“Issuers need not ‘disclose’ Murphy’s Law or the Peter Principle, even though these have substantial effects on business.”). Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 34 of 50 28 DM1\7870991.1 4. Category D: The allegedly false certifications are not actionable or false and are immaterial as a matter of law. Plaintiffs’ afterthought-allegations regarding the certifications in Defendants’ SEC filings do not state a claim for securities fraud. In each 10-K and 10-Q during the class period, Defendants reported that (1) “based on [their] knowledge” the information in the filings was accurate, and (2) they had “[d]esigned” and “[e]valuated” internal and disclosure controls. See CAC ¶ 197. These statements are part of routine, statutorily required certifications under regulations promulgated under the Sarbanes- Oxley Act. See 17 C.F.R. §§ 240.13a-1417, 240.15d-14. On November 9, 2016, Defendants amended the certification they made on February 29, 2016, to clarify that recent discoveries had revealed “material weaknesses” in narrow sets of internal controls. CAC ¶ 198. Without explanation, Plaintiffs assert that the amendment proves a securities violation. Id. ¶ 200. First, these certifications cannot be the basis for a securities fraud suit. “[T]here is nothing in either the 1934 Securities Exchange Act or the Sarbanes-Oxley Act and implementing regulations that authorizes plaintiffs to base a claim for securities fraud on an alleged misstatement in a Sarbanes-Oxley certification.” In re Silicon Storage Tech., Inc., Sec. Litig., No. C-05- 0295PJH, 2007 WL 760535, at *17 (N.D. Cal. Mar. 9, 2007). Second, even if the certifications were actionable, Plaintiffs have not alleged anything to show they were false at the time they were made. The certifications “only represented that the officers designed disclosure controls and procedures that ensured material information relating to [the Partnership] would be known to them.” In re Impac Mortg. Holdings, Inc. Sec. Litig., 554 F. Supp. 2d 1083, 1091 (C.D. Cal. 2008). Plaintiffs do not allege with particularity that Defendants knew that, at the time of certification, the filings were inaccurate. Nor do they allege with particularity that Defendants had altogether failed to “design” or “evaluate” the particular controls. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 35 of 50 29 DM1\7870991.1 Without such allegations, these claims would fail as a matter of law even if such representations were actionable. Third, these claims are immaterial as a matter of law. Third Circuit precedent holds that where a complaint acknowledges that a corrective disclosure has no impact on the price of a security, the alleged misstatement is immaterial as a matter of law. See In re Burlington Coat Factory, 114 F.3d at 1425 (“[B]ecause the [corrective] disclosure had no effect on [defendant’s] price, it follows that the information disclosed . . . was immaterial as a matter of law.”). Based on Plaintiffs’ allegations, the corrective disclosure about the certifications did not alter the price of StoneMor’s units. The disclosure that Plaintiffs allege corrected the false certifications was released on November 9, 2016. CAC ¶ 198. Plaintiffs make no allegation that StoneMor’s unit price moved in response.23 Instead, the Complaint alleges that any artificial price inflation in StoneMor’s units was “fully removed” on October 27, 2016, weeks before the alleged corrective disclosure regarding the certifications. Id. ¶ 242. Consequently, the corrective disclosure had no negative impact on the price of the units, and the certifications are immaterial as a matter of law.24 C. Plaintiffs fail to plead a strong inference of scienter. Plaintiffs’ various attempts to meet the strict standard for alleging scienter under the PSLRA fail. Scienter is “a mental state embracing intent to deceive, manipulate, or defraud.” Tellabs, 551 U.S. at 318. Scienter cannot be shown through “simple, or even inexcusable negligence” but, rather, Plaintiffs must demonstrate at least recklessness, which is “an extreme 23 Indeed, the exact opposite is true. As judicially noticeable material indicates, StoneMor’s unit price increased nearly 10% in the day following the November 9th disclosure. See StoneMor Partners L.P., Yahoo! Finance, https://finance.yahoo.com/quote/STON/history?period1=1477976400&period2=1480485600&interval=1d&filter=hi story&frequency=1d (last visited June 8, 2017); see also Ieradi, 230 F.3d at 600 n.3 (permitting judicial notice of any “fact not subject to reasonable dispute that is capable of accurate and ready determination by resort to a source whose accuracy cannot be reasonably questioned”). 24 Plaintiffs have alleged that all of the annual and quarterly reports during the class period included the certifications, implying they believe that all of the certifications were false. CAC ¶ 197. To the extent Plaintiffs are making such additional claims, the same arguments foreclose these claims. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 36 of 50 30 DM1\7870991.1 departure from the standards of ordinary care” that “presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.” GSC Partners, 368 F.3d at 239. The PSLRA requires that “the complaint shall, with respect to each act or omission alleged to violate this chapter, 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). To determine whether a plaintiff has alleged a strong inference of scienter, courts “must engage in a comparative evaluation,” considering “not only inferences urged by the plaintiff . . . but also competing inferences rationally drawn from the facts alleged.” Tellabs, 551 U.S. at 314. An allegation will survive a motion to dismiss under the PSLRA only if the inference of scienter is “cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Id.25 And Plaintiffs “may not benefit from inferences flowing from vague or unspecific allegations….” In re Rockefeller Ctr. Props., 311 F.3d at 224. 1. Plaintiffs cannot establish scienter through “group pleading.” Most of Plaintiffs’ scienter allegations are fatally flawed because they do not distinguish between the Individual Defendants or connect these individuals to statements made by “StoneMor.” To plead that a corporate entity had scienter when making a representation, Plaintiffs must plead scienter as to the individual who was speaking on behalf of that entity. City of Roseville Emps.’ Ret. Sys. v. Horizon Lines, Inc., 442 F. App’x 672, 676 (3d Cir. 2011) (“City of Roseville III”); In re Tyson Foods, Inc., 155 F. App’x 53, 57 (3d Cir. 2005) (finding no primary liability as to the corporate defendant where the plaintiffs failed to plead scienter as to the individual 25 StoneMor’s disclosures of the allegedly concealed information, discussed in § IV.A supra, weigh against an inference of scienter. See In re Bank of Am. AIG Disclosure Sec. Litig., 980 F. Supp. 2d 564, 587 (S.D.N.Y. 2013) (dismissing complaint and finding that the defendant’s “general and categorical public disclosures also weigh heavily against an inference of scienter”). Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 37 of 50 31 DM1\7870991.1 defendants); In re Amarin Corp. PLC., No. 13-CV-6663 FLW TJB, 2015 WL 3954190, at *9 (D.N.J. 2015). In other words, the Court should only “look to the state of mind of the individual corporate official or officials who make or issue the statement . . . rather than generally to the collective knowledge of all the corporation’s officers and employees acquired in the course of their employment.”26 City of Roseville III, 442 F. App’x at 676 (quoting Southland Sec. Corp. v. INSpire Ins. Solutions, Inc., 365 F.3d 353, 366 (5th Cir. 2004)). Plaintiffs make two critical mistakes in this regard. First, Plaintiffs’ repeated claims that “StoneMor” or “the Company” made alleged misstatements cannot meet the PSLRA’s pleading standard because they do not connect the statement to an individual.27 The Third Circuit has squarely rejected such “group pleading” for the purposes of inferring scienter, and held that the “PSLRA requires plaintiffs to specify the role of each defendant, demonstrating each defendant’s involvement in misstatements and omissions.” Winer Family Trust v. Queen, 503 F.3d 319, 335-37, 337 n.6 (3d Cir. 2007); see also In re NutriSystem, Inc. Derivative Litig., 666 F. Supp. 2d 501, 521 (E.D. Pa. 2009). Because Plaintiffs do not identify the executive or director who made or approved many of the statements at issue, it is impossible for them to provide the required scienter allegations for such statements. 26 Plaintiffs cannot end run around the requirement to plead scienter as to each of the Individual Defendants by invoking the so-called “Core Operations Doctrine.” CAC ¶ 236. According to Plaintiffs, “[b]ecause StoneMor’s focus on pre-need cemetery sales was the most important part of Defendants’ scheme,” and “[g]iven the importance of the distributions to Defendants’ personal bank accounts,” it “would be absurd to suggest that the Defendants were simply unaware” of their allegedly false statements. Id. ¶¶ 236, 240. “[W]hile courts will impute knowledge of core activities in some cases, they do so cautiously.” In re Stonepath Grp., Inc. Sec. Litig., No. CIV.A. 04-4515, 2006 WL 890767, at *12 (E.D. Pa. Apr. 3, 2006). Courts will “not impute knowledge absent particularized allegations showing that defendants had ample reason to know of the falsity of their statements.” Id. Thus, the “core operations doctrine” does not allow Plaintiffs to combine the falsity and scienter elements or obviate the need to plead more than generic allegations concerning the Individual Defendants’ positions and access to information. 27 See CAC ¶¶ 128, 133, 134, 137, 143, 148, 159, 162, 165, 170, 176, 179, 184, 186, 189. The statements are identified in Appendix A in rows 1-3, 13, 18, 17, 20-21, 23-29. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 38 of 50 32 DM1\7870991.1 Accordingly, Plaintiffs’ claims pertaining to the statements listed supra in footnote 27 fail as a matter of law. Second, this Court should also disregard most of Plaintiffs’ scienter allegations because they are lodged against “Defendants” generally. CAC ¶¶ 209, 210, 212, 213-19, 223, 227, 229, 230, 235. The PSLRA precludes such attempts to lump defendants together in scienter allegations. For example, courts have rejected allegations of scienter involving “senior executives” or “management.” City of Roseville Emps’ Ret. Sys. v. Horizon Lines, Inc., 713 F. Supp. 2d 378, 397 (D. Del. 2010) (“City of Roseville II”); see also Rahman v. Kid Brands, Inc., 736 F.3d 237, 245- 46 (3d Cir. 2013) (finding that the plaintiff failed to plead scienter where the plaintiff offered vague details regarding “leadership” and the “management team”). Here, too, the Court should reject all scienter allegations that do not identify a specific individual. For similar reasons, the statements of former StoneMor employees are not indicative of scienter. CAC ¶¶ 227-29. Plaintiffs make no attempt to connect the former employees’ statements to the Individual Defendants’ knowledge. For instance, Plaintiffs allege that former employee James Young spoke about StoneMor’s offerings and distributions to Ken Lee, another StoneMor employee who is not a named defendant. Id. ¶ 228. Nothing in Young’s statements implicates a specific Individual Defendant’s state of mind. Id. 2. Plaintiffs’ boilerplate scienter allegations do not meet the PSLRA’s heightened burden. Plaintiffs’ scienter allegations are a collection of boilerplate, deficient allegations present in nearly every Rule 10b-5 lawsuit. They have all been rejected by this Circuit, and this Court should reject them on the pleadings, too. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 39 of 50 33 DM1\7870991.1 a. The Individual Defendants’ positions and control are not indicative of scienter. Plaintiffs’ boilerplate attempts to attribute scienter to the Individual Defendants because of their “positions within the Company and the General Partner” and “control of all the major corporate decisions of StoneMor” (including “control” over “equity offerings”) fail. See CAC ¶¶ 6, 210-11, 213-14. Such “[g]eneralized imputations of knowledge do not suffice, regardless of the defendants’ positions within the company.” In re Astea Int’l Inc. Sec. Litig., No. CIV.A. 06- 1467, 2007 WL 2306586, at *17 (E.D. Pa. Aug. 9, 2007); see also Advanta, 180 F.3d 525, 539 (“[A]llegations that a securities-fraud defendant, because of his position within the company, must have known a statement was false or misleading are precisely the types of inferences which [courts], on numerous occasions, have determined to be inadequate to withstand Rule 9(b) scrutiny.”) (citation omitted). If arguments such as these were accepted, scienter could automatically be established in any case against an executive or officer of the company. These arguments should be rejected. b. Defendants’ access to unidentified “reports” and “information” cannot give rise to an inference of scienter. Claims that the Defendants were “provided with copies of the Company’s reports” or had “access to material information available to them but not to the public” do not suffice to allege scienter under the strict PSLRA standard. See CAC ¶¶ 210, 212. The Third Circuit has deemed as “bare bones” and insufficient generalized allegations that the Defendants had “access” to “information.” GSC Partners, 368 F.3d at 245; see also Winer, 503 F.3d at 333-34 (holding that reports did not raise a strong inference of scienter when they did not contain information that contradicted public disclosures). Plaintiffs do not—because they cannot—identify any particular “reports” or pieces of “information,” let alone specify something in these unidentified materials Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 40 of 50 34 DM1\7870991.1 that contradicts Defendants’ disclosures to the investing public and was received by an individual before he/she made an alleged misrepresentation. See CAC ¶¶ 210, 212. c. Defendants’ public statements do not meet the PSLRA’s standard to plead scienter. Plaintiffs incorrectly argue that the Individual Defendants’ public statements themselves support a strong inference of scienter. CAC ¶¶ 215-23. But an alleged false statement by an individual defendant cannot, in and of itself, demonstrate that the individual acted with scienter when making that statement. City of Roseville Emps.’ Ret. Sys. v. Horizon Lines, Inc., 686 F. Supp. 2d 404, 423 (D. Del. 2009) (“City of Roseville I”) (rejecting “plaintiffs[’] attempt to bootstrap the scienter requirement by claiming we can infer knowledge or recklessness based on the nature of the false or misleading statements themselves” (emphasis added)); see also Wozniak v. Align Tech., Inc., 850 F. Supp. 2d 1029, 1044 (N.D. Cal. 2012). If that argument were accepted, it would obviate the need for a scienter element because the misrepresentation and scienter elements would be fused into one. Further, as described above, Plaintiffs have not alleged any false or misleading statements. Supra §§ IV.A-IV.B. d. The timing and proximity of the resignations and retirements do not support a strong inference of scienter. Plaintiffs’ bare allegations regarding the resignations of a Chief Executive Officer and certain Chief Financial Officers also do not contribute to an inference of scienter. CAC ¶¶ 230- 35. It is well-established that resignations or retirements, by themselves, say “nothing about the Individual Defendants’ mental state,” even if there are multiple resignations during the class period. In re Stonepath, 2006 WL 890767, at *16; Lighthouse Fin. Grp. v. Royal Bank of Scotland Grp., PLC, 902 F. Supp. 2d 329, 343 (S.D.N.Y. 2012) (determining that the resignation of several of the officers and directors of the defendant-company did not raise a strong inference of scienter as they were not “highly unusual or suspicious”). Rather, the “resignation of an officer may serve Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 41 of 50 35 DM1\7870991.1 as evidence of scienter where the timing is suspicious and it is coupled with ‘extraordinary corporate measures,’” which could include “banishment from corporate premises, denial of severance, or [a] statement tying the resigning officer to the fraud.” Messner v. USA Techs., Inc., No. CV 15-5427, 2016 WL 1466543, at *10 (E.D. Pa. Apr. 13, 2016). Here, Plaintiffs admit that the individuals who left StoneMor’s employ did so because they were retiring, “devot[ing] more time to personal and family matters,” serving only in an interim role, and “pursu[ing] business opportunities outside the deathcare industry.” CAC ¶¶ 233-34. None of these reasons tie an officer to fraud. Moreover, Plaintiffs do not allege any of the other “extraordinary measures” in conjunction with these departures. e. Plaintiffs’ motive and opportunity allegations are deficient and, at any rate, may only bolster other allegations of scienter. Plaintiffs’ boilerplate allegations concerning Defendants’ motivations to enrich themselves also fail to support (let alone establish) a strong inference of scienter. CAC ¶¶ 5-6, 224-26. Allegations of “motive and opportunity may no longer serve as an independent route to scienter.” Gold v. Ford Motor Co., 577 F. App’x 120, 123 (3d Cir. 2014). Thus, at most, motive and opportunity allegations can bolster other independent grounds for establishing scienter. Here, however, Plaintiffs’ allegations concerning Defendants’ motive and opportunity provide no support whatsoever. Courts have routinely rejected similar allegations that defendants acted with scienter because they had a financial incentive to defraud the public. “If allegations that a corporate defendant desired to retain his position or realize gains on company stock were sufficient to raise a strong inference of scienter, the directors of virtually every company would be forced to defend securities transactions every time a company effected a merger or acquisition.” In re Radian Sec. Litig., 612 F. Supp. 2d 594, 609 (E.D. Pa. 2009); In re Adolor Corp. Sec. Litig., 616 F. Supp. 2d Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 42 of 50 36 DM1\7870991.1 551, 573 (E.D. Pa. 2009); see also GSC Partners, 368 F.3d at 238. The Complaint runs afoul of these principles with its allegations related to StoneMor GP’s receipt of an “incrementally higher proportion of each quarterly distribution,”28 Hellman’s ownership of equity in StoneMor and StoneMor GP, and his desire to “raise distributions.” CAC ¶¶ 5-6, 224-26. Thus, allegations of motive and opportunity as to the Individual Defendants do not contribute to an inference of scienter. * * * Regardless of the quantity of Plaintiffs’ allegations of scienter, the “total weight” of Plaintiffs’ allegations is “scant.” City of Roseville III, 442 F. App’x at 675 (emphasis in original). In the words of the Third Circuit: “zero plus zero equals zero” and the Complaint should be dismissed on the basis that Plaintiffs do not plead a strong inference of scienter. Id. D. Plaintiffs do not adequately plead loss causation. Plaintiffs have not adequately alleged loss causation because they fail to connect the alleged misrepresentations to the late 2016 decline in StoneMor’s unit price. To plead loss causation, a plaintiff must allege facts sufficient to show that a defendant’s alleged misrepresentations “proximately caused the plaintiff’s economic loss.” Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 342 (2005). “[T]he plaintiff must show that the revelation of [the alleged] misrepresentation or omission was a substantial factor in causing a decline in the security’s price . . . .” McCabe v. Ernst & Young, LLP, 494 F.3d 418, 425-26 (3d Cir. 2007) (emphasis added). “[T]he plaintiff must plead that defendant’s misrepresentation concealed something from the market that, when disclosed, negatively affected the value of the security.” In re Intelligroup Sec. Litig., 468 F. Supp. 2d 670, 692 (D.N.J. 2006) (emphasis in original) (citation omitted). 28 Further, Plaintiffs do not connect this supposed motive to all of the Individual Defendants. For instance, Yost is not alleged to—and does not—have any ownership interest in StoneMor GP. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 43 of 50 37 DM1\7870991.1 “[L]oss causation is not pled upon allegations of drops in stock price following an announcement of bad news that does not disclose the fraud.” In re Tellium, Inc. Sec. Litig, No. 02-cv-5878-FLW, 2005 WL 2090254, at *4 (D.N.J. Aug 26, 2005); accord Payne v. DeLuca, 433 F. Supp. 2d 547, 608 (W.D. Pa. 2006) (“Because the previous misrepresentations about the fraudulent scheme were not disclosed in the press release, there could have been no proximate cause between revelation of the truth and the decline in the stock price.”). Under the foregoing authorities, Plaintiffs fail to plead loss causation. 1. Plaintiffs allege loss resulting from poor business performance, not from the revelation of any prior misrepresentation. Plaintiffs do not (and cannot) adequately allege that StoneMor’s unit price dropped due to the revelation of the supposed “truth” concerning StoneMor’s alleged misrepresentations. According to Plaintiffs, StoneMor common units were inflated “from March 15, 2012 through October 27, 2016” due to various misrepresentations, but such inflation was “removed following the Company’s publication of the post-closing October 27, 2016 press release . . . , which disclosed that StoneMor would be cutting its distribution by 50%.” CAC ¶¶ 241-42, 272. Plaintiffs contend that this press release “revealed” for the very first time that StoneMor’s distribution “was not, as they had insisted, generated from business operations, but instead depended on access to capital markets to sell equity and then use the proceeds to pay down borrowings on the credit facility in order to pay the distribution.” Id. ¶ 243. The press release, however, said nothing of the sort and did not reveal any previously concealed information. The Complaint quotes the press release extensively, yet nothing in these quoted portions reveals anything about the alleged misrepresentations. Id. ¶¶ 242. Further, the portions of the press release Plaintiffs do not cite explained that StoneMor’s distribution cut was Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 44 of 50 38 DM1\7870991.1 due to issues with StoneMor’s salesforce. See Ex. 25, StoneMor Press Release (Oct. 27, 2016). Plaintiffs do not—and cannot—allege that this explanation was false or misleading. To the extent Plaintiffs are alleging that the press release implicitly disclosed the truth about StoneMor’s past misrepresentations, that argument fails. When disclosure is “indirect”— “that is, through disclosure of another event”—a plaintiff must show “that the market recognized a relationship between the event disclosed and the fraud.” McKowan Lowe & Co., Ltd. v. Jasmine, Ltd., No. Civ. 94-5522-RBK, 2005 WL 1541062, at *8 (D.N.J. June 30, 2005); see also In re DVI, Inc. Sec. Litig., No. 2:03-cv-05336, 2010 WL 3522090, at *24 (E.D. Pa. Sept. 3, 2010). Plaintiffs have not satisfied this onerous burden. Rather, Plaintiffs have affirmatively conceded that the market did not learn anything from this announcement; the market, according to the Complaint, had known about the purported fraudulent scheme for years. See CAC ¶¶ 65, 129, 219-22; see also supra § IV.A. Plaintiffs further undermine their claims by conceding that “analysts reacted to the news of the distribution cut by downgrading the units and dropping their price targets;” in other words, it was the distribution cut—and not a revelation of fraud—that caused StoneMor’s unit price to drop. CAC ¶ 245 (emphasis added). Courts have dismissed complaints for failure to plead loss causation where, as here, Plaintiffs have failed to connect a stock drop to the revelation of a previously concealed fraud. See In re Tellium, 2005 WL 2090254, at *3 (explaining that “allegations of a drop in stock price following . . . a disclosure” that “revenues would be significantly lower than expected” is the “type of announcement[] that courts have found do not adequately demonstrate a market correction of the artificial inflation caused by defendants’ misrepresentations”); Nat’l Junior Baseball League v. Pharmanet Dev. Grp., Inc., 720 F. Supp. 2d 517, 561 (D.N.J. 2010) (explaining that “Plaintiff improperly relies on negative financial results” in an effort to establish that a “decline in stock Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 45 of 50 39 DM1\7870991.1 price was substantially caused by the alleged fraud”); see also, e.g., Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 175 n.4 (2d Cir. 2005) (holding that defendants’ downgrades of a stock were not corrective disclosures because the downgrades did not reveal to the market the alleged falsity of defendant’s prior recommendations); D.E.&J. Ltd. P’ship v. Conaway, 133 F. App’x 994, 999-1000 (6th Cir. 2005) (holding that allegations of a stock price drop following a disclosure that a company had filed for bankruptcy were insufficient to plead loss causation because there was no allegation of any corrections to any prior misrepresentation to the market); In re Initial Pub. Offering Sec. Litig., 399 F. Supp. 2d 261, 266 (S.D.N.Y. 2005) (holding that a company’s failure to meet earnings forecasts did not show loss causation because it did not disclose the alleged scheme to issue low forecasts and then beat them, and therefore “cannot correct the artificial inflation caused by the scheme”). 2. Plaintiffs’ materialization-of-risk theory fails as a matter of law. Plaintiffs improperly attempt to overcome the lack of a corrective disclosure by alleging that the distribution cut itself constituted “the materialization of the concealed risk that the Company would be unable to pay the distribution.” CAC ¶ 243. This “materialization-of-risk” theory, however, has been rejected by district courts within the Third Circuit. For example, in Bartesch, the court dismissed plaintiffs’ complaint, explaining: “The Third Circuit has not adopted the ‘materialization of risk’ test but, instead, requires that there have been corrective disclosures that exposed the alleged fraud.” Bartesch v. Cook, 941 F. Supp. 2d 501, 512 (D. Del. 2013); Nat’l Junior Baseball League, 720 F. Supp. 2d at 563 n.35 (declining to consider plaintiff’s materialization-of-risk theory “because the Third Circuit has not endorsed this type of pleading”); WM High Yield Fund. v. O’Hanlon, No. Civ. A. 04-3423, 2013 WL 3230667, at *14-15 (E.D. Pa. June 27, 2013) (observing that the Third Circuit has not adopted the materialization-of-risk Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 46 of 50 40 DM1\7870991.1 theory); Glover v. DeLuca, No. 2:03-cv-0288, 2006 WL 2850448, at *33-35 (W.D. Pa. Sept. 29, 2006) (same). Even assuming Plaintiffs could rely on a materialization-of-risk theory in the Third Circuit, Plaintiffs’ complaint fails under that theory, too. The theory requires a plaintiff to allege, among other things, that “the loss was within the zone of risk concealed by the misrepresentations and omissions….” DVI, 2010 WL 3522090, at *7; see also Prime Mover Capital Partners L.P. v. Elixir Gaming Techs., Inc., 898 F. Supp. 2d 673, 685-86 (S.D.N.Y. 2012); Glover, 2006 WL 2850448, at *33-35 (holding that even if materialization-of-risk were a viable doctrine, plaintiff’s claim failed because the allegedly concealed risk had been disclosed). The risk that distributions could be cut was not “concealed;” it is not only inherent in any MLP, but StoneMor repeatedly warned investors about it. For example, in its Form 10-K for 2014, StoneMor warned: “We may not have sufficient cash from operations to increase distributions, to continue paying distributions at their current level, or at all . . . .” Ex. 19, 2014 Form 10-K (Mar. 16, 2015) at 12. StoneMor explained that its cash available for distributions depended on many factors, including “working capital borrowings,” and it identified its “major risk” as “uncertainties associated with our cash flow.” Id.29 * * * In sum, Plaintiffs have failed to plead that Defendants’ alleged misrepresentations proximately caused the economic loss, as required by the Supreme Court in Dura. Plaintiffs’ “theory of materialization of risk would eviscerate Dura’s loss causation requirement, as any negative earnings news following a misrepresentation could, arguably, ‘materialize’ the risk of a prior misrepresentation.” In re Dell Inc. Sec. Litig., 591 F. Supp. 2d 877, 911 (W.D. Tex. 2008). 29 See also Ex. 4, 2011 Form 10-K (Mar. 15, 2012) at 12; Ex. 11, 2012 Form 10-K (Mar. 15, 2013) at 12; Ex. 15, 2013 Form 10-K (Mar. 17, 2014) at 10; Ex. 23, 2015 Form 10-K (Feb. 29, 2016) at 11-12. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 47 of 50 41 DM1\7870991.1 Indeed, Plaintiffs’ attempt to “recover . . . without alleging that a fraudulent scheme was ever disclosed and that the disclosure caused their losses . . . would effectively convert the securities laws into an insurance policy for investors.” In re Initial Pub. Offering Sec. Litig., 399 F. Supp. 2d at 267. E. Plaintiffs’ secondary liability claim for violation of section 20(a) fails. Plaintiffs’ control person liability claim under Section 20(a) of the Exchange Act fails as a matter of law because Plaintiffs’ primary claims are not adequately pleaded. Liability under Section 20(a) is secondary only and cannot exist in the absence of a primary violation. See Shapiro v. UJB Fin. Corp., 964 F.2d 272, 279 (3d Cir. 1992), as amended (May 27, 1992) (“If no controlled person is liable, there can be no controlling person liability.”); 15 U.S.C. § 78t(a). Because there is no properly pleaded primary liability claim under Section 10(b), this Court should dismiss Plaintiffs’ secondary liability claim under Section 20(a). V. CONCLUSION For all of the foregoing reasons, Defendants respectfully request that the Court (a) grant their motion to dismiss, (b) dismiss the Complaint with prejudice in its entirety, and (c) grant such other and further relief to which Defendants may be entitled. Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 48 of 50 42 DM1\7870991.1 Respectfully submitted, /s/ Brian J. Slipakoff_____________ Michael C. Holmes* Texas Bar No. 24002307 Craig E. Zieminski* Texas Bar No. 24066331 Amy T. Perry* Texas Bar No. 24068623 Meriwether T. Evans* Texas Bar No. 24087485 Bryan U. Gividen+ Texas Bar No. 24087591 R. Kent Piacenti+ Texas Bar No. 24083660 *Admitted pro hac vice + Motion for admission pro hac vice forthcoming VINSON & ELKINS LLP 2001 Ross Avenue, Suite 3700 Dallas, Texas 75201 Telephone: 214.220.7700 Facsimile: 214.220.7716 mholmes@velaw.com czieminski@velaw.com aperry@velaw.com mevans@velaw.com bgividen@velaw.com kpiacenti@velaw.com James H. Steigerwald (PA ID: 82469) Brian J. Slipakoff (PA ID: 91850) DUANE MORRIS LLP 30 S. 17th Street Philadelphia, PA 19103 Telephone: 215.979.1000 Facsimile: 215.979.1020 jsteigerwald@duanemorris.com bslipakoff@duanemorris.com Attorneys for Defendants Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 49 of 50 DM1\7870991.1 CERTIFICATE OF SERVICE I certify that on the 8th day of June, 2017, a true and correct copy of the foregoing document was filed with the Clerk of Court using the CM/ECF system which will send electronic notification of such filing to all counsel of record. /s/ Brian Slipakoff Case 2:16-cv-06111-ER Document 68-2 Filed 06/08/17 Page 50 of 50 APPENDIX A Case 2:16-cv-06111-ER Document 68-3 Filed 06/08/17 Page 1 of 8 Page 1 DM1\7871012.1 APPENDIX A Anderson v. StoneMor Partners L.P. et al. Alleged Misrepresentations in the Consolidated Class Action Complaint1 # CAC ¶ Alleged Source Speaker Statement2 Category A: StoneMor was a “strong” or “healthy” company 1 128 3/15/2012 - Press Release Unattributed In January 2012, we announced that for the fourth quarter of 2011, we declared a distribution of $0.585. We made this decision after evaluating recent operating results, the impact of our capital restructuring, and the impact on our financial position due to our recent acquisitions. These occurrences led to a substantial buildup in our liquid net asset position as compared to prior periods, which we believe supports our decision to maintain our distribution.” 2 133 5/9/2012 – Press Release Unattributed “We made this decision after evaluating recent operating results, the impact of our capital restructuring, and the effect on our financial position of recent acquisitions. These occurrences led to a substantial buildup in our liquid net asset position as compared to prior periods, which we believe supports our decision to maintain our distribution.” 3 137 9/17/2012 – Press Release Unattributed “We determine the distribution based on the operating performance of the company and the resultant Available Cash at the end of the quarter. . . . Given the solid performance this year so far and what we expect will be continued good performance, we are comfortable affirming our distribution of at least $0.585 per unit through the end of the year.” 4 138 10/22/2012 – Press Release Miller “Since our initial public offering in 2004, StoneMor has increased its distribution by more than 27.5%. It is a testament to the strength of our underlying business, and the execution of our growth strategy.” 5 141 11/6/2012 – Press Release Miller “We previously announced that we have increased our distribution to $0.59 per unit from $0.585 per unit. The increases reflects the strength of our business and our commitment to generate increasing returns for our unit holders.” 1 Defendants do not admit the content of any of the allegations in the Consolidated Class Action Complaint (“CAC” or “Complaint”) or this Appendix A. The purpose of Appendix A is to organize the alleged misrepresentations in the Complaint for the Court. 2 Language is quoted directly from the press releases rather than from the excerpts given in the Consolidated Amended Class Action Complaint (“CAC”) unless otherwise noted. Bolded terms are those highlighted by Plaintiff as being false. Case 2:16-cv-06111-ER Document 68-3 Filed 06/08/17 Page 2 of 8 Page 2 DM1\7871012.1 # CAC ¶ Alleged Source Speaker Statement2 6 145 4/24/2013 – Press Release Miller “We are very happy to announce our second distribution increase in six months. All of our growth strategies, i.e. cemetery acquisitions, funeral home acquisitions etc., have been on display of late and this distribution increase is a reflection on our ability to successfully implement these strategies.” 7 150 5/29/2013 – Press Release Miller “As a growing company, we strive to manage our capital with the goal of keeping our financial profile as conservative as possible. . . In addition to managing our financial profile, we are also committed to creating value for our unit holders. The savings created by these actions [exchanging the 2017 Notes for the 2021 Notes], along with continued financial performance allow us to increase our distribution by a half a cent per quarter, the third such increase in the past eight months.” 8 153 8/7/2013 – Press Release Miller “The previously announced refinancing of our Senior Notes has extended the maturity date to 2021 and will generate significant interest cost savings. . . . In fact, the anticipated savings were strong enough that we increased our quarterly distribution to $0.60 per unit just after the refinancing, the second such increase in the quarter and the third increase in the last eight months. Our capital management efforts, combined with solid operating performance, keep us on track for what we believe will be continued strong financial results throughout the year.” 9 167 7/25/2014 – Press Release Miller “With the strong performance of our base operations and the results we’re beginning to see from these two transactions, we believe we should be able to increase distributions by at least $.01 per unit each quarter through 2015.” 10 174 5/8/2015 – Press Release Miller “The pace of our business and our expectations going forward also gave us the confidence, as previously announced, to raise our distribution for the first quarter to $0.64 per unit from $0.63, our fourth consecutive quarterly increase. In addition, we remain confident in our intention to continue to increase distributions by $0.01 per quarter through the end of 2015.” 11 178 8/10/2015 – Press Release Miller “The continued strength in our revenue growth and distributable free cash flow allowed us to increase our distribution for the second quarter by $0.01 per unit to $0.65 per unit as previously announced.” Case 2:16-cv-06111-ER Document 68-3 Filed 06/08/17 Page 3 of 8 Page 3 DM1\7871012.1 # CAC ¶ Alleged Source Speaker Statement2 Category B: Statements regarding the connection between operations and distributions 12 129 3/15/2012 – Earnings Conference Call Shane Unknown Analyst: “Okay, and in terms of distributions, how long do you guys-- you got $80 some million left on your-- on the revolver. And what is it? $12 million in cash? With your current cash burn how long can you continue to either fund the dividend or-- before you have to issue equity or have you done that sort of calculation? William R. Shane: “No, we haven’t done the calculation, but we intend to always continue to fund distributions from the business.” 13 134 5/9/2012 – Press Release Unattributed “Our primary source of cash from which to pay partner distributions and make routine capital expenditures is operating cash flow. Over longer periods of time, operating cash flows should exceed the sum of routine capital expenditures and partner distributions.” 14 155 11/18/2013 – Investor Day Yost Defendant Yost noted that StoneMor was often asked how it managed to pay distributions well in excess of its (relatively small) operating profit. Defendant Yost referred to a graph and claimed:3 “So if you look the orange is our GAAP operating profit and the grey bars are the amount that we distributed during each period. The green bars are how much we have actually earned, how much current revenue, current expenses, all those things. And we always have a significant amount of coverage over the amount that we distributed during the quarter. I mean this is a very powerful slide when we talk to a lot of people. They then start to understand that our distribution is earned currently and this is how we pay it.” 3 Portion of statement outside quotes is pulled from Plaintiffs’ Complaint. Case 2:16-cv-06111-ER Document 68-3 Filed 06/08/17 Page 4 of 8 Page 4 DM1\7871012.1 # CAC ¶ Alleged Source Speaker Statement2 15 172 11/12/2014 – Investor Day Yost “One of the questions that comes up a lot is based on your GAAP revenues, how could you possibly make the distributions that you make. As I showed earlier, a comparison to GAAP revenues is -- and GAAP operating profits doesn’t make much sense and that that is not our current production, that is not our current business. So when you look at the three combined together and you look at our operating profits, you look at the amount of distributions and you look at our GAAP operating profits, you see the big divergence in the three. We are clearly in [every] period earning well in excess of the distribution that we make. In fact, our average distribution coverage has been about 1.23 times for the history of the company. So it’s very safe, it’s very stable, very secure if you look at it on [a production based revenues perspective.] … [B]ecause our accounting is a little strange, because we are an MLP, [this] is a death care company, because we are a cemetery-focused death care company rather than a funeral death care company, our stock is misunderstood to some extent.” 16 182 11/11/2015 – Investor Day McGrath “I don’t know if the SEC can get anymore screwed up with regard to revenue recognition rules. This might be a new level in terms of screwed up. So this is why we moved towards the non-GAAP.... But we look at how we characterize our cash flow on our press release and the non-GAAP measure of it. We remove all of the arcane and bizarre deferral rules. And we try to show people exactly, ‘Listen, this is the activity we did during the period. This is what we generated. These are the costs associated with that.’ And that’s why you can feel comfortable that we generate enough cash flow to pay a distribution in this period.” Category C: StoneMor’s use of cash from equity offerings and the credit facility. 17 143 3/21/2013 – Press Release Unattributed “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.” 18 148 5/7/2013 – 10-Q Signed by Miller and Yost “On March 26, 2013, we completed our most recent follow-on public offering of 1,610,000 common units at a price of $25.35 per unit. Net proceeds of the offering … were approximately $38.4 million. The proceeds were used to pay off debt on our Credit Facility.” Case 2:16-cv-06111-ER Document 68-3 Filed 06/08/17 Page 5 of 8 Page 5 DM1\7871012.1 # CAC ¶ Alleged Source Speaker Statement2 19 156 11/18/2013 – Investor Day Yost “In order to carry out our acquisition philosophy, what we do is we borrow money on a short-term on our revolver and then use equity offerings to de-lever and to free up our balance sheet to go out and do more acquisitions. That’s our growth strategy and has been since we started. So that end this year, we raised an additional $40 million in equity to pay down some existing debt for previous acquisitions and we have worked forward from there.” 20 159 2/11/2014 – Press Release Unattributed “StoneMor intends to use the net proceeds from the common units it is offering to pay down borrowings outstanding under its existing credit facility. . . . Amounts to be paid down under StoneMor’s credit facility were incurred for acquisitions and General Partnership purposes, including for working capital needs and to fund StoneMor’s capital expenditure program.” 21 162 3/17/2014 – 10- K Unattributed “On February 27, 2014, we completed a follow-on public offering of 2,300,000 common units at a price of $24.45 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $53.1 million. The proceeds were used to pay down borrowings outstanding under our revolving credit facility.” 22 163 3/14/2014 – Press Release Miller “We are very excited by the strategic actions we’ve taken in 2013 as well as so far in 2014, when a recent unit offering raised approximately $53.1 million, primarily for the purpose of paying down borrowings.” 23 165 5/29/2014 – Press Release Unattributed “StoneMor announced today that it has priced 2,600,000 common units representing limited partner interests in StoneMor at a price to the public of $23.67 per unit.” “StoneMor intends to use the net proceeds from the offering first to pay the purchase price of certain assets to be acquired from Service Corporation International (“SCI”) and to use the remainder of the net proceeds to pay down borrowings outstanding under its existing credit facility.” Case 2:16-cv-06111-ER Document 68-3 Filed 06/08/17 Page 6 of 8 Page 6 DM1\7871012.1 # CAC ¶ Alleged Source Speaker Statement2 24 170 8/8/2014 – 10-Q Signed by Miller and Yost “On June 12, 2014, after the exercise of the underwriters’ overallotment option, the Company completed a follow-on public offering of 2,990,000 common units at a price of $23.67 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $67.3 million. The proceeds from the offering were used to pay the purchase price related to the transaction with Service Corporation International, which closed in the second quarter of 2014, with the remainder used to pay down borrowings outstanding under the Credit Facility.” 25 176 7/7/2015 – Press Release Unattributed “StoneMor intends to use the net proceeds from the offering to pay down outstanding indebtedness under its revolving credit facility.” 26 179 8/10/2015 – 10- Q Signed by Miller and Pippis “On July 10, 2015, we completed a follow-on public offering of 2,415,000 common units at a public offering price of $29.63 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $67.8 million. The proceeds were used to pay down outstanding indebtedness under our Credit Facility.” 27 184 11/19/2015 – 8- K Unattributed “The Partnership intends to use the net proceeds from any sales pursuant to the ATM Agreement . . . to pay down outstanding indebtedness under its revolving credit facility.” 28 186 4/15/2016 – Press Release Unattributed “Stonemore intends to use the net proceeds from the offering to pay down outstanding indebtedness under its revolving credit facility.” 29 189 5/9/2016 – 10-Q Signed by Miller and McGrath “On April 20, 2016, the Partnership completed a follow-on public offering of 2,000,000 common units at a public offering price of $23.65 per unit . . . . Additionally, the underwriters exercised their option to purchase an additional 300,000 common units, resulting in net proceeds of $6.8 million, after deducting underwriting discounts and offering expenses, of $51.5 million. The proceeds from the offering were used to pay down outstanding indebtedness under the Credit Facility.” Case 2:16-cv-06111-ER Document 68-3 Filed 06/08/17 Page 7 of 8 Page 7 DM1\7871012.1 # CAC ¶ Alleged Source Speaker Statement2 30 191 6/2/2016 – MLPA Investor Conference McGrath “People say you raise equity to pay your distributions and that couldn’t be further from the truth. We look at the amount of equity we raised over the last three years compared to what we used that equity for which are acquisitions, contributions to our trust funds, and expansion capital expenditures. We’ll see here that every dollar went to fund those properties. So once again we try to maintain a conservative financial profile. We usually like to have leverage about below three times and we make sure that we issue adequate equity and bond in order to cover our capital needs.” 31 192 6/28/2016 – Three Part Advisors’ East Coast IDEAS Conference McGrath “We’ve gotten some comments, particularly from some short sellers that are out there, that we raise equity in order to pay a distribution. And it couldn’t be further from the truth. When you look at the last three years, the top orange line is the amount of equity we’ve raised over that period. We use equity to fund acquisitions, contributions to our trust funds, and expansion capital expenditures. When you look at the last three years, when you total these three amounts, the total amount raised versus the total amount used almost matches dollar for dollar. So when we raise equity, it is to grow the business or to put money in the trust, that we know we’re going to take back out at some point in time.” Category D: Certifications in SEC filings 33 196- 200 Various Various See Consolidated Complaint ¶¶ 196-200 for summary of allegations. Case 2:16-cv-06111-ER Document 68-3 Filed 06/08/17 Page 8 of 8