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Securities Regulation, Keyed to Choi
Fan v. StoneMor Partners LP
Citation:
927 F.3d 710 (2019)Facts
StoneMor Partners LP operates in the death-care industry, selling funeral products and burial plots. State law required StoneMor to hold a percentage of pre-need sales proceeds in trust until customer death, when services would be delivered. Under GAAP, these trust-held proceeds could not be recognized as current revenue. As StoneMor successfully acquired properties and increased pre-need sales, a disparity grew between overall sales and accessible cash for investor distributions. To address this, StoneMor issued non-GAAP financials alongside GAAP reports showing pre-need sales as current revenue, borrowed cash to fund quarterly distributions before trust release, and used equity sale proceeds to pay down the borrowed amounts. This created a cycle of distributions funded by borrowings, borrowings paid by equity proceeds, and equity proceeds attracted by growing sales and distributions. On September 2, 2016, StoneMor announced it would restate three years of financial statements, temporarily prohibiting unit sales under GAAP regulations. The October 27, 2016 distribution fell nearly 50%, causing unit prices to drop 45%. Plaintiffs filed suit alleging violations of Section 10(b) and Rule 10b-5.
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