this is the matter of peter fan it al versus stone more partners lp now just goldsmith morning please the court my name is david goldsmith i represent the plaintiff mr fan and his affiliated investment and cities in this securities class action i'd like to respectfully request three minutes for a bottle gra sir the complaint in this actually your honor is against own more which is a publicly traded limited partnership which provides what they call death care goods and services sufficiently pleads claims for securities fraud under the exchange act and the the relationship between the stone more lp entity which is the the company if you will and also to stone more g p if i can call it that which is the general partner this is the operating part and the operating of this is this securities class action is is a bit different then than the cases that have generally come before your honor's is in that this is not your typical delaware corporation but this company is a master limited partnership which is a publicly limited traded limited  about an efficient market here with a with an entity that's traded publicly in new york state you're right that is right we've got a footnote that just sort of pins that down right and you referred a few minutes ago to what the district court did here you're the or the appellant one thing that struck me at least superficially is of that there's a relatively short relatively brief discussion as to specific allegation of by the district court here in response to a complaint that is comprised of two hundred ninety two paragraphs  a fact i read it in its entirety over the weekend cancelled dinner plans at one point but got through it all are you faulting the district court here for giving inadequate attention to some of the specific allegations that you said for well we are your honor i mean where were we recognize this is under do novo review and we're prepared to argue about the case itself but part of our contention this morning is that we believe that the district court's reasoning was respectfully inadequate did not give you the really isn't a district goodguys not is not required to look at each and each and every one of the allegations were at least you discuss in opinion each and every one of you know i mean that the district court is not required to write it right a phone book but on a on a c enter for example which i think is the most you know perhaps what you are getting at you know there is a one of a case that's very important for  universal sense and consider each inference and allegation as they affect one another you can't do this sort of you know segmented analysis looking at what were the disclosures in the ten k s not sufficient coupled with the something i fully intended to tackle and it's what you're going to hear from my friend on the other so so this goes off the center track little bit not unlike the op to get back to it but one one issue in the cases that you have you've got gap financials and met metrics next to each other those are not financials you're on of those are metrics because the the non gap are are metrics that the company is able to put together for themselves they are committed they disclosed all this in the ten case and they disclosed their gap financials and certain non gap metrics and the most important non gap metrics for this court to consider is a big line item called distributable cash flow but they did disclose in the ten k s they would borrow money if they disclose that they borrow money but there's a lot that they don't disclose about that i mean the problem with the risk disclosures is that they don't connect the dots between the borrowing and the distribution of let me stop you right there of putting  aside the expression connecting the dots you would agree would you not that a considerable number of the allegations you make in the complaint involve statements that surely you concede are literally true or just refer go there are certain statements that you could if you apply a very narrow approach and i would suggest a crabbed approach are literally true but what is also clear as a bel at this metrics the happens well here's well just talking about the gap metrics excuse me the nonghet metrics for a moment and we do not allege that the gap financials themselves or the non het metrics them selves are false or misleading statements and there's reasons we made a choice to attempt to do that approach the statements are different in that in the complaint which i know your honour's of have read so one of the one of the statements is that they say that the lp says that the primary source of cash from which to pay partner distributions was operating cash flow it's the paragraph number the complaint one thirty four your honor that's j a j one zero three  that's an example this isn't one example of a false misleading statement that we allege a primary source of cash from which to pay partner distributions was operating cash flow we alleged that this was misleading because that's not true they didn't pay their partner distributions out of operating cash flow they didn't have very much operating cash flow if it gap operating cash flow was very very low for two reasons one most of their cash because of the merchandise trust has to have to get stuck in the merchandise trust because of industry regulations because of the cemetery rules when you sell a plot or a trip you have put most your money away and also they were spending most of their money on cemeteries and funeral homes including the archdiocese cemeteries so they were spending all that money on on that but they still wanted to enjoy a rich quarterly distributions to enrich themselves so that's why they engage in what we call in our breaks the cycle of offerings and borrowings which was unsustainable in the in the longer doing is a ponzi scheme funded by day and you point out and point out correctly that this graphic comparison explicitly shows gap operating profit it is not designated nonghet what's the significance of that that's right so so so this this slide which we put in our complaint in our view actually you know shows the scheme in many this out it was all out there everyone could could figure this out and here's the thing about that your honor so so questions were raised at the beginning of the class period and at near the end of the class period and in the middle of the class period you did have some intrepid analysts who said hold on a second you don't have enough cash to pay these distributions are you going to have to sell equity and here's what the company said they said they denied it basic no we would never do that we're limited to one point a persistent inquiry actually resulted in one of the officers and i can't remember you suggesting the what defendants were trying to do was hide the ball that's exactly what i needed and if so then doesn't this truly can down to whether or not the ball was in fact actually hidden or whether it was out there for any reasonable investor to to see least be able that the net is right where the mix of information with whether whether one could reason with a reasonable investor could could see what was actually happening or whether one a reasonable investor could not and when questions were raised at the on the first day of the class period and a couple months before the last day of the class period and then in august two thousand and twelve if you're on a mentioned a few months into the class period every single time a smart investor raised their hand and said a whole lot of second mr corporate office or the that the officer shut them down and said we would never do that we'd never do that it couldn't be further from the truth you don't know what you're talking about m and that was a false hood that's that that's a false statement and shows the investor and shows the sea enter in and of itself under the a via case which talks explicitly about this denial issue and i would mention the urban outfitters case which was written by your honor judge rescript on the on that on the district court bench sites of i'm part on precisely that issue and this case is is exactly like a vine and an urban outfitters on that point and it's i think this court should follow suit on that question fifteenth two thousand and twelve the first day of the class period you had mr shane who was the c f o of the company at that time he was asked by an analyst in sum and substance you don't seem to have enough cash to do these distributions are you going to have to sell equity to do an equity offering in order to make your distributions and mr shane says and i don't have i don't have it right in front of me he says it is our intention to always continue to fund distributions from the business thank you sir but always continue to fund distributions from the business it could couldn't they or you we disclose as sometimes we have to borrow money and that's part of our business model that's included in the ten k s they borrowing money borrowed borrowing money for what is the is the is the next question that must be considered and our position is that they never disclose that they borrowed money for the purpose of funding distributions they never connected the dots between borrowing and having to borrow for the purpose of distributions will lie on borrowing relying on borrowing for the purpose of distributions i'm sure they borrowed to pay the bills they borrowed for certain other things we don't we don't deny that they borrowed every every company's got a revolver there's a disclosure issue unless it's a disclosure issue or lack thereof and then risk disclosure is worn enough and one thing that i would ask the court to keep in mind let's not forget that the value of the units these are it's not called stocks all the units dropped by forty five percent in one day easy end of the class period that matter is the matter background information i am assuming that this is an instrument that the units are instruments that an investor purchases largely for income stream income purposes this is not like buying  correct the the entire purpose of the unit because a limited partnership is to get that cash distribution every quarter kind of like a dividend that is guaranteed in the sense that you know you're going to get something every quarter the value of the unit does change daily it's a publicly traded but it it it doesn't swing wildly it's not as volatile as as a stock is the idea is to more get your check who they're going to is not enough to religion to the drop of the did not reach it and so this court should not go get into it as a you know in the first instance we think this court's got enough to to within this case but the drop in the in the unit is still highly relevant on on materiality which is an issue and this court has what i think is called the clearest commitment to the efficient market theory and we would suggest that that very very significant drop on that day in october of twenty sixteen is highly relevant to  the effect of these disclosures i mean if everything you know the basic defense here is that everything was out there enough was out there you knew everything there's nothing we didn't disclose it was all you know even if it wasn't on the same place you know the grains of rice were out there you could have put it all together you knew enough if that's really true then why did the stock crash and it's never come back are you asking us to reverse judge or bring or send it back for further consideration both reverse your honor on falsity materiality and see enter send it back for consideration on loss causation and further proceedings and i'm sorry and control person liability is a name defendant he is not a ten b defendant but he is a twenty eight defendant the reason for that is we did not identify a false statement by him so he is not a ten be defended but he is a control person defended we contend that he is and he's identified in the complaint by name and in detail he is a defendant in the case although not ten b and he is unquestionably high up enough in the corporate structure that he he is an authorized agent of the company and this might be a good precedent not only in mark but also in iraq when you look at what the crux of the plaintiff's case is it is that the market would not understand that's down more was distributing more than its operating profit and that it had to borrow in order to fund with the market didn't understand it is that because they were the market was misled no and that's what i want to get to if you like just as a starting point  is the are the plaintiffs correct that what was done over the class period was in many instances  to have an equity offering use that money to pay down the credit facility and then in turn to maintain the distributions as had been if not promised assured to the unit holders borrow additional money then from the credit facility to pay the distribution they're not there this is the point of stated this is a unique business not only because it's an n l p which is a basically a flow through energy that has a a poorly distribution if there is available cash under the partnership agreement  and in this case stone more defines in its public statements the way it looks at available cash which not only includes operating results from operations that are gap but also working capital borrowings that's how they look at it  e cash it's also unique because in the cemetery business you have at need and need sales and so when you have a pre needs sale in a quarter it is a contract with a customer but it's for some time hopefully you know well in the future for that for the customer at least if you're the customer hopefully you know we secure the customer hopefully if if you cannot under gap recognize the revenue from the pre made sales contracts until certain i have until the yet certain time certain delivery of you know if you build a career up or buy certain materials that are required the same as by the way i want to get too much detail but when you look at the gap non gap reconciliation which is in every k and every q it seems also true for a portion of at meade because your day you may have something you may  have a sale at the end of a quarter but it's not completed until till the next quarter so you see a little bit of at me the cannot be immediately recognized at the time to get into any details for that is primarily that delta between gap and the at and the now i'm gapper the adjusting just an operating profit i know your honor asked about what i'd say non gap you every one of the casing keys defines the non gap measures the adjusted operating profit when you look at the reconciliation s me that the senior briefing included correct that you don't have to disclose everything in a single document if you think all the documents together disclosures are there in there's no ability but couldn't there be a situation maybe this is what on the opinions of the circuit so the first thing at the factual answer from looking at the disclosure i was struck by the statement that the that the disclosures were kind of grains of rice spread around and i think that when you look at the disclosures is completely unfounded and clearly homeo which disclosure discovery single k in every single q had a gap versus non gap reconciliation every single q and every single k and i believe most of the earnings releases say we have to certainly every q said we need to borrow between twenty two and forty nine million depending on the year there was a specific number for each year in order to make our distribution this year we needed to borrow twenty two million from working capital or we needed to borrow forty nine million every single case says that every q who makes clear we look at our business it our business there's a lot of statements that we're going to fund from the business because of the receive it in the future and so to the what the company says and it's in a just in multiple of the case in the queues and i give a record cite is the way it believes the best way to look at the business is through this non it seems to me if the house are accurate the specific allegations of occurred that investors and the analyst community were not simply being asked to concentrate on non gap this demographic was dissing the whole use of gap principles at least as directed by the c i mean how do you explain i don't know if the f c c can get any more screwed up this might be a new level of screwed up and it looks to me like mr mcgrath on behalf of the of the lp l l c is saying don't look at this ignore the guy behind the curtain look at this why number one what's the important that the import is not there using nonghet measures to is how you think you should look at the business you need an explanation for that they're not alot of businesses that probably use i've not done a study but when you're using a non gap to an investor you have to tell the investor well why are you using non gap number one and there are statements through hours of we use non gap because we think it's a better measure of our business but oh by the way here are our gap earnings here is our gap operating profit mr mcgrath statement that you're on to refer to is an opinion statement by mr mcgrath it is not every investor the gap operating profit opinion then an opinion that i don't think we need we're going to we're going to have a problem with distributions look i think the last pretty clear on opinions that you have to show at the time the person made the opinion he didn't have a reasonable basis to express the opinion and so there would have to be about potentially any competitor practices the company the plaintiffs allege we didn't disclose that you had exclusive con exclusive exclusive supply agreements not only do you not disclose it you specifically denied it that was the allegation you specifically denied it and the case was dismissed in this court affirmed on the basis that there was a disclosure an f t c investigation which should put the investing public on notice that there are potential any competitive wris and actions taken by the defendant despite an expressed amount mercs the same there was a statement merck involved revenue recognition policy about whether or not a subsidiary of merck medco that was going to go public  included in its revenues the co payments by people that were getting subscriptions a prescription and it and it it said no we're not doing it and then it came out later and said ok well we are doing it but we're not going to tell you the amount of it we're not going to tell you what portion of our of our revenue it is a wall street journal article came out and said want to make an assumption that it's a five to ten dollar co pay and so you've got a back five to ten dollars per  script out of the revenue recognition article comes out stock price drops thirty five percent district court dismissed this court affirmed on the basis that its revenue recognition it had disclosed despite a prior disclosure that it wasn't including co pays have disclosed that it was including co pays in that amount but it didn't disclose how to calculate it mccourt said look it required the investing public to make an assumption about what the amount of the co pay was and do a simple mathematical exercise the investing public can do that as evidenced by the wall street journal article here the disclosures far exceed what was in not only did stone were disclosed repeatedly throughout the class period it was distributing more money than its gap operating profit would allow but less money than its adjusting adjusted operating profit would allow so it was in between those two because that's how it looked at its business adjusted operating profit but it disclosed why it was doing it because it believed it was the better way to look at its business and how it was doing it it disclosed we are doing it because we are using working capital borrowings to fund the shortfalls in cash flow the time lag created by the premium sales that is in every ten k and the other  that's in the ten k s is a statement on the quick to be in capital resources and this i'll just cite one example this is j three fifty nine and it says our primary short term liquidity needs are to fund general working capital requirements repair our debt obligations service our debt make routine capital maintenance improvements and pay distributions we will need additional liquidity to construct our primary sources of liquidity are cash flow from operations and amounts available under our credit facility as described below in the past this is a two thousand and sixteen in the past we have been able to increase our liquidity through long term borrowings and the issuance of additional common units in other partnership securities stoneware made very clear this is our business model we look at it strictly premium at need as if in the present period and we're making the business decision to distribute to our limited partners distributions based on the entirety of the causation that the what the plaintiffs allege in their complaint is material that you did well is a little different but what the plaintiffs legend their complaint is the truth came out in october twenty sixth seen because stone wore announced that it was cutting distributions by fifty percent because the business had the client its sale it had sales force issues and the sales had declined it didn't say we're cutting distributions because we don't have working capital borrowings we're cutting distributions because we can't raise common it's quite the opposite as stonewall always said throughout the class period its business had declined the sales had declined and it couldn't support the distribution it was pay and the what the plaintiff says in the complaint which they are that's not they don't allege that's a false and misleading statement never in fact one of the very first risk factors in this film or ten k is that a distribution is not here in t as in any business the distribution depends on the health and the strength of the business it in this quarter the health of the strength of the business did not support the distribution and the distribution was cut by fifty percent as your other noted is it is true it's background these are you  percent so on that basis we would say they have failed not only they failed to plead last causation but they have it mid that there is no loss causation let me get in search of  not to give a longer answer than necessary but i think that does depend on a i b answer is no cross the border because it depends on a alleged misrepresentation by alleged misrepresentation basis a a lot of their statements are unattributed in the complaint they don't say who made them they don't give a lot of them are tributed some are so but i think on a statement by the statement basis i think you know there are parts of the ticket larry the who what when where part of particularity and some statements may be satisfied on those parts why why is it misleading i think that they have failed across the board and i think to address one of your honor's questions one of the reasons i think you know you can have in these cases very long complaints and have sometimes short opinion sometimes long opinions the reason why you have it i think perhaps you have a short opinion here is because  particularly long opinion either and it's the same reason it's because the truth was disclosed exactly what stonewall was doing why it was doing it and how it was doing it was repeatedly disclosed any statement that's made by any of the officers must be viewed in the context of those statements so i think on a statement by statement basis i'm sure on the who what when and where is satisfied on some i don't think the wia satisfied on any thank you very much thank you rebuttal mr goldsmith page twenty two of our reply brief or i think we deal with that issue in some detail i won't belabor it most of the statements are attributed their statements that are attributed to stone or there's no reason why a company can't be a speaker there's  cases that seem to assume that a company can't be speaker why not company can be sued company can speak see no reason why a company can't be a speaker here the sales force issue  restatement they lost their access to the capital markets the reason they lost apple access to the capital markets because you have to have fourteen months of gap compliant audited financial statements if you don't have that then you're done you can't do any offering that could do any offerings and everything collapsed like a house of cards that's the reason but they couldn't admit the real reason so they call the sales force issues that's the excuse they used in their press release and we've got stuff in our brief that explains why that should be except is why our version should be accepted as at least as plausible as stone moore's reason under recall that that's the version that we contend has to be accepted here  in terms of the sea enter issues you know it's one thing that's really important that i've asked this court to consider is that under tellabs which we discussed briefly justice ginsburg you know handed the defendants in every case a golden opportunity to tell their own story so justice ginsburg made clear that the courts are obligated to consider proffered plausible non comparable inferences and you have to weigh the tie but you have to consider what the defense say this in this case for the first time in my personal experience and these kinds of cases are basically all i do since since tellabs the defendants