NovaStar Financial Inc. Case 04/14/2004

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Company Name(s): 
NovaStar Financial
Case Name: 
NovaStar Financial Inc. Case 04/14/2004
Case Status: 
Lawsuit Filed
Case Status: 
Judgment Issued
Case Status: 
Settlement Proposed
Case Status: 
Settlement Approved
Affected Securities
OTC: NOVS
Lawsuit Overview
Type of Lawsuit: 
Shareholder Class Action
Date Filed: 
04/14/2004
Class Period Begin: 
10/29/2003
Class Period End: 
04/08/2004
Court of Filing: 
U.S. District Court for the Western District of Missouri
Date Settled: 
01/14/2009
Settlement Amount: 
$7,250,000
Deadline to Participate in Settlement: 
05/15/2009
Summary: 

On January 14, 2009, a Preliminary Order For Notice And Hearing In Connection With Settlement Proceedings was submitted to the court.

According to a press release dated February 9, 2007, a federal judge has certified a lawsuit against NovaStar Financial as a class action, reported the Kansas City Business Journal.U.S. District Court Judge Ortrie Smith ruled on Thursday that the plaintiffs met the conditions required for class-action status, the Kansas City paper reported. The newspaper also took note, however, of NovaStar arguments that Milberg Weiss had changed its original theory in the case to pursue a different line of attack. Judge Smith reportedly ruled that the matter would be addressed during the summary judgment stage of the trial.

On March 31, 2006, the plaintiffs filed a motion to certify the class. The motion is currently pending before the court.

According to a press release dated May 12, 2005, Entwistle & Cappucci LLP announces that the United States District Court for the Western District of Missouri has denied the Defendants' motion to dismiss in the Novastar Financial, Inc. Securities Litigation. In its May 12, 2005 decision, the Court determined that based upon Novastar's alleged failure to inform investors about government investigations and fines in two states resulting from its regulatory violations, combined with filings by the company stressing the importance of complying with state regulations and noting the possible effect such compliance may have on its operations and profitability, Novastar's omissions were not immaterial as a matter of law. The Court additionally held that "upon review of the allegedly false or misleading statements made by Defendants, the allegedly illegal behavior in which Defendants engaged, and the benefits allegedly reaped by Defendants, the Court finds that Plaintiffs have sufficiently plead scienter." Novastar investors are represented in this matter by Entwistle & Cappucci LLP and Milberg Weiss Bershad & Schulman LLP. Pursuant to the Court's decision, these firms will now commence formal discovery of Novastar and its senior executives, including requesting that the company produce certain documents relevant to the litigation and requiring its senior executives to appear for depositions.

The original complaint alleges that defendants violated federal securities laws by issuing a series of materially false and misleading statements to the market throughout the Class Period which statements had the effect of artificially inflating the market price of the Company's securities. More specifically, the complaint charges defendants with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.

The complaint alleges that defendants failed to disclose and misrepresented the following material adverse facts which were then known to defendants or recklessly disregarded by them: (1) that the Company was operating branches in various states without obtaining the necessary regulatory licenses. Accordingly, a material amount of the Company's branch offices were conducting business in violation of the applicable laws and regulations; (2) that the risk of the Company being subject to adverse regulatory action was heightened given the aforementioned facts. Accordingly, Novastar's purported risk disclosures concerning regulatory oversight did not constitute meaningful cautionary language; and (3) that the Company was materially overstating the growth of its network of branches as many of those purported branches either did not actually exist or were operating in violation of applicable law.

The complaint further alleges that the Company's compliance problems were exposed by The Wall Street Journal, in an April 12, 2004 article entitled 'Outside Audit: Novastar's Rise Has A Ring Of Deja Vu.' The article reported that in February 2004, Nevada state authorities ordered Novastar to cease operations there after a finding that none of the Company's branches were licensed to do business in the state. Furthermore, according to the article, 'Nevada's top mortgage-lending regulator said he found that most of the 15 branches that Novastar claimed to have in the state didn't actually exist.' In response to the facts revealed in the aforementioned news article, the price of Novastar common stock dropped from $54.18 per share to $37.50 per share on extremely heavy trading volume.