NovaStar Second Lender To Face Claims of Securities Fraud

Kansas City-based NovaStar Financial (NYSE:NFI) is the latest subprime lender to be hit with class action claims of securities fraud, after reporting last week that it lost $14.4 million during the fourth quarter and stating that it did not expect to report taxable income for the next five years.

At least three class action claims have been filed so far, in three different states, according to complaints obtained by Housing Wire. All three claims allege that the company issued “materially false and misleading” statements regarding the company’s business, which led the company’s stock to trade at an “artificially inflated” level.

On February 20, 2007, after the markets closed, NovaStar announced its disappointing fourth quarter and year-end 2006 results and further warned that the company expected to earn little, if any, taxable income in the next five years. The next day, NovaStar’s stock collapsed to close at $10.10 per share, a one-day decline of 42 percent, on volume of 22.4 million shares, 15 times the average three-month volume.

NovaStar issued a subsequent clarification of its earnings release after numerous media outlets, including HW, reported that the company would not be profitable under any measure until 2011. The company later said it expects to report a profit under GAAP measures, and that its profitability remarks apply to taxable income only.

NovaStar is the second large lender to be hit with claims of securities fraud in recent weeks, with Orange County, Calif.-based New Century Financial Corporation also hit with similar claims of securities fraud, as reported by Housing Wire on February 12.

The financial implications of any pending class action suit at either NovaStar or New Century are as of yet unclear, as none of the existing classes have been certified by the respective courts in which the motions were filed. Calls to both companies for comment were not returned.

The firms filing charges so far include: Washington, D.C.-based Klafter & Olsen LLP; Calif.-based Lerach Coughlin Stoia Geller Rudman & Robbins LLP; and Pennysylvania-based Law Offices of Howard G. Smith.