Risk Management

Judge Certifies NovaStar Class Action

A shareholder lawsuit against the subprime lender reportedly claims that the company concealed critical information, artificially raising the compa...
Stephen TaubFebruary 9, 2007

A federal judge has certified a lawsuit against NovaStar Financial as a class action, reported The Kansas City Business Journal.

Filed in April 2004 on behalf of shareholders by Milberg Weiss Bershad Hynes & Lerach, the class action reportedly claims the Kansas City, Missouri-based subprime lender concealed critical information, artificially raising the company’s share price.

According to the Journal, the complaint alleges that the company — as well as chairman and chief executive officer Scott F. Hartman, president and chief operating officer W. Lance Anderson, and principal accounting officer Rodney E. Schwatken — issued press releases and made filings with the Securities and Exchange Commission that reported record growth due to its core business.

The complaint also charges, however, that the company failed to disclose that its noncompliance with certain regulations could materially and negatively affect its ability to conduct business, and that the company had already been fined for noncompliance in two states.

An April 12, 2004, Wall Street Journal article reported that NovaStar had compliance issues with certain state licensing agencies. Three months later, NovaStar announced the appointment of Greg Metz as senior vice president and chief financial officer. Previously senior vice president and director of corporate tax with Union Planters, Metz was also a former partner at Ernst & Young. It is unclear whether he was the first person at NovaStar to hold the title of CFO.

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.

Smith also reportedly rejected defense arguments that Milberg Weiss attorneys should not be permitted to serve as co-lead counsel for the plaintiffs because the firm was indicted in California last year for allegedly giving kickbacks to clients.

“Removal of Milberg Weiss as co-lead counsel would not only harm the class, but prematurely punish the firm for unproven allegations,” Smith reportedly wrote in his order. “The court does not believe it is…appropriate to consider disqualification of the firm unless and until the claims have been substantiated.”