Novastar Loses Motion to Dismiss

In the Novastar securities class action, Judge Ortrie D. Smith (W.D. Mo.) has denied the Company and Individual Defendants’ motions to dismiss in full. Basically, Plaintiffs alleged that: “(1) the company repeatedly reassured the market that it was fully complying with all applicable regulations and made no mention of any regulatory infractions; (2) the company violated the laws in two states and was subsequently fined but these violations were not disclosed to public investors; and (3) the company's growth through branch office expansions was overstated because the offices were illegally conducting business.”

Judge Smith said that “based on the alleged misrepresentations that Defendants made by failing to inform investors about the investigations and subsequent fines in Massachusetts and Nevada, combined with the filings by NovaStar that stress the importance of complying with state regulations and note the possible effect it may have on the company's operations and profitability, the Court cannot find that the omitted information was so obviously insignificant that it is immaterial as a matter of law.” In addition, Defendants’ “stock sales around the time of the allegedly false statements,” the fact that “NovaStar also allegedly benefited in a concrete way from the fraud” by engaging “in two stock offerings, raising more than $ 110 million,” and issuing “$ 1.48 billion in Home Equity Loan Asset-Backed Certificates during the class period” “sufficiently plead scienter.”

Finally, Defendants argued that “NovaStar did not have a duty to disclose its compliance issues because the compliance problems were not material.” However, the Court found that this was material, and also held that “once Defendants began repeatedly assuring the investing public that NovaStar was in full compliance with all applicable regulations and was not aware of any regulatory problems, they assumed a duty.”

You can read In re Novastar, issued May 12, 2005, at 2005 U.S. Dist. LEXIS 19946.

Nugget: “The Court denies Defendants' request to take judicial notice of its NovaStar's monthly loan production reports and its analysts' reports.”