Loan repurchases and unexpected 2006 financial losses have landed another subprime lender in legal hot water. California-based law firm Lerach, Coughlin, Stoia, Geller, Rudman & Robbins LLP, filed a class action lawsuit against Kansas City, Missouri-based NovaStar Financial Inc. Financial Inc.on Friday.
In a petition, filed on behalf of all common stockholders who purchased stocks in the company between May 4, 2006 and Feb. 20, 2007, the law firm alleges “the defendants issued materially false and misleading statements regarding the company’s business and financial results.” The claim also says, “As a result of the defendants’ false statements, NovaStar stock traded at artificially inflated prices during the Class Period, reaching a high of $37.59 per share in May 2006.” The lawsuit contends the company also failed to report potential loan repurchases and changes in underwriting guidelines that would eventually impact its overall loan volume and financial results. In turn, the law firm says the mortgage lender’s stocks recently experienced a 42 percent drop when it finally reported its 2006 financial earnings.

In a statement released last week, Chief Executive Officer Scott Hartman with NovaStar attributed the company’s recent losses to a deterioration in the company’s overall loan portfolio during the fourth quarter. He also blamed lower whole loan prices and an increase in defaulted subprime loans.
“During the fourth quarter, we experienced a greater level of loan repurchase requests due to early payment defaults than we have historically,” said Hartman. “However, we believe our current reserves are adequate to cover the repurchase risk for all loans sold to date.”
NovaStar Financial is the second subprime lender to have a class action lawsuit filed against it in relation to its actions prior to the fallout in the subprime market. Earlier this month, Lerach, Coughlin, Stoia, Gellar, Rudman & Robbins LLP, also filed a lawsuit against Irvine, California-based New Century Financial Corp. In the suit, the firm accused the subprime lender of similar infractions.
Washington, D.C.-based law firm Klafter & Olsen LLP also reported on Monday that it has been retained to file a class action lawsuit against the lending giant in the U.S. District Court for the Western District of Missouri. The suit also will be filed on behalf of investors.