NovaStar Settles Stock Drop Suit for $925K

April 27, 2010 ( – The U.S. District Court for the Western District of Missouri has approved a $925,000 settlement of a lawsuit claiming NovaStar Financial continued to offer company stock in its 401(k) plan when it was no longer prudent.

In the suit, Jennifer Jones, on behalf of a class of participants in NovaStar’s 401(k) plan, alleges that fiduciaries of the plan allowed the imprudent investment of the plan’s assets in NovaStar common stock when they knew or should have known the investment was unduly risky and imprudent due to the company’s “serious mismanagement and improper business practices.” (See NovaStar Faces 401(k) Company Stock Suit over Lending Practices)

Those improper business practices include, among other things:

  • relying on originating, purchasing, securitizing, selling, investing in and servicing subprime residential mortgages for revenue;
  • manipulation of its mortgage origination process; and
  • failing to abide by its stated mortgage underwriting process and criteria.


Jones alleged NovaStar also failed to abide by proper risk management processes, used improper financial accounting for its portfolio of mortgages, and engaged in practices that endangered, and ultimately eliminated, its ability to elect to be taxed as a real estate investment trust (REIT). 

Attorneys for the class were awarded more than $330,000 of the settlement amount.

The case is Jones v. NovaStar Financial Inc., W.D. Mo., No. 4:08-cv-490-NKL.