The original complaint alleges that defendants violated federal securities laws by issuing a series of materially false and misleading statements to the market throughout the Class Period which statements had the effect of artificially inflating the market price of the Company's securities. More specifically, the complaint charges defendants with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.
The complaint alleges that defendants failed to disclose and misrepresented the following material adverse facts which were then known to defendants or recklessly disregarded by them: (1) that the Company was operating branches in various states without obtaining the necessary regulatory licenses. Accordingly, a material amount of the Company's branch offices were conducting business in violation of the applicable laws and regulations; (2) that the risk of the Company being subject to adverse regulatory action was heightened given the aforementioned facts. Accordingly, Novastar's purported risk disclosures concerning regulatory oversight did not constitute meaningful cautionary language; and (3) that the Company was materially overstating the growth of its network of branches as many of those purported branches either did not actually exist or were operating in violation of applicable law.
The complaint further alleges that the Company's compliance problems were exposed by The Wall Street Journal, in an April 12, 2004 article entitled 'Outside Audit: Novastar's Rise Has A Ring Of Deja Vu.' The article reported that in February 2004, Nevada state authorities ordered Novastar to cease operations there after a finding that none of the Company's branches were licensed to do business in the state. Furthermore, according to the article, 'Nevada's top mortgage-lending regulator said he found that most of the 15 branches that Novastar claimed to have in the state didn't actually exist.' In response to the facts revealed in the aforementioned news article, the price of Novastar common stock dropped from $54.18 per share to $37.50 per share on extremely heavy trading volume.
According to the Company’s FORM 10-K For the Fiscal Year Ended December 31, 2008, since April 2004, a number of substantially similar class action lawsuits have been filed and consolidated into a single action in the United States District Court for the Western District of Missouri. The consolidated complaint names the Company and three of the Company’s current and former executive officers as defendants and generally alleges that the defendants made public statements that were misleading for failing to disclose certain regulatory and licensing matters. The plaintiffs purport to have brought this consolidated action on behalf of all persons who purchased the Company’s common stock (and sellers of put options on the Company’s common stock) during the period October 29, 2003 through April 8, 2004. On January 14, 2005, the Company filed a motion to dismiss this action, and on May 12, 2005, the court denied such motion. On February 8, 2007, the court certified the case as a class action. The Company has entered into a settlement agreement to resolve these pending class action lawsuits. The total amount of the settlement is $7.25 million, and it will be paid by the Company’s insurance carriers. The settlement agreement contains no admission of fault or wrongdoing by the Company or other defendants. On April 28, 2009, the Court approved the settlement.