Overview
On March 8, 2019, U.S. District Judge Deborah Batts granted final approval to a $165 million settlement in connection with losses from securities issued by NovaStar Mortgage Inc., a major subprime lender prior to the housing crisis, and several top Wall Street banks. The settlement, which was initially announced in March 2017, brings over 10 years of litigation to a close.
In the years leading up to the financial crisis, NovaStar specialized in authorizing risky residential mortgage loans that banks underwrote and packaged into investment portfolios called mortgage-backed securities (MBS). The class action lawsuit settled today charged NovaStar, the Royal Bank of Scotland, Wells Fargo and Deutsche Bank with misleading investors into believing that the securities they bought were safer than they proved to be. The suit argued the company hid how it systematically disregarded its own underwriting guidelines to increase the number of mortgages it could originate and incentivized its employees to make noncompliant loans to extremely risky borrowers.
The New Jersey Carpenters Health Fund, the lead plaintiff in the case, and Iowa Public Employees’ Retirement System, a class representative, were among many worker pension funds that bought mortgage-backed securities from NovaStar in 2006. When these securities were downgraded to junk bond status, the Funds took a painful financial hit. Cohen Milstein represents the lead plaintiff in this litigation. Please visit https://www.novastarmbssettlement.com/ for additional information on this settlement.
Case Background
Cohen Milstein represents the Lead Plaintiff, New Jersey Carpenters Health Fund (“Carpenters”), in a securities class action lawsuit pending in the United States District Court for the Southern District of New York. In addition to NovaStar Mortgage, Inc. (“NMI”), the Defendants named in the action are NMI’s wholly-owned subsidiary NovaStar Mortgage Funding Corporation (“NMFC”); certain officers and directors of NMFC (the “Individual Defendants”); the Underwriters of the securities, RBS Securities, Inc., f/k/a Greenwich Capital Markets, Inc. d/b/a RBS Greenwich Capital (“GCM”), Deutsche Bank Securities, Inc. (“DBS”) and Wells Fargo Advisors LLC f/k/a Wachovia Securities LLC (“Wachovia”) (the “Underwriter Defendants”); and the Nationally Recognized Statistical Ratings Organizations, which assigned credit ratings to the securities at issue, The McGraw-Hill Companies, Inc. (“S&P”) and Moody’s Investors Services, Inc. (“Moody’s”) (the “Rating Agency Defendants”).1
Plaintiff brings this action pursuant to the Securities Act of 1933 (the “Securities Act”), 15 U.S.C. § 77a, et seq., on its own behalf and as a class action on behalf of all persons and entities (the “Class”) who purchased or otherwise acquired interests in various NovaStar Mortgage Funding Trusts (the “NovaStar Trusts” or “Issuing Trusts”), pursuant or traceable to a single Registration Statement and accompanying Prospectuses filed with the Securities and Exchange Commission (the “SEC”) by on June 16, 2006 (the “Registration Statement”). Pursuant to the Registration Statement and the Prospectus Supplements incorporated therein (the “Offering Documents”), the Underwriter Defendants in conjunction with the Ratings Agency Defendants underwrote and sold to Lead Plaintiff and the Class $7.75 billion of Home Equity Loan Asset-Backed Certificates (the “NovaStar Certificates”). The NovaStar Certificates were issued in six (6) Offerings which took place between June 22, 2006 and May 25, 2007 (the “NovaStar Offerings).
The lawsuit alleges, inter alia, that Offering Documents contained material misstatements and omissions of material facts in violation of Sections 11 and 12 of the Securities Act, including the failure to disclose that: (i) the mortgage loan collateral underling the Certificates was not originated in accordance with the stated mortgage loan underwriting guidelines set forth in the Registration Statement and the Prospectus Supplements (ii) NMFC, the Underwriter Defendants and Ratings Agency Defendants failed to conduct adequate, and in some cases any, due diligence with respect to compliance with the stated mortgage loan underwriting guidelines; (iii) the stated credit enhancement did not support the investment grade ratings assigned to the Certificates in light of the true undisclosed and impaired quality of the mortgage collateral; (iv) there were material undisclosed conflicts of interest among the various Defendants, including the undisclosed “ratings shopping practices” Defendants engaged in; and (v) the amount of credit enhancement provided to the Certificates was inadequate to support the AAA and investment grade ratings because those amounts were determined primarily by the Ratings Agency Defendants’ models which had not been updated in a timely manner. Soon after issuance of the Certificates, and as a result of massive increases in borrower delinquency, foreclosure, repossession and bankruptcy in the mortgage loans underlying the Certificates revealing the true defective nature of the collateral, the value of the Certificates collapsed.
On November 4, 2016, Judge Deborah Batts of the Federal District Court for the Southern District of New York granted, in its entirety, Plaintiffs’ motion for class certification. This means that the certified class encompasses investors who purchased on any of the six Novastar mortgage backed securities offerings at issue in the case.
[1] NMI, NMFC, and the Rating Agency Defendants are no longer in the action.