LV mortgage operator facing probe by SEC

Wednesday, April 21, 2004 | 10:59 a.m.

SUN STAFF AND WIRE REPORTS

NovaStar Financial Inc. said Tuesday that it had been notified by the Securities and Exchange Commission that it is looking into some of NovaStar's business practices.

The Kansas City, Mo.-based subprime lender said it would cooperate fully with the inquiry.

NovaStar attorney Lanny Davis said the notice, issued Friday, was not surprising in the aftermath of a widely circulated article last week in The Wall Street Journal about NovaStar's regulatory problems in Nevada and other states.

"As the SEC stated in its letter," Davis said, "this inquiry 'should not be construed as an indication by the commission or its staff that any violations of law have occurred."'

Davis said NovaStar was confident that a full review of the facts would put the matter behind it.

The Journal reported on April 12 that NovaStar had paid fines for operating unlicensed offices in Nevada and Massachusetts. The newspaper also raised questions about the company's aggressive growth.

In a conference call with analysts the next day, NovaStar officials said the company was approved and authorized to do business in every state in which it operates.

NovaStar has retained the Washington law firm of Weiner Brodsky Sidman Kider to undertake a review of its compliance with relevant state mortgage licensing requirements.

The story in The Journal triggered a 31 percent drop in the price of Nova- Star's stock, which had closed at $54.18 the previous trading day. After NovaStar's announcement of the SEC inquiry, the stock took another beating Tuesday, falling $7.21, or 18.48 percent, and closing at $31.80.

Davis said the SEC had asked NovaStar to provide information on the number of its branches, its compliance with state regulatory requirements, its loan origination and securitization programs, and other aspects of the company's business.

"When the SEC is conducting an informal inquiry, it typically asks for a range of information so that it can understand a company's business and how it operates," Davis said. "Not surprisingly, the SEC has asked NovaStar for such kinds of information, and we look forward to answering its questions."

Davis, a former special counsel to President Bill Clinton, is a member of the Washington law firm of Orrick Herrington & Sutcliffe. NovaStar retained the firm last week after NovaStar was hit with a wave of lawsuits accusing it of misleading investors. The suits were filed after the 31 percent plunge in NovaStar's stock after the Journal's story.

At least half a dozen securities class actions have been filed so far. The suits generally assert that NovaStar's rapid growth outpaced its ability to keep pace with state regulatory requirements and that the company failed to disclose its licensing problems.

Seven-year-old NovaStar originates, invests in and services nonconforming loans, or loans to borrowers with credit problems.

NovaStar agreed to pay Nevada an $80,000 fine in February for operating unlicensed branches and was permitted to resume business in the state.

One shareholder lawsuit was filed by Milberg and Weiss in U.S. District Court for the Western District of Missouri on behalf of purchasers of NovaStar common stock during the period between Oct. 29, 2003 and April 8, 2004.

The lawsuit alleges that NovaStar executives violated securities laws by attempting to artificially inflate the price of the company's stock.

The complaint said NovaStar created the illusion that the number of NovaStar offices was increasing. The company's growth through branch office expansions was overstated as these offices were illegally conducting business in Nevada and elsewhere, a statement from Milberg Weiss said, adding that growth would be halted once regulators figured out the plan.

Milberg Weiss, as an example, pointed out that NovaStar overstated the number of its Nevada branches by 120 percent.

"As a result of the defendants false statements, NovaStar stock traded at inflated levels ... increasing to as high as $67 on March 22, 2004, whereby the company sold more than $107 million worth of its shares to the unsuspecting public," the Milberg Weiss statement said.