NovaStar Financial looks to settle class-action lawsuit

NovaStar Financial, the infamous subprime lender that became a poster child for naked short selling conspiracy theorists, wants to settle a securities fraud lawsuit brought against it in April of 2004.

The lawsuit alleged that the company used false and misleading statements to unload $107 million worth of stock on the public between October 29th of 2003 and April 8th of 2004. Novastar has proposed a $7.5 million settlement of the suit -- but will still have to wade through many, many other similar lawsuits that resulted from the company's aggressive accounting that it allowed it to book huge profits and pay huge dividends while making loans to people who would never be able to pay them back. The stock now trades on the Pink Sheets with a market cap of less than $3 million.

Investors were warned by a cavalcade of investigative journalists and other intelligent people, including our own Peter Cohan, of the problems that ultimately led to Novastar's demise. Instead people relied on optimistic projections from insiders and conspiracy theories about a worldwide short seller plot to destroy the company that flourished on the internet. Anyone who questioned the company's accounting was harassed and had their motives and ethics questioned. That's a pretty common theme of the housing bubble, and part of the explanation for why it inflated as much as it did: People were afraid to speak up.