10-Q filing discusses compliance issues
By COCO SALAZAR
8/10/2005

NovaStar Financial possibly broke securities laws when it "inadvertently" sold more than 300,000 shares of stock over the past year. The action, which could cost the subprime lender at least $12.8 million, follows a lawsuit by shareholders accusing it of making misleading statements regarding regulatory and licensing matters.

The Kansas, Mo.-based lender recently discovered that it may have sold approximately 50,000 shares under the company's 401(k) plan and an additional 287,000 shares under its Direct Stock Purchase and Dividend Reinvestment Plan in a manner that may not have complied with registration requirements of applicable securities laws, NovaStar said in a FORM 10-Q filing Friday with the Securities and Exchange Commission.

The holders of unregistered shares may have rescission rights or the right to recover damages if they no longer own such shares, the real estate investment trust reported.

NovaStar said it estimates it could be required to pay $12.8 million to repurchase the shares. That amount could end up being higher, however, if it is ultimately determined that additional unregistered shares were sold.

Plus, the company may be subject to monetary fines or other regulatory sanctions as provided under applicable securities laws, according to the filing.

NovaStar is already subject to an ongoing consolidated lawsuit that generally alleges the company made misleading public statements for failing to disclose certain regulatory and licensing matters. Although the REIT stated it believes these claims are without merit and that it intends to vigorously defend against them, its motion to dismiss the legal action was denied this past May.

Subsequent to publication of this story, NovaStar spokesman Mike Enos informed MortgageDaily.com that the 287,000 shares were sold unregistered because these exceeded the DRIP plan shelf limit. However, the company filed for a limit expansion, which the SEC approved. "A new shelf of 2.5 million was declared effective August 10 as a result of an August 3 SEC notification that no review was necessary," he said.

As for the other 50,000 shares, NovaStar believes it may have needed an S-8 filling in place when the shares were sold, Enos said.

The spokesman pointed out that Friday's filing was simply a public disclosure of what had transpired, and is not an issue. He also noted that the filing is not related in any way to the lawsuit.

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