Judge Dismisses Investors' Federal Suit With Prejudice

A federal judge has taken the unusual step of dismissing with prejudice a suit by investors against NovaStar Mortgage Inc. over $1.32 billion in mortgage-backed securities. In an 18-page ruling issued on March 29, Southern District Judge Deborah Batts (See Profile) found that the investors’ allegations were “not sufficiently specific to state a claim upon which relief can be granted.”

Plaintiffs lawyers at Cohen Milstein Sellers & Toll had presented Batts with citations from at least 17 other cases in which plaintiffs asserted violations of the Securities Act of 1933 against MBS issuers and underwriters, noting that in each case judges had at least partly denied motions to dismiss. Batts, though, concluded in this case that the plaintiffs had failed to allege facts specific to NovaStar’s origination practices to establish that it had made material misstatements or omissions in the offering documents for the securities. “The Offering Documents disclosed the high-risk nature of the loans backing the certificates, and in the months leading up to the Plaintiff’s purchase information regarding the [downturn] of the subprime mortgage market was well-known and widely available,” she wrote in New Jersey Carpenters Health Fund v. Novastar Mortgage, 08 Civ. 5310.