Novastar Wins Dismissal of RMBS Action

Orrick, Herrington & Sutcliffe LLP
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On March 29, 2012, Judge Deborah A. Batts of the Southern District of New York dismissed with prejudice a putative RMBS class-action lawsuit against Novastar Mortgage and other defendants. The plaintiff, New Jersey Carpenters Retirement Fund, alleged in its Second Amended Complaint that Novastar disregarded its underwriting guidelines in originating loans that served as collateral for approximately $1.3 billion in RMBS certificates that were marketed to investors. Judge Batts dismissed the action, which brought claims under Sections 11, 12, and 15 of the Securities Act of 1933, because the plaintiff failed to tie any of its allegations about Novastar’s general underwriting practices to the specific loans in the collateral pool for the certificates at issue. Judge Batts also rejected plaintiff’s allegations that Novastar granted improper exceptions in the course of its underwriting, observing that the risk disclosures in the offering documents explained that Novastar permitted exceptions when, in the loan underwriter’s judgment, there were sufficient compensating factors. Because the plaintiff failed to identify any specific instance in which Novastar granted an exception when it did not subjectively believe that one was warranted, Judge Batts found that plaintiff’s allegations lacked sufficient specificity to survive a motion to dismiss. Finally, Judge Batts also found that the extensive risk disclosures in the offering documents rendered the alleged misstatements about which plaintiff complained immaterial as a matter of law. This was especially true in light of the total mix of information available to plaintiff at the time of its purchase of the securities at issue in 2007. Orrick represents the Novastar Defendants in this matter. Order.

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