401(k) suit against NovaStar gets go-ahead

A federal judge ruled last week that lawyers for a former employee can proceed with a class-action suit against NovaStar Financial.

On December 31, 2006, workers who participated in NovaStar’s 401(k) plan held $6.4 million in company stock. A year later, as home prices fell and NovaStar and other subprime mortgage lenders were stuck with a lot of worthless paper, the investment could practically fit in a coin dispenser.

Jennifer Jones, a former employee of the Kansas City-based company, sued NovaStar last year, claiming that company management offered an “imprudent” investment by allowing workers to invest their retirement in NovaStar stock. NovaStar was mismanaged, the suit says, and company officials “issued misleading communications” about the health of the organization.

Jones was luckier than some. She unloaded her NovaStar for $31.61 a share. The share price ultimately fell 99 percent.

NovaStar’s lawyers tried to argue that Jones lacked standing, in part because she didn’t get hammered the way other stockholders did. U.S. District Judge Nanette Laughrey rejected this argument. In her ruling, Laughrey said that Jones had adequately shown that she had suffered injury — she bought NovaStar at $36.41 — for the lawsuit to proceed.