| NovaStar Shares Tank Following News Story
Shares fall 31% following publication of article about regulatory problems April 14, 2004 By PATRICK CROWLEY
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| Shares of subprime lender NovaStar Financial took a sharp nosedive Monday after the company was slammed in a Wall Street Journal article.The stock of the Kansas City-based company, which operates as a Real Estate Investment Trust, or REIT, fell 31% to $37.50 following publication of an article that criticized the company’s regulatory and financial reporting.
NovaStar acted quickly and aggressively to stop the hemorrhaging, releasing a statement and convening a Tuesday morning teleconference call between top executives and financial analysts and journalists. “Our businesses are performing at or above expectations,” chairman and CEO Scott Hartman said during the conference call. “We are facing no material regulatory issues … and our accounting practices and disclosures are conservative and accurate. “Investors are really asking right now what caused the stock to drop $16 yesterday,” Hartman said. “As you know there was a very uncomplimentary column in Monday’s Wall Street Journal.” NovaStar is a seven-year old “specialty finance company that originates, invests in and services” residential subprime loans, according to its corporate Web site. It raises money by packaging securities backed by its residential mortgage loans. The WSJ article detailed how regulators in Nevada shut NovaStar’s branches in February after determining the company was not licensed to operate in the state. NovaStar paid an $80,000 fine but did not disclose the incident in regulatory filings because it did not have a financial material impact on the company’s operations, Hartman said. In a statement, Hartman said the company voluntary closed the branches after learning its operations did not comply with Nevada laws. During the conference call, NovaStar president and COO Lance Anderson said the branches were only closed for about two weeks and that the company’s license was not suspended. “We are licensed and in good standing in all states in which we operate,” Anderson said. “We don’t play fast and loose. We do what needs to be done on the right side of the agency that regulates us.” Anderson said the company agreed to pay the fine even because “we see Nevada as a promising market and we wanted to resolve any difference of opinion with regulators.” The WSJ article also accused the company of inflating the number of branches it operates in Nevada. Anderson acknowledged that some branches that had been closed were listed as open on the company’s Web site but that steps have been taken to correct that problem. “In Nevada we failed to update the list” of branches, Anderson said, “and wound up with some confusion. We have grown rapidly but we also pay close attention to controls, policies and procedures.” NovaStar’s profit more than doubled last year to $110.5 million. Revenues grew 59% to $170.4 million. The article also said that in October, NovaStar was halted from during business for two months in Massachusetts and that it failed to register branches in Texas. In the statement, NovaStar said that a branch manager opened an unlicensed Massachusetts location in 2003 without the company’s approval. “NovaStar immediately terminated the branch manager and closed the office,” the company said, adding that it has since been allowed to continue operating in Massachusetts. In Texas, the company said it is “properly approved to conduct business” in the state. NovaStar’s financial operations were also questioned by the Journal article, which pointed out that short-sellers — stock traders who bet that a company’s stock is going to fall — have been trading heavily in NovaStar stock. The article also raised concerns about the company’s long-term growth prospects. “The (WSJ) article raises questions about our business model, which we believe reflects a misunderstanding of the mortgage lending business,” Hartman said in the statement. “As with most lenders, NovaStar uses borrowings to enhance the overall returns to levels in excess of the coupon of the underlying mortgage loans. Our securitization enables us to mitigate the risks of lending.” The company’s comments appeared to have slightly eased investor concern; during late trading Tuesday, shares of NovaStar were trading at $41.78 — up $4.28 from Monday’s close. |
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Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: pcrowley@enquirer.com |
