March 11, 2019

A Manhattan federal judge gave final approval on Friday to a $165 million settlement between underwriters of the failed subprime lender NovaStar and hundreds of investors, rejecting objections from the Federal Housing Finance Agency and Freddie Mac that they shouldn’t be included in the class.

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The deal resolves claims from investors, including union pension funds, who alleged that Deutsche Bank Securities Inc., RBS Securities Inc. and Wachovia Capital Markets LLC, now Wells Fargo Advisors LLC, lied in offering documents on securities issued by NovaStar Mortgage Inc.

The case was filed in 2008, in the midst of the financial crisis. When the bulk of the mortgages underlying those securities went into default, the investors lost significant amounts of money, they said in court papers.

It was unclear how much each defendant contributed to the settlement fund, but Judge Batts wrote that it was fully funded. According to settlement documents, plaintiffs will receive $30.84 per $1,000 of face value of the securities they purchased.

At the time the deal was announced, it was stated that holders of around $2.2 billion worth of NovaStar-issued mortgage-backed securities were expected to opt out of the deal. At least 620 proofs of claim have been filed with settlement administrators, the judge wrote in Friday’s order.

The dispute dates back to 2006, when NovaStar issued six securities tied to residential mortgage backed securities. The RMBS were underwritten by Deutsche Bank, RBS and Wachovia. By June 2009, more than half the mortgages behind the securities had defaulted amid the housing collapse, causing massive investor losses, according to the suit.

The New Jersey Carpenters Health Fund, which had invested $100,000 in one of the securities, filed suit against NovaStar, the underwriting banks and ratings agency defendants such as Moody's and Standard & Poor's. The ratings agencies were dismissed from the suit in April 2011.

Steven Toll, the managing partner of class counsel Cohen Milstein Sellers & Toll PLLC, hailed the decision in an email to Law360.

"We are gratified the court granted final approval," he wrote. "This was a long, hard-fought litigation that yielded an excellent result for the class, whom we were pleased to represent."

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