Entwistle & Cappucci LLP Announces Update to Class Action Lawsuit: District Court Denies Novastar Financial's Motion to Dismiss.

NEW YORK -- Entwistle & Cappucci LLP announces that the United States District Court for the Western District of Missouri has denied the Defendants' motion to dismiss in the Novastar Financial, Inc. Securities Litigation. The complaint alleges that between October 29, 2003 and April 8, 2004, Novastar and certain of its senior executives violated the federal securities laws. Specifically, the complaint alleges that the company repeatedly emphasized the advantages and importance of its branch network as a "strategic cornerstone" in originating the sub-prime mortgages on which Novastar's profitability depended. The complaint further alleges that during the class period, Novastar failed to disclose to the market that it was in violation of federal and state regulations as a result of its effort to expand its branch network at all costs.

In its May 12, 2005 decision, the Court determined that based upon Novastar's alleged failure to inform investors about government investigations and fines in two states resulting from its regulatory violations, combined with filings by the company stressing the importance of complying with state regulations and noting the possible effect such compliance may have on its operations and profitability, Novastar's omissions were not immaterial as a matter of law. The Court additionally held that "upon review of the allegedly false or misleading statements made by Defendants, the allegedly illegal behavior in which Defendants engaged, and the benefits allegedly reaped by Defendants, the Court finds that Plaintiffs have sufficiently plead scienter."

Novastar investors are represented in this matter by Entwistle & Cappucci LLP and Milberg Weiss Bershad & Schulman LLP. Pursuant to the Court's decision, these firms will now commence formal discovery of Novastar and its senior executives, including requesting that the company produce certain documents relevant to the litigation and requiring its senior executives to appear for depositions.

If you wish to obtain a copy of the Court's May 12, 2005 decision, the operative complaint or any other pleadings, or have any questions concerning this matter, please contact Robert N. Cappucci of Entwistle & Cappucci LLP at 212-894-7200 or via e-mail at [e-mail].

Entwistle & Cappucci LLP (www.entwistle-law.com) is one of the nation's leading securities litigation firms, representing some of the nation's largest public pension funds and private institutional investors in significant securities litigation in federal and state courts across the country. The firm specializes in all aspects of securities-related litigation for these institutional clients, including private, class and derivative actions as well as actions alleging breach of fiduciary duty and corporate waste, appraisal proceedings and actions challenging corporate transactions on fairness and other grounds.