U.S. Southern District Judge Deborah A. Batts shut down underwriter defendants’ attempt to avoid proceeding with discovery in a $7.7 billion mortgage-backed securities fraud action, by arguing that an automatic bankruptcy stay applied to the underwriter defendants in addition to the debtor defendants.

The current discovery dispute arises from a proposed class action lawsuit against the now bankrupt NovaStar Mortgage Inc. (“NMI”) and NovaStar Mortgage Funding Corporation (“NMFC”) and the investment banks that underwrote $7.7 billion of NovaStar mortgage-backed securities issued in 2006.  The underwriter defendants include RBS Securities Inc., Deutsche Bank Securities Inc., and Wells Fargo Securities LLC.  The class action alleges that the offering documents failed to disclose that NovaStar had abandoned its underwriting standards in the wake of the 2009 housing crisis, which caused significant losses for investors.

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