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NovaStar Financial, the infamous subprime lender that became a poster child for naked short selling conspiracy theorists, wants to settle a securities fraud lawsuit brought against it in April of 2004.

The lawsuit alleged that the company used false and misleading statements to unload $107 million worth of stock on the public between October 29th of 2003 and April 8th of 2004. Novastar has proposed a $7.5 million settlement of the suit -- but will still have to wade through many, many other similar lawsuits that resulted from the company's aggressive accounting that it allowed it to book huge profits and pay huge dividends while making loans to people who would never be able to pay them back. The stock now trades on the Pink Sheets with a market cap of less than $3 million.

Investors were warned by a cavalcade of investigative journalists and other intelligent people, including our own Peter Cohan, of the problems that ultimately led to Novastar's demise. Instead people relied on optimistic projections from insiders and conspiracy theories about a worldwide short seller plot to destroy the company that flourished on the internet. Anyone who questioned the company's accounting was harassed and had their motives and ethics questioned. That's a pretty common theme of the housing bubble, and part of the explanation for why it inflated as much as it did: People were afraid to speak up.

TheStreet.com's Jim Cramer says a year of living dangerously almost destroyed Merrill Lynch and Citigroup.

To me the customers made out this time, the dealers didn't.

When I look at the losses the dealers are taking, I keep wondering how the heck they all got caught. Think of it like this -- if this merchandise were equities, you would ask: How did Merrill (NYSE: MER) (Cramer's Take) and Citigroup (NYSE: C) (Cramer's Take) get caught owning so much stock?

That's why we have to be shocked at the losses at Citigroup and Merrill. It was like they were making a big bet on housing and just masking themselves as dealers.

Now it is true that they were merchandizing and got caught. Prince was such an idiot. I hectored this guy and the board for a year, but all they did was stand by and applaud him. He probably had no inventory controls because he never understood the instruments anyway. That's OK, they were hard to understand. But he was the CEO, for heaven's sake.

Although short selling -- the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price -- goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn't, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and seek your comments and questions for story ideas. I don't offer any investment advice and I don't trade on any of the posts I write.

About 13 months ago, I suggested selling short shares of NovaStar Financial (NYSE: NFI) when it traded at a split-adjusted $116 a share. If you had followed that advice, you would have made a tidy profit -- it now trades at $1.79. If you covered your position today, you'd have a return -- before adjusting for the cost of margin escrow -- of 64x your investment.

According to The Associated Press, NovaStar laid off 85% of its people last week and its stock will be delisted on Thursday. Prior to the delisting, NovaStar had claimed that Wachovia Corp. (NYSE: WB), its lender, had given it a break by lowering NovaStar's minimum required liquidity from $30 million to $22 million.

In what could be a a key ruling for those of us hoping to learn more about shady subprime lending practices, a bankruptcy judge has given New Century Financial until February 6 to turn over a report of an investigation into the firm's cash handling practices to bankruptcy monitors.

Michael Missal was appointed by judge Kevin Carey to look into the accounting mistakes and/or fraud that led the firm to file false financial statement with the SEC in 2005 and 2006. According to the AP, "That report has yet to be filed. Missal said that continued foot-dragging by the defunct lender, former leaders and accounting firm KPMG will hold it up until March."

However, he has filed the report on possible cash mishandling, but it has not been made public at the request of New Century.

You would think that with its stock in the toilet, lawsuits alleging securities fraud pending, and a history of SEC inquiries, Novastar Financial (NYSE: NFI) would find it wise to start being honest with investors.

You would think. But on December 20, I wrote about the departure of Novastar's CEO, CFO, and general counsel. In the press release dated December 19 announcing their "retirements," Novastar wrote that Chairman and CEO Scott Hartman would "leave the Company and retire from its Board of Directors."

In the 8-K announcing the moves, filed with the SEC on the 21, Novastar said that "On December 18, 2007, Scott Hartman was terminated as the Chief Executive . . . On December 18, 2007, Gregory Metz was terminated as the Chief Financial Officer of the Company, effective as of January 3, 2008."

Why did Novastar change its language so dramatically? "Leaving the company" became "terminated" in a wonderful case of differential disclosure: 'Let's put out a broadly disseminated PR saying one thing and then file an 8-K with the SEC a few days before a holiday saying something completely different and hope no one will notice'.

Given that Novastar has already handed its shareholders massive losses, the least they could do is be honest and forthcoming in their press releases. But apparently, that's too much to ask.

Naked-shorting poster child/terrible company Novastar Financial (NYSE: NFI) has finally lost three of its top executives as it continues to flounder on the brink of bankruptcy.

Not so long ago (and by not so long ago, I mean 90%+ of the company's value), Novastar shareholders were blaming the company's sagging share price on naked short sellers.

Of course that turned out to be baloney, as the company was poorly-run enough to collapse on its own lack of merit -- no conspiracy theories needed!

What's fascinating is that it took so long for the chairman/CEO and CFO who presided over such destruction of value to resign to spend more time with their families.

If only Novastar shareholders had devoted more time to monitoring the company and holding management accountable instead of going off on loony conspiracy theories, this might have ended better.

When a stock declines from a reverse split-adjusted $250 per share down to $3.41 before heads roll, corporate governance and accountability are a serious problem.

TheStreet.com's Jim Cramer gives you the questions you have to answer about this major issue affecting the market and the economy.

We never talk about "purchased loans," yet those are at the crux of what's wrong with the system. The big losses that E*Trade (NASDAQ: ETFC) (Cramer's Take) and Wells Fargo (NYSE: WFC) (Cramer's Take) had were all loans that were purchased that were originated by others.

I have long held that there are specific parts of these bad loan amalgams that have made them so elusive to get your arms around, although we should be forever thankful to Citadel for placing a dollar value of 27 cents on this gunk.

Put simply there are five items on any check list of the purchased loans that are awful:

1. Who originated the loan? We know that the sloppiest lenders included NovaStar (NYSE: NFI) (Cramer's Take), New Century Financial, American Home Mortgage, Fremont General (NYSE: FMT) (Cramer's Take) and Ditech (NASDAQ: GM). If your collateralized debt obligation (CDO) has a lot of origination by them, you are in trouble. (I am excluding Washington Mutual (NYSE: WM) (Cramer's Take) and Countrywide (NYSE: CFC) (Cramer's Take) loans as we don't know enough about how much was packaged and sent and how much was bad.)

The New York Times provides some useful clues on how Goldman Sachs Group (NYSE: GS) was able to profit while its peers took enormous write-downs on holdings of Mortgage Backed Securities (MBS). Its culture encourages a healthy paranoia, which gives unusual power and pay to Goldman's risk managers -- and a willingness to act in conflict with clients' interests if it helps Goldman make more money.

The critical moment came late last year -- coincidentally around the time of my NovaStar Financial (NYSE: NFI) short call -- when Goldman's CFO called a "mortgage risk" meeting which concluded that Goldman should reduce its MBS holdings and buy expensive insurance as protection against further losses. Despite this strategy shift, Goldman continued to package risky mortgages to sell to investors. Many of these clients took losses while Goldman made money. (I think if it was truly concerned about its clients' well-being, it would have warned them of the dangers it saw.)

Goldman has a relatively flat management hierarchy which allows people closest to the markets to get their views heard. And one of the keys to adapting to risk at Goldman is the unusual power and pay of its risk managers. Its controller's office, the group responsible for valuing Goldman's huge positions, has 1,100 people, including 20 PhDs. If there is a dispute, the controller is always deemed right unless the trading desk can make a convincing case for an alternate valuation.

TheStreet.com's Jim Cramer explains what could force the Fed to cut rates again.

The housing index just can't rally for a minute. The thing's amazing. The stress of the system is so clearly manifested by this that I have to wonder if the Fed wants this index lower.

The fact that the Fed's speakers never mention things like this index and the homebuilders makes me wonder if this group is actually what the Fed wants to put out of business. I wonder if the Fed thinks that Pulte (NYSE: PHM) (Cramer's Take) and Horton (NYSE: DHI) (Cramer's Take) and Lennar (NYSE: LEN) (Cramer's Take) and Standard Pacific (NYSE: SPF) (Cramer's Take) and Centex (NYSE: CTX) (Cramer's Take) need to go bankrupt before the Fed can ease any more.

Many of these firms lent money recklessly. Are the Fed heads thinking these companies need to pay like the New Centurys and the NovaStars (NYSE: NFI) (Cramer's Take) did? (Are the feds, by the way, thinking that this GMAC company has to go because that was a huge provider of crummy mortgages?)

Although short selling -- the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price -- goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn't, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and seek your comments and questions for story ideas. I don't offer any investment advice and I don't trade on any of the posts I write.

Last December, I urged investors to consider selling short shares of NovaStar Financial (NYSE: NFI) when they could be had for $116 a share. And in August, I asked whether NovaStar would file for bankruptcy. It's not quite there yet -- but at $1.72 a share -- it's getting close. (It borrowed $95 million from Wachovia Corp. (NYSE: WB) and now can't pay it back after posting a $64.05 a share loss.) If one were to buy back the shares at Friday's $1.72 sold short at $116 -- it would represent a 66-fold return on investment. (Actually slightly less when taking into account the cost of collateral required to hold the short position during the last 11-months).

Meanwhile the New York Times reports on NovaStar's creative management compensation and the message board boasts of Howard B. Hill, a member of the quantitative management group at Babson Capital, a unit of MassMutual. NovaStar paid its top executives dividends on their stock option grants -- they got paid dividends on shares they didn't even own. Specifically, NovaStar reduced shareholders' equity by $2.2 million in 2006 and $4.1 million in 2005 to cover those dividends.

JC Penney (NYSE: JCP) is trading off almost 4% after cutting its holiday sales outlook.

InfoSpace (NASDAQ: INSP) is up 7% after announcing a special dividend.

Telestone Technologies (NASDAQ: TSTC) is trading up 26% on strong earnings.

Advanced Life Sciences (NASDAQ: ADLS) is up on news of a successful trial of one of its drugs.

Sina (NASDAQ: SINA) is down 10% on weak earnings.

NovaStar Financial (NYSE: NFI) is down 39% on poor earnings and the possibility that its shares could be de-listed.

Stocks trading in the pre-market may open at different prices in the regular session.

Douglas A. McIntyre is an editor at 247wallst.com

What a fantastic time to own oil, gold, or any currency other than the dollar! And what a wonderful world it must be for foreclosure lawyers! How can you profit? Buy non-dollar currencies, lock in your heating oil price, and consider shorting mortgage insurers.

The statistics are mind-numbingly awful. The price of oil hit a record $96 a barrel, up 300% from $24 in January 2001. Gold is near a record high at $800, the dollar is at record lows -- for instance it takes $2.08 to buy a British pound. Housing, which has been tumbling from its peak in August 2006, is hurting too -- with foreclosures up 100% in the last year. And the mortgage meltdown has led to big layoffs -- my firm counts 70,087 finance layoffs by 42 companies so far this year.

There are three ways you can profit from this trend. First, you can buy currencies -- like the pound and the Euro -- which are getting stronger as the dollar weakens. Second, if you heat your house with oil, you can consider locking in a fixed price -- because oil is clearly going to keep going up.

No one would be particularly surprised that Chinese stocks traded on U.S. exchanges did well in the third quarter. The Shanghai Composite has doubled so far this year, and many stocks like Baidu (NASDAQ: BIDU), the China search engine, have made stunning gains.

In the third quarter, China Eastern Airlines (NYSE: CEA) moved up 112%. China Finance Online (NASDAQ: JRJC) ran up 282%. It is hard to imagine that the Chinese market can keep up this momentum, but analysts say that every quarter.

No one would find it odd that home builders and mortgage lenders were among the big losers in the quarter. Beazer Homes (NYSE: BZH) fell 66% to $8.25. Fremont General (NYSE: FMT), which has a subprime lending operation, fell 63.4% to $3.90. Mortgage lender Novastar Financial (NYSE: NFI) was down 68% to $8.87.

As retail sales fell, specialty store operations took a pounding. Gottschalks (NYSE: GOT) fell 63.5% to $4.34. And, Sharper Image (NASDAQ: SHRP) dropped 63.7% to $4.13.

The toughest part of the quarter is the realization the retail, housing, and mortgage shares could actually go lower during the October to December period.

Douglas A. McIntyre is a partner at 24/7 Wall St.

It's amazing that it took Novastar Financial (NYSE: NFI) this long to announce it, but now it's official: The company scrapped its plans to pay a dividend on its 2006 "profits", and will therefore have to forfeit its status as a real estate investment trust.

The company expects the new tax status to have a "significant adverse effect" on its third quarter results.

This is a great time to give a shout out to BloggingStocks' own Peter Cohan, who had one of the best short calls I've seen in a long time. In a brilliant post on December 18th of 2006, he wrote that "Potential loss of short-term liquidity could make it tough for NovaStar to repay these debts." He suggested that investors short the stock, and the stock is down more than 92% year to date. Great call Peter!

At the time, many were complaining that the company was a "victim" of naked short selling. Obviously, short sellers were the least of Novastar's concerns, as the company is currently fighting for its life.

Although short selling -- the practice of selling borrowed shares with the hope of repaying the loan by buying back the shares at a lower price -- goes against the American belief that stocks always go up, I have long been fascinated with it. Short Stories discusses what works, what doesn't, and what some of the leading lights in shorting stocks think about its opportunities and threats. I describe possible short trades and seek your comments and questions for story ideas. I don't offer any investment advice and I don't trade on any of the posts I write.

Last night Bloomberg News reported that American Home Mortgage Investment Corp (NYSE: AHM), which catered to borrowers with good credit, would file for bankruptcy -- possibly August 6th -- a few days after it shut down most of its operations. This week American Home stopped making loans and fired 90% of its 7,000 employees after a surge in borrower defaults prompted investment banks to quit extending credit.

This suggests that NovaStar Financial (NYSE: NFI) which I suggested shorting last December at a split-adjusted price of $116 could soon follow suit. That's because on Friday, according to Reuters, NovaStar -- which specializes in subprime mortgages -- announced to brokers that it would stop funding certain mortgages "temporarily." This is a less extreme version of what American Home did earlier this week.