Case | HBS Case Collection | March 2013

NovaStar Financial: A Short Seller's Battle

by Suraj Srinivasan and Amy Kaser


The NovaStar case describes the challenges faced by short seller Marc Cohodes of hedge fund Rocker Partners as he tried to expose what he thought was widespread fraud in mortgage lender NovaStar Financial. The case is set in the time period from 2001 to 2007 and tracks the growth of the subprime industry and its collapse leading to the financial crisis. The case describes the business model of NovaStar, a leading subprime mortgage lending company, and its accounting practices with a focus on the key risks and opportunities facing the company. The case requires students to put themselves in the shoes of Marc Cohodes and understand the business model and accounting numbers and to identify if the financial performance is a good representation of the true economic performance. In particular, students learn accounting concepts related to securitization, gain on sale accounting, valuation of available for sale securities, and analyzing the statement of cash flows. The case also allows students to understand the role and incentives of various capital market participants like sell-side analysts, the media, auditors, and the Securities and Exchange Commission (SEC).

Keywords: short selling; Financial Accounting; financial analysis; financial analysts; valuation; Business analysis; financial statement analysis; financial statements; securitization; Securities analysis; fraud; accounting quality; accounting red flags; Accounting restatements; hedge fund; hedge funds; accounting scandal; accounting fraud; financial crisis; financial intermediaries; financial firms; corporate governance; corporate accountability; subprime lending; mortgage lending; fair value accounting; Accounting; Accrual Accounting; Fair Value Accounting; Governance; Governance Compliance; Corporate Governance; Governance Controls; Financial Services Industry; United States; California;


Srinivasan, Suraj, and Amy Kaser. "NovaStar Financial: A Short Seller's Battle." Harvard Business School Case 113-120, March 2013.