Two former directors of failed finance company Capital+Merchant used investors' money for their own benefit in a property project and deliberately hid their involvement in it, the High Court has heard.

Neal Medhurst Nicholls and Wayne Leslie Douglas are on trial in Auckland in a case brought by the Serious Fraud Office.

The pair face one criminal charge for theft by a person in a special relationship and two for the publishing of false statements. The latter carry maximum penalties of 10 years' jail.

As well as being Capital+Merchant Finance directors, the defendants headed a company allegedly $3 million out of pocket and in mortgagee possession of a run-down Palmerston North office block.


Between 2002 and 2004, Capital+Merchant allegedly advanced $14.5 million of investor funds to related parties, which purchased the office block and another one nearby and converted them into student accommodation known as "the Hub".

During opening arguments yesterday, the Crown said the pair knew they needed to disclose these transactions to Capital+Merchant investors and the company's trustee, but did not.

The Crown also argued the defendants stood to benefit from the transactions and used a "front man" to hide their involvement in the project.

"This is a classic case of the directors of a finance company knowingly and deliberately using the company for unauthorised purposes which they hid from the trustee and investors. In law, such use amounts to theft," prosecutor Nick Williams said yesterday.

"The transactions were not prudent arm's-length transactions and they caused significant loss to the company and thus the investors," Williams said.

Capital+Merchant went into receivership in November 2007 owing $167 million to about 7500 investors. No funds are expected to be recovered.

The Crown said the directors deliberately omitted information about the related-party loans in two prospectuses in order to induce investors to put their money into Capital+Merchant.

Due to the lack of disclosure, investors could not ascertain the risk of advancing funds, Williams said.

But the defendants' lawyer, Bruce Gray, QC, said the Crown "did not understand the true nature" of the transactions. Properly understood the loans did not amount to related-party transactions, Gray said.

The trial continues today and is expected to take about 2 weeks.

A second criminal case involving Nicholls, Douglas and former director Owen Francis Tallentire will follow.

This trial, also brought by the SFO, relates to transactions worth $28 million made between 2004 and 2006. These transactions allegedly gave trusts controlled by the three defendants $15.9 million in benefits.

A further Financial Markets Authority case is pending against Nicholls, Tallentire, Douglas and fellow directors Colin Ryan and Robert Sutherland which alleges the company's offer documents and advertisements misled investors. It is due to start in February.