Nathans Finance gave public false impression of investment risk

Nathan's Directors Donald Young (pictured), Kenneth Moses, and Mervyn Doolan in the High Court at Auckland yesterday. Photo / Paul Estcourt

Nathans Finance gave a misleading impression that its loan book was more diversified than it was, giving the public a false impression of the risk they were taking by investing in the company, a court heard this morning.

The Crown closed its opening submission before noon today and will call its first witness this afternoon in the Securities Commission's case against former Nathans Finance directors, Mervyn Doolan, Donald Young and Kenneth Roger Moses.

All three directors pleaded not guilty to six alleged breaches of the Securities Act yesterday.

A fourth director, John Hotchin, has already pleaded guilty to similar charges and was sentenced this month.

Crown lawyer Colin Carruthers, QC, said investors were misled into thinking Nathans was diversifying the spread of risk in its loan portfolio across different business sectors. "This was untrue as Nathans' business risk sat squarely with VTL (its parent company)."

"The statements were misleading because they portrayed a situation where the concentration on new lending was on commercial loans that would lead to greater diversification over time. This was not the case."

In Nathans' prospectus it stated that it had "consistent profits combined with a robust credit assessment process and a strong level of corporate governance have ensured that we have retained our unblemished record of nil bad debts written off for the period June 30, 2006".

But during that period Nathans had advanced loans to master franchise holders, Intelligent and Advanced, these two business owed Nathans $36.2 million as of June 30, 2006.

These are two of several related party loans Nathans advanced.
Carruthers said that Nathans frequently did not obtain security for its lending.

He said the loans to Intelligent and Advanced were examples of a "lack of prudential lending".

"In sum, investors were led to believe that Nathans was a prudent lender, when in reality is was not. Very significant funds were advanced to related parties with little, if any, adherence to proper and prudent and commercial lending criteria. Thus investors did not have the safeguard promised by Nathans' offer documents."

Nathans was primarily a funding vehicle for VTL, and its associated entities that purchased vending franchises from VTL, that operated in the US, Europe, Australia and New Zealand.

VTL bought vending machines and installed its own software into the machines.

It then established a franchised network of operators that leased the machines from VTL. Nathans acquired funds from the public by offering debt security in the form of debenture stock.

It is these offerings - prospectuses, investment statements and advertisements - that led the commission to begin an investigation into Nathans for alleged Securities Act breaches.

The directors are defending allegations that the statements they issued concerning related party lending (to VTL), the quality of its loan book, its loan management practices and its management of liquidity were untrue.
The commission claims the directors made untrue statements in the company's registered prospectus and investment statement of December 13, 2006.

It further alleges the directors made untrue statements when they signed a prospectus extension certificate on March 30, 2007.