Nathans gave false idea of loan book, says Crown

Nathans Finance director Donald Young. Photo / Dean Purcell

Nathans Finance gave investors the false impression that its loan book was "very sound" and an investment in its debenture stock was "relatively safe", a court heard yesterday.

The Securities Commission's trial against former directors of Nathans Finance, Mervyn Doolan, Donald Young and Kenneth (Roger) Moses, started on Monday.

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

A fourth director, John Hotchin, younger brother to Hanover's Mark Hotchin, pleaded guilty to similar charges in February.

Nathans was primarily set up as a funding vehicle for its parent company VTL, a vending machine business, and its associated entities.

Crown lawyer Colin Carruthers, QC, said the clear impression from disclosures on Nathans' loan portfolio in the company's prospectus and investment statement was that the company was growing and diversified, which "was not the case".

Carruthers said letters to investors were even more misleading, as they made no mention of Nathans' related party lending to VTL and other related entities.

Nathans stated in an investment letter that it had a "proven track record in commercial lending" and specialised in commercial lending to small businesses across diverse sectors such as franchising, manufacturing, leisure, hospitality and transport.

As of June 30, 2006, company records show Nathans advanced 12 loans to the combined value of $12 million to companies outside the vending machine business.

All other lending, around $136 million, had been advanced to VTL, VTL subsidiaries, master franchisees and franchisees - all in the vending machine business.

In total, despite Nathans' claims of diversification, only 8.1 per cent of the loan book comprised of lending outside the VTL model. As of December 31, 2006, nine loans worth $6.5 million were lent to entities not operating in the vending machine business, which totalled 4.1 per cent of the loan book comprised of lending outside VTL.

"The statements regarding the diversity of Nathans' loan book were misleading because they conveyed an impression that the directors and management of Nathans were focused on, and were achieving, growth in its commercial loan book and diversifying away from related party loans and loans to franchisees," Carruthers said.

When Nathans was placed into receivership in 2007 its lending book totalled $171 million and all its money, except $6 million, was lent to VTL, subsidiaries of VTL or vending business borrowers.

"In sum, investors were led to believe that Nathans was a prudent lender, when in reality it 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."

The directors defend allegations that statements they issued concerning related party lending, the quality of its loan book, its loan management practices and management of liquidity were untrue.