Former Nathans directors Mervyn Doolan, Donald Young and Kenneth (Roger) Moses have been found guilty on five charges of breaching the Securities Act.

The men were on trial in the High Court at Auckland for a marathon 12 week stretch, from March 22 to June 16. While found guilty on five charges, they have been acquited on one other.

They have been remanded on bail and will be sentenced on September 2.

All must surrender their passports by 5pm today.

Doolan's attempts to go to Australia were denied by Justice Paul Heath. Doolan has family in Australia but he is required to hand in his passport too.

The terms of their bail conditions were set to ensure they did not apply for travel documents and the judge said he intended to seek a pre-sentencing report "with a home detention appendix".

"Reparation is likely to be important in this case," he added.

The Crown claimed the financial statements the directors - including fourth director John Hotchin - issued concerning related party lending to VTL, the quality of its loan book, its loan management practices and its management of liquidity were untrue.

Read a full copy of the court's decision here.

The Crown also said the directors made untrue statements in the company's offer documents of December 13, 2006, and in a signed extension certificate on March 30, 2007.

John Hotchin was excused from the trial after pleading guilty to breaching the Securities Act in February.

He avoided a jail sentence in part because he agreed to cooperate with the Crown and testify against his former colleagues.

He received 11 months home detention, a $200,000 fine and 200 hours of community service.

The directors could face a jail term and the judge referred to this when he convicted them this morning.

"A director of a company that distributes a prospectus or an advertisement (including an investment statement) that contains an untrue statement commits a criminal offence, punishable on conviction on indictment by a maximum term of imprisonment of five years or a fine of $300,000," he said.

The Crown's case was that misleading statements were made and facts omitted, he said.

But the directors denied this.

The judge said it was the duty of all directors to act in good faith and in the best interests of a particular company. Directors needed to exercise the care, diligence and skill that a reasonable director would exercise.

"I am satisfied that all of the directors attempted to give truthful evidence of what actually occurred. For understandable reasons, their recollections of events were, in some cases, imperfect," he said, referring to what he called memory lapses which he said were to be expected.

"Mr Hotchin struck me as an enthusiastic and energetic man who was prepared to take greater business risks than his co-directors. That approach reflected his background in marketing. He was always keen to accentuate the positive factors of the VTL business-related activities.

"I assess him as someone whom his fellow directors should have realised had to be questioned closely on favourable reports about business developments of which they had much less knowledge, to avoid being influenced unduly by an over-optimistic presentation that was not supported by hard financial data," the judge wrote.

The Crown's case was that the public was misled about Nathans, gaining an impression about the business which was untrue.

The judge summed up misleading aspects as being "the extent of lending to related parties, the absence of bad debts, the growing the diverse nature of the commercial lending book, the credit assessment and management of loans and the adequacy of liquidity."

The case down to one simple point: "The real issue is whether the investment statement and prospectus, read as a whole by a prudent but non-expert person, contained misleading statements on the topics to which the Crown referred," the judge ruled.

The combination of statements and material omissions conveyed a false impression to investors about the true nature of Nathans' business, the actual state of its financial health and the risks of investment, he said.

From at least June 2006, the Nathans' directors knew there was no reasonable prospect of inter-company debt being repaid without VTL selling its businesses units.

The judge also found statements about good governance lacking.

"Likewise to say that Nathans had robust credit management procedures was only half true," he said.

Assumptions were made about the repayment of loans made to trusts associated with Doolin, Stevens and Hotchin "because (they were) men of substance, the debts would be repaid."

The judge called this folly.

"The Crown has proved beyond reasonable doubt that statement to which I have referred were misleading."

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.

Nathans was set up as a funding vehicle for VTL, and its associated entities that purchased vending franchises from it.

VTL, which bought vending machines and installed its own software into them had operations in the US, UK, Europe, Australia and New Zealand.

Crown lawyer Colin Carruthers, QC, said in March that there was an an inherent conflict between parent VTL and Nathans' investors.

Hotchin admitted in court in May that he had not shown due care while a director of Nathans.

He admitted that the company got its offer documents wrong and that related party loans were advanced to VTL despite the fact they could not be paid back on time.

Hotchin said Nathans' prospectus and investment statement were wrong.

The defence for Moses, Young and Donald said the directors had been prudent and had been entitled to rely on professional advice from Nathans' finance team, to lawyers, auditors and accountants.

Nathans took down $174 million when it collapsed in 2007, leaving many of the 7000 small investors without their retirement savings.


VTL listed on the NZX in 2004 following the sale of 7.5 million shares to the public at $1 each. Nathans was primarily set up as a funding vehicle for VTL.

The Crown said funds provided by Nathans were typically paid directly to VTL for the initial operating licence fee or master licence fee.

The directors - Doolan, Hotchin, Young and Moses - were also directors of VTL.

The Crown alleged this raised a conflict of interest between the company and its investors.

"It in in the interests of the principal [investor] that the agent [Nathans] is motivated to act in the best interest of the principal. Related party transactions are likely to give rise to concerns as to whether Nathans is acting in the best interests of the investor or in the interests of the related party ."


Count 1: Distributing December 13, 2006 investment statement with "an untrue statement"

Count 2: Distributing December 13, 2006 prospectus No 8 with an untrue statement

Count 3: Distributing Prospectus No 8, purusant to an extension certificate, with an untrue statement

Count 4: Distributing an ad (letter to investors) dated May 14, 2007 with an untrue statement

Count 6: Distributing an ad (letter to investors) dated August 6, 2007, with an untrue statement

Not Guilty

Count 5: Distributing an ad (letter to investors) on July 12 with an untrue statement

Source: Written decision Justice Paul Heath, High Court at Auckland