Judge: Nathans investors misled

Mervyn Doolan. Photo / Dean Purcell

The Nathans Finance trio were yesterday convicted of Securities Act breaches after a judge found investors were given false impressions about the business.

Roger Moses, Donald Young and Mervyn Doolan were found guilty of five of six breaches.

The High Court ruling from Justice Paul Heath summed up misleading aspects of Nathans documents as being "the extent of lending to related parties, the absence of bad debts, the growing diverse nature of the commercial lending book, the credit assessment and management of loans and the adequacy of liquidity".

The judge said the case came 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."

He stressed the importance of the case and people's right to know what happened.

"This prosecution is of public interest. Nathans was one of a number of finance companies that collapsed in 2006 and 2007. Public investors lost significant sums of money. This is the first case of its type to come before this court. Others are to follow. Both the accused and the public are entitled to understand fully the reasons of my verdicts," he said.

The Bridgecorp trial is due to start next month.

A trial last year centering on the collapse of carpet maker Feltex resulted in former directors getting almost $1 million compensation after being found not guilty.

The Crown's case against the former Nathans directors was that the public was misled, gaining an impression of the business which was untrue.

Justice Heath said charges under the Securities Act 1978 arose from distributing offer documents containing untrue statements through which Nathans offered debt securities to the public.

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 parent company VTL selling its business 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 repayment of loans made to trusts associated with Doolan, Stevens and fellow convicted ex-director John Hotchin that "because [they were] men of substance, the debts would be repaid".

The judge called this folly.

All directors must act in good faith and in the best interests of a company and 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," the judge said, referring to memory lapses which he said were to be expected.

"Each accused pleaded not guilty to all charges and elected trial without a jury.

"The trial was conducted before me over 54 sitting days from March 21 to June 16."

The judge mentioned that the directors could face a jail term.

"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."

All three are remanded on bail for sentencing on Friday, September 2.

Verdict

Guilty:

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, pursuant to an extension certificate, with an untrue statement

Count 4: Distributing an advertisement (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, 2007 with an untrue statement. The letter did not meet the statutory definition of 'advertisement'.