Capital + Merchant Finance verdicts

UPDATE / 3.15pm:

Justice Ed Wylie has delivered a mixed bag decision on two Capital + Merchant Finance (C+MF) trials this afternoon.

C+MF directors Wayne Douglas (58) and Neal Nicholls (56) have been found not guilty of fraud charges they faced during a trial at Auckland High Court trial in May.

Three charges, brought by the Serious Fraud Office (SFO), related allegations of false prospectus statements and misuse of $14 million of investor funds. It was alleged the loans were advanced, against trust deed requirements, to four companies associated with a development in Palmerston North, known as 'The Hub'.

The pair were acquitted on all charges.

They were on trial before Justice Ed Wylie alone in late-April/early-May, but the judge  reserved his decision until completion of the second, five-week trial in June.

Verdicts on both trials were delivered at Auckland High Court today.
 

Eight guilty verdicts for second trial (three acquittals)

The June trial, also brought by the SFO, included C+MF boss Owen Tallentire (65) on the charge list alongside Douglas and Nicholls. 

In his decision on that trial, Justice Wylie delivered guilty verdicts for the trio on some of the theft charges they faced under the Crimes Act relating to $28 million worth of property and investment loans advanced by C+MF between 2005 and 2006.

Douglas and Nicholls were found guilty of all three of the theft charges the trio jointly faced. Tallentire, the firm's boss, was found guilty of two.

Tallentire and Nicholls were found not guilty of the fourth charge they jointly faced. (Read more about the charges below).

Justice Wylie said he found Tallentire not guilty on the first charge, because he was not persuaded beyond reasonable doubt he was in control of money depositied by investors with C+MF.

All three have been remanded in custody for sentencing in August.

Jail sentences sought

The Crown will push for jail sentences for the three men.

Crown Prosecutor Nick Davidson, QC, said the offending was significant and involved substantial amounts of money.

Douglas and Nicholls Queen's cousel Bruce Gray asked for his bail application to be heard in Chambers - with the public and media excluded - but the judge declined this request.

Mr Gray told the court his clients recognised a jail sentence was "likely or inevitable".

Defence lawyers indicated an appeal was a "distinct possibility".

SFO says Capital & Merchant Finance investigation among the most important commercial fraud cases in recent years

SFO chief executive Adam Feeley said that while the collapse of C+MF had not received the same attention as some other failed finance companies, the two investigations into its affairs had been one of SFO's highest priorities.

“Thousands of New Zealanders’ lives were irrevocably changed for the worse from the collapse of Capital + Merchant. Its failure was as bad as anything which occurred in the industry, with $190 million invested in it by approximately 7,000 members of the public," said Mr Feeley.

"Nothing has been recovered for them, in contrast to most other finance company collapses where at least some recoveries have been made."

Mr Feeley said that the case was one of the most important commercial fraud cases in recent years.

“This was a hugely complicated case involving deeply cynical transactions.  The defendants used convoluted legal structures and opaque accounting methods to fool the public into investing for one purpose and then using that money for other, unauthorised, purposes."

This morning: A verdict on one of the most complicated finance company trials is due this afternoon.

Complex money movements behind the alleged multi-million dollar theft set the second Capital + Merchant Finance trial, held in Auckland High Court in May, apart from other recent finance company trials.

C+MF boss Owen Tallentire and directors Wayne Douglas and Neal Nicholls face three charges of theft under the Crimes Act relating to $28 million worth of property and investment loans advanced by C+MF between 2005 and 2006.

The charges concern four separate transactions, referred to as Numeria 1 and 2, and Clyde 1 and 2, and their intersection with the C+MF.

Messrs Nicholls and Tallentire also face a fourth Crimes Act theft charge.

The trio is jointly accused of intentionally breaching the trust deed, which had a restriction on related party lending.

The men pleaded not guilty to all charges.

Justice Ed Wylie, who heard the five week trial alone, will deliver his verdict this afternoon.

If found guilty, they face a maximum penalty of seven years' jail.

Wayne Douglas and Neal Nicholls were before the same judge in April defending separate Crimes Act charges, also brought by the SFO. Justice Wylie reserved his decision until completion of the second trial.

C+MF owed $167.1million to about 7500 investors when it was placed in receivership in November 2007 – that is an average of about $22,280 each. Recoveries are unlikely.

By comparison, Bridgecorp owed $459 million to about 14,500 investors; Nathans Finance owed about $174 million to some 7000 investors and Lombard owed $127 million to 4400 investors.

The Crown’s case
Crown prosecutor Nick Davidson, QC, speaking outside the court earlier, said unraveling C+MF could be likened to the 1990s Winebox Inquiry, which involved claims of corruption and incompetence in the Serious Fraud Office and Inland Revenue.

The Crown called 16 witnesses as it set out to prove the director trio deliberately breached trust deed obligations as they circulated millions of investor’s money between several trusts – and were guilty of theft relating to $28 million worth of property and investment loans.

Central to the Crown’s case is the allegation Messrs Nichols and Douglas used investor money to finance C+MF’s purchase of loans and leasing company Numeria Holdings, based on a grossly inflated valuation by Mr Tallentire.

It is alleged trusts associated with the director trio benefited from the sale to the tune of $5 million.

Mr Davidson told the court the directors had no defence. They abandoned their duties and deliberately breached their obligations under the trust deed as they circulated millions of investor's dollars between several trusts.

The Defence: 'Misuse of theft charge'

The defence called no witnesses during the trial and relied largely on the argument there was no case to answer.

None of the directors gave evidence. They sat through the trial alongside their lawyers.

Mr Tallentire’s lawyer Nathan Gedye wrapped up the defence by arguing prosecutors had picked the wrong charge – that of theft.

The Crown had tried to prosecute the director trio with facts which might be appropriate to be considered in a director's duty or negligence case, but were not appropriate to the crime of theft.

"Section 220 of the Crimes Act was not intended to be used in cases like this," Mr Gedye said in closing submissions.

"This prosecution takes the criminal law too far into the rightful provinces of civil and company law and Securities Act issues."

The Crown's "grand agglomeration" of duties and obligations would make it very difficult for finance company directors to justify their actions or defend a section 220 charge in any case where a loan resulted in a loss, he said.

"This approach cannot be correct when seeking to prove a serious criminal charge.”

Capital + Merchant history


C+MF was set up in January 2002 by Messrs Douglas and Nicholls – to run alongside their existing contributory mortgage business National Mortgage Company (liquidated March 2008).

They employed Owen Tallentire as chief executive.

Messrs Nicholls and Douglas controlled the group through their equal shareholdings in a vehicle called Investment Capital Trust.

C+MF mainly provided finance and mortgage facilities for commercial and residential property development. Funds were sourced primarily from the issue of securities to the public as debenture stock and convertible capital notes.

Eight prospectuses were issued from incorporation in January 2002 until receivership in November 2007.