Nathans directors 'bedevilled by conflict'

Investment statements of Nathans Finance, seeking $100 million from the public, concealed an unsound loan book and misled investors into believing their money was safe, a court heard yesterday.

Nathans directors Mervyn Doolan, Kenneth Roger Moses and Donald Young have denied 12 Securities Act charges of distributing an advert containing an untrue statement and six charges of signing a 2006 Nathans prospectus, which contained an untrue statement.

But according to Securities Commission prosecutor Colin Carruthers, QC, the trio did everything in their power to cover up the level of debt on the financier’s books.

A statement that Nathans had no bad debts written off was a cornerstone of its marketing pitch, said Mr Carruthers.

In the final stages of a 12-week Auckland High Court trial, Mr Carruthers said the “no bad debts written off” statement was only technically correct, because the Nathans and parent company VTL directors did “everything in their power to avoid any of its debts being classified as impaired, let alone bad and requiring to be expensed and written off”.

Fellow director John Hotchin, who masterminded a Nathans-funded global vending machine dream, earlier cut a deal with the Crown, changed his plea to guilty ahead of trial and agreed to give evidence against the trio – which he did last month while serving an 11-month home detention sentence.

He was also ordered to do 200 hours community work and ordered to pay Nathans receivers $200,000.

Crystallising the complex case against the trio, Mr Carruthers said the statement Nathans had no bad debts belied the truth of the loan book in which the vast majority of its loans were not paying cash interest but were continually rolled over after due dates or milestones were not met, with interest being capitalised.

“Nathans routinely rolled over impaired related party loans and capitalised the interest on them to create the guise of a performing asset in its financial statements.”

In fact, the loans were substantially impaired and interest and principal could not be repaid on their due dates, he said.

“The untrue statement created an impression for investors that Nathans’ single asset of any value, its loan book, was very sound, and an investment in its debenture stock relatively safe, whereas the true position was to the contrary.

“Ongoing disclosures to investors and the trustee that the loans were carried at full value without impairment misreported the true position and gave a misleading view of Nathans asset quality, profitability and overall solvency.”

Mr Carruthers used the expression “all eggs in one basket” to describe the close relationship between Nathans Finance and its parent company, VTL.

The crown presented a schedule of the inter-company loans, highlighting how they crept from $56 million in June 2006 to $94 million in December 2006 and $176 million by receivership in August 2007 – representing an exposure of 92.8%, far from the 42.6% stipulated.

The true extent of Nathans financial exposure to VTL-associated companies at June 2006 could not be ascertained from the investment statement and the prospectus, said Mr Carruthers.

Yet the deteriorating financial position was plainly available to the directors, he said.

Nathans’ lending could not be considered to be truly commercial when its lending was so focussed on the Hotchin-driven global VTL vending machine business, hungry for funds to fuel its international ambitions.

“One has to stand back from that and say, can it be regarded as commercial when it is one of a series of transactions that led to 94% of the loan book being on one group of associated companies.”

Hopes of multimillion-dollar deals in the pipeline for VTL “blinded the duties” of the directors, who were torn by “significant conflicts” between protecting Nathans; investors on one hand and the competing interests of VTL on the other, said Mr Carruthers.

“The whole relationship was bedevilled by conflict,” he said.”

“The prospects of the VTL business clouded the judgment of the accused, leading to financial disaster for investors.”

The trial, before Justice Paul Heath sitting alone, continues with the defence expected to start its closing address on Monday.