The Capital + Merchant Finance trial - a beginner's guide

A second Capital & Merchant trial before Auckland High Court has been described as more complicated than unravelling the Winebox Inquiry.

Complex money movements behind the alleged multi-million dollar theft sets this trial of three Capital + Merchant Finance (C+MF) directors apart from other recent finance company trials.

Crown prosecutor Nick Davidson, QC, speaking outside of the court, said the unravelling exercise could be likened to the 1990s Winebox Inquiry, which involved claims of corruption and incompetence in the Serious Fraud Office and Inland Revenue.

Confusing matters further is that two of the directors were, just weeks ago, in the same court defending separate Crimes Act charges, also brought by the Serious Fraud Office.

The same judge, Justice Ed Wylie, has reserved his verdict on Wayne Douglas and Neal Nicholls until completion of this trial, which sees the firm’s former boss Owen Tallentire join the charge list.

All three directors face three charges of theft under the Crimes Act relating to $28 million worth of property and investment loans advanced by the financier 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 are jointly accused of intentionally breaching the trust deed, which had a restriction on related party lending.

The men pleaded not guilty to all charges.

C+MF owed $167.1million to about 7500 investors when it was placed in receivership in November 2007 – that’s 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.

Yet another trial, brought by the Financial Markets Authority, looms against Messrs Tallentire, Nicholls and Douglas and their fellow directors Colin Ryan and Robert Sutherland, alleging investors were misled by Capital + Merchant’s offer documents and investors.

That trial is expected to start early next year.

Directors' defence due to start this week
Defence for Messrs Tallentire, Douglas and Nicholls is due to start this week – the fourth of what’s expected to be a five-week trial.

It’s not yet known whether Mr Tallentire, the boss, will take the stand.

In the trial to date, the Crown has 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 are 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’s alleged trusts associated with the director trio benefited from the sale to the tune of $5 million.

The court heard how C+MF agreed to buy 66% of Numeria from Investment Capital Trust (of which Messrs Nicholls and Douglas were the beneficiaries) for $10 million in November 2004 – funded by a related party loan of $7.66 million to the Capital + Merchant Group.

Just three days earlier Mr Tallentire had calculated its value based on cash value.

The Crown said it was absurd the company could be valued so much higher than the $1.08 million it had been sold for only 17 months earlier.

Three years later the loan had increased to $9 million – an amount Numeria was always unlikely to be able to pay.

Early on in the trial, SFO forensic accountant Blair Bulloch, the Crown’s first witness, gave evidence to construct the complicated ownership structure of the four key entities through which Capital + Merchant’s money flowed.

When C+MF’s trustee Matthew Lancaster, head of corporate trust at Perpetual Trust, gave evidence, he said he was unaware Mr Tallentire had seized control of the Capital & Merchant group with money from the finance arm.

Last week, receiver Timothy Downes said the quality of “box-ticking” that preceeded transactions at Capital & Merchant Finance was not up to the standard he would have expected to see.

Valuation expert Charles Cable, a partner at Deloitte – which prepared a report for the SFO – was also called to give expert evidence on how Numeria was valued last week.

Capital + Merchant history
Capital + Merchant Finance 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.