AUKLAND, New Zealand -- The three directors of the finance arm of failed vending technology company VTL have been found guilty of failing to adequately inform investors of the risks the company faced.
Justice Paul Heath delivered the verdict in the Nathans Finance case today at the Auckland High Court following a 13-week trial that ended last month.
Mervyn Doolan, Kenneth Moses and Donald Young were found guilty of lying to investors in a prospectus, investment statement and two advertisements that the company used to seek $100 million from investors in 2006.
The convicted directors were released on bail and will be sentenced on Sept. 2. They face maximum penalties of $300,000 fines or five years in prison.
A fourth director pled guilty in March to similar charges. After agreeing to assist the securities agency in its prosecution of Nathans, John Hotchin's sentence was reduced from four years in jail to 11 months home detention. He was also ordered to pay $200,000 in restitution to Nathans' receivers.
Nathans Finance collapsed in 2007, owing about $174 million to some 7,000 investors. Most of its lending was to parent company VTL, which sold vending machines, franchises and technology in the U.S., Australia, New Zealand, the UK and Europe.
Prosecutor Colin Carruthers argued that Nathans' lending to VTL and its associated companies involved a conflict of interest. He said that the parent company was failing and used funds obtained from the public by relying on the purported financial strength and prudential lending standard of the subsidiary.
As a result, Carruthers said, there was insufficient cashflow to allow Nathans to pay investors interest or to repay principal, except from the cash it obtained from new investors. Meanwhile, investors in the finance company were expecting returns, and had reason to, given the company's public records, the prosecutor added.
The three directors denied Securities Act charges that they distributed an advertisement and prospectus that contained untrue statements regarding related party lending, bad debts and liquidity and sought $100 million from investors.
The trio argued that they relied on the information their management team and professional advisers had provided them. Upon delivering his verdict, Justice Heath said it was their independent responsibility to ensure the statements were correct.
The 156-page judgment says it was clear that Nathans' loans could not be repaid out of VTL revenue. Meanwhile, the directors were rolling over the VTL loans and capitalizing interest without following the "robust" credit-checking process claimed in the Nathans prospectus. Justice Heath said this information was relevant to the investment risk because it was directly linked to the possibility that VTL may itself become insolvent.