AUCKLAND, New Zealand -- A trial is under way in New Zealand's high court for the directors of Nathans Finance, the collapsed financing subsidiary of global vending machine technology manufacturer and franchisor VTL Group. Nathans left 7,000 investors owed a total of $174 million.
The Securities Commission of New Zealand filed criminal charges in 2008 against Nathans directors Mervyn Doolan, Kenneth (Roger) Moses and Donald Young, who were also VTL directors and owners.
Nathans Finance went into receivership in August 2007 when VTL revealed that it was insolvent. VTL sold vending franchises in the United States, Europe, Australia and New Zealand under the 24seven and Shop24 brands.
The commission charges that the Nathans directors misled investors by signing false statements that stated VLT had adequate liquidity and no bad debts. Nathans issued a loan to VTL, and the directors stated that the company's lending practice was "diversified" and in "accordance with sound policies."
All three defendants pled not guilty to 18 criminal charges for distributing false prospectuses, advertisements and investment statements.
The criminal charges they face carry maximum penalties of five years in jail, or fines of up to $300,000. Civil proceedings are also underway, under which each director could be ordered to pay up to $500,000 in compensation.
A fourth director, John Hotchin, pled guilty in March to similar charges. After agreeing to assist the securities agency in its prosecution of Nathans, Hotchin's sentence was reduced from four years in jail to home detention.
Prosecutor Colin Carruthers argued in his opening statement 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 told the court, 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 company sold its 24seven Australasia and U.S. vending franchises in spring 2009. The receivers said they obtained $8 million from the sale of the assets -- far short of the debt owed to investors. They said court action was the only other means of securing additional money from the failed company. | SEE RELATED STORY
Among those testifying at the trial was Australian master franchisee Rob Seymour, who told New Zealand news sources that Nathans Finance was never likely to repay a $12.5 million loan to its parent, VTL Group, to establish a master franchise for a vending business in Australia.
Seymour said difficulties in installing the company's vending management technology in machines, along with delayed royalty and machine license payments from VTL to his company, Advanced Vending Systems Australia, made it impossible for him to service its debt.
He told the court that he alerted VTL's auditor, Chris Hughes, as early as March 2006 that the company was in danger of collapsing. In May 2006, he reportedly emailed Nathans director Doolan, saying that his position as a master franchisee in Australia was "unsustainable, unprofitable and unworkable," according to local news agencies covering the trial.
The master franchiser testified that he also detailed complaints from his franchisees in a separate email to VTL, claiming that some of them had to wait more than two months for vending machine deliveries and that many machines were not online with VTL's remote monitoring technology, which delayed service calls and left machines inactive for weeks.
Seymour added that in July 2006, he emailed Doolan again, asking to exit the business and seeking his portion of the startup costs associated with the Australian venture, which came from the earlier sale of his New Zealand franchise to VTL. He asked to be released from all debt. That month, he sent another email, stating the Australian business was insolvent.
Additionally, the New Zealand court heard testimony from VTL's Californian master franchisee, Paul Hyslop. He recounted similar difficulties in operating his vending franchises, getting answers from the company's directors and paying debts owed to Nathans Finance.
The trial, before Justice Paul Heath, is expected to last several weeks.