R v Moses Hc Ak

• Jurisdiction: New Zealand
• Judge: Heath J
• Judgment Date: 08 July 2011
• Neutral Citation: [2011] NZHC 646
• Docket Number: CRI-2009-004-001388
• Court: High Court
• Date: 08 July 2011

The Queen

and

Kenneth Roger Moses

Mervyn Ian Doolan

Donald Menzies Young

[2011] NZHC 646

CRI-2009-004-001388

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

Sentencing for offences under s58 Securities Act 1978 (criminal liability for misstatement in advertisement or registered prospectus) — offenders directors of Nathans Finance Ltd — funds diverted to repay debt owed by parent company — offending categorised as inept rather than dishonest — offers of reparation — previous good character — no previous offending — whether previous good character relevant when sentencing on charges of this type.

Counsel

C R Carruthers QC, B H Dickey, N R Williams (except 25 May to 2 June 2011) and J Blythe for Crown

P J Davison QC, S J Mount (21 March 2011 only), D C S Morris (until 11 May 2011), A C Cook (from 11 May 2011) and M A Corlett (from 13 April 2011) for Mr Moses

N S Gedye, S E Cameron and K Murphy for Mr Doolan D P H Jones QC and D C S Morris (until 11 May 2011) and A C Cook (from 11 May 2011) for Mr Young

Counsel

C R Carruthers QC, PO Box 305, Wellington

N S Gedye, PO Box 2097, Shortland Street, Auckland

D P H Jones QC, PO Box 1750, Shortland Street, Auckland

REASONS FOR VERDICT OF Heath J

Heath J

Contents

1. The accused, the charges and my verdicts	[1]
2. General background	[7]
3. The indictment and its particulars	[14]
4. The Crown case in outline	[23]
5. The defence cases in outline
(a) No untrue statements	[26]
(b) Immateriality and reasonable belief of truth	[28]
6. Securities Act 1978: the statutory scheme	[31]
7. Elements and onus of proof on a s 58 Securities Act charge	[39]
8. The impact of the “investment statement” regime	[52]
9. The characteristics of the “prudent but non-expert” person	[64]
10. The regulatory regime: roles and functions
(a) Introductory comments	[71]
(b) Directors and management	[74]
(c) The auditors	[88]
(d) The trustee	[92]
(e) Registrar of Companies	[97]
(f) External advisers	[99]
11. Nathans? business operations
(a) The VTL group structure	[101]
(b) Nathans’ directors	[110]
(c) The senior management team	[127]
(d) Nathans’ credit management	[144]
12. Nathans? lending concentration
(a) Classifications	[150]
(b) The inter-company debts	[154]
(c) The VTL business-related and commercial debts	[157]
(d) “Commercial” loans	[162]
13. Preparation of the 2006 investment statement and prospectus	[163]
14. The content of the investment statement and prospectus
(a) The investment statement	[186]
(b) The prospectus	[198]
15. What impression would the prudent but non-expert investor
get?	[207]
16. The allegations of untrue statements: the investment
statement and prospectus	[210]
17. Were the statements in the investment statement and
prospectus materially misleading?	[214]
18. The extension certificate
(a) Alleged misleading statements	[228]
(b) Analysis	[237]
19. The letters to investors
(a) Letter of 14 May 2007
(i) Alleged misleading statements	[242]
(ii) Analysis	[245]
(b) Letter of 12 July 2007	[252]
(c) Letter of 6 August 2007
(i) Alleged misleading statements	[261]
(ii) Analysis	[264]
20. Reasonable grounds for belief in truth of statements: Context
(a) Introductory comments	[267]
(b) VTL's business – an overview
(i) Interests in the United States of America	[269]
(ii) The Australian business	[299]
(c) Strategic planning
(i) Nathans	[315]
(ii) VTL	[332]
(d) Information available to Nathans’ directors
(i) Nathans’ board papers	[364]
(ii) VTL board papers	[373]
(e) Valuations	[375]
21. Reasonable grounds for belief in truth of statements: Analysis
(a) Honest beliefs	[393]
(b) The differing responsibilities of the directors	[395]
(c) The directors’ grounds for believing misleading
statements were true	[405]
(d) Were the beliefs based on reasonable grounds?
(i) Overview	[407]
(ii) As at 13 December 2006: prospectus
and investment statement	[412]
(iii) As at 29 March 2007	[438]
(iv) As at 14 May 2007	[451]
(v) As at 6 August 2007	[454]
22. Conclusion	[460]

1. The accused, the charges and my verdicts

1 At material times, Mr Roger Moses, Mr Mervyn Doolan and Mr Donald Young were directors of Nathans Finance NZ Ltd (Nathans). Each has been charged with six counts, under s 58 of the Securities Act 1978 (the Act). 1 The charges arise out of the distribution of offer documents, 2 allegedly containing untrue statements, through which Nathans offered debt securities to the public: 3

• (a) Count 1: Between 13 December 2006 and 30 August 2007, distributing an investment statement dated 13 December 2006 containing an untrue statement.

• (b) Count 2: Between 13 December 2006 and 30 March 2007, distributing Prospectus No 8 dated 13 December 2006 containing an untrue statement.

• (c) Count 3: Between 29 March 2007 and 30 August 2007, distributing Prospectus No 8 (pursuant to an extension certificate) containing an untrue statement.

• (d) Count 4: On 14 May 2007, distributing an advertisement (a letter to investors dated 14 May 2007) containing an untrue statement.

• (e) Count 5: On 12 July 2007, distributing an advertisement (a letter to investors dated 12 July 2007) containing an untrue statement.

• (f) Count 6: On 6 August 2007, distributing an advertisement (a letter to investors dated 6 August 2007) containing an untrue statement.

2 Each accused pleaded not guilty to all charges and elected trial without a jury. The trial was conducted before me over 54 sitting days, from 21 March to 16 June 2011.

3 A fourth director, Mr Hotchin, was charged in respect of the three distributions that occurred between 13 December 2006 and 15 April 2007; the latter being the date on which his resignation as a director of Nathans took effect. On 25 February 2011, Mr Hotchin entered guilty pleas to counts 1, 2 and 3. On 4 March 2011, he was sentenced by Lang J. 4 Mr Hotchin was called by the Crown to give evidence against his fellow directors.

4 Earlier today I found Mr Moses, Mr Doolan and Mr Young guilty on counts 1, 2, 3, 4 and 6. Convictions were entered on each of those charges. The three accused were found not guilty on count 5 and discharged.

5 These are my reasons for returning those verdicts. While it is unusual for full reasons to be given in Judge-alone trials, 5 it is appropriate in a case such as this. The prosecution is of public interest. Nathans was one of a number of finance companies that collapsed in 2006 and 2007. Public investors lost significant sums of money. This is the first case of its type to come before this Court. Others are to follow. Both the accused and the public are entitled to understand fully the reasons for my verdicts. 6

6 I thank counsel for their considerable assistance. I intend no disrespect to them in not setting out or reviewing their comprehensive closing arguments in detail. I have carefully considered the relevant evidence and closing addresses. I have elected to deal only with those matters that are essential to my decisions. I

acknowledge that any summary of the voluminous evidence that I have heard and read will necessarily be both selective in its content and incomplete in nature. I also accept that time constraints have resulted in these reasons being far longer than is desirable

2. General background

7 Nathans was a wholly owned subsidiary of VTL Group Ltd (VTL). 7 VTL and Nathans were incorporated on 23 December 1997 and 23 July 2001, respectively. In 2004, after the sale of 7.5 million shares to the public at $1.00 per share, pursuant to a registered prospectus, VTL was listed on the New Zealand Stock Exchange. After the float, interests associated with Messrs Doolan and Hotchin each owned 33.2% of the company, while those associated with Mr Gary Stevens (a director of VTL) and Mr Moses each owned 4.1%. 8 The public shareholding in VTL amounted to 25.4% of its share capital.

8 Nathans carried on business as a finance company. It solicited funds from the public, through the issue of secured debenture stock. That method of raising capital is regulated by the Act. Offers to invest in “debt securities” were made through the use of prospectuses, investment statements and advertisements. Pursuant to a deed of trust dated 15 November 2001, Perpetual Trust Ltd (Perpetual) was appointed as trustee for the secured debenture holders. On 20 August 2007, Perpetual placed Nathans in receivership, on the basis of its insolvency. There is a deficiency as to secured debenture holders of something in the order of $174 million.

9 Nathans was established for the purpose of providing working capital to VTL. First tier financiers (such as trading banks) do not ordinarily lend to such a company. VTL had no trading history. Its primary asset was intellectual property. It possessed few tangible assets against which security could be taken. Its business involved the acquisition of vending machines (depreciating assets) and the

installation of a unique proprietary software into them. To maximise returns from the software product, VTL intended to establish a network of franchised machine operators to lease the machines from subsidiary companies

10 All of Nathans’ directors were, at one time or another, members of the VTL board:

Both Mr Hotchin and Mr Doolan lived...