The finding has paved the way for Sir Douglas to be stripped of his knighthood.
Read the judgement here.
Prime Minister John Key had delayed making a decision on revoking Sir Douglas' title until the appeal had been decided.
The Solicitor-General had appealed against the men's sentences as manifestly inadequate.
Sir Douglas and Lawrence Bryant had been sentenced to 300 hours' community service and ordered to pay $100,000 reparation, while Michael Reeves and Bill Jeffries, also a former justice minister, had been sentenced to 400 hours' community service.
The Court of Appeal found the correct starting point for their sentences should have been two years to two years and six months imprisonment.
But because the Solicitor-General had not sought prison sentences, the court found the proper sentence was a combination of home detention and community work.
The $100,000 reparation orders against Sir Douglas and Bryant were upheld.
The court will impose final sentences once it has received reports on the home detention addresses of the directors.
The Lombard collapse, one of many finance company failures between 2007 and 2009, left 4400 investors owed $127 million.
The Financial Markets Authority said the Court of Appeal's decision further clarified directors' duties and would help restore investor confidence.
"The Court has clarified that the duties on directors under the Securities Act to ensure that offer documents are true overrides the duty that they owe to the company to act in its best interests, if they conflict," said head of enforcement Belinda Moffat.
"The Court has reconfirmed that the purpose of the Securities Act is to protect the investing public through timely disclosure of material information."
Lombard Finance & Investments was placed in receivership in 2008, owing $111 million to approximately 3600 investors.
