Damien Grant: Duties abrogated in murky world of second-tier finance

Mervyn Doolan. Photo / Dean Purcell

The Nathans Finance trial was an eye-opening insight into the murky world of our lamented and recently departed second-tier finance industry. How could it have got to this and who enabled it?

Justice Heath's 156-page deconstruction of Nathans Finance makes for an interesting and, at times, entertaining read.

Nathans Finance was a subsidiary of VTL, a firm developing vending technology products. Nathans raised money from the public, ostensibly for lending to third parties but, in reality, most of its lending was to VTL.

John Hotchin emerges as a key player in this dysfunctional circus. Described as "aggressively commercial" by one witness, it was a description Heath suspected Hotchin would wear as a badge of honour.

At one stage, Hotchin emailed his displeasure at a draft prospectus: "I strongly urge that the RISK section is changed as if this is going to market NO cash will come in."

It was over the content of these prospectus documents that the directors were charged. The Securities Commission alleged that they were misleading and the court agreed.

Although the directors may have believed the information that went to market, they had no basis for that belief. In essence, they abrogated their duties as directors to others: specifically, their management, auditors, other directors and the trustee.

Heath colourfully gives his own version of how the prospectus should have read, starting: "The main purpose of the offer is to provide working capital to Nathans' parent company ... "

The directors needed to be held to account but there is also an issue whether Nathans Finance was enabled by the very institutions we seek to prevent such failures, including the Securities Commission and auditors.

The commission is defunct so there is no point dwelling on its role (or lack of one) but it is interesting that they offered a deal to Hotchin and not to other directors. Did someone with intimate knowledge of the matters that ought to have been disclosed to investors get a lighter ride?

Nathans Finance is in receivership and it is pleasing to see receivers PricewaterhouseCoopers state they are suing the directors, as well as Nathans' auditors, for a breathtaking $73 million.

The Institute of Chartered Accountants has already fined the audit partner concerned $163,000, although you have to wonder what happened during the last practice review.

This was a small Hamilton firm auditing a large, complex and international finance house. Perhaps they thought the alarm bells were from the local rugby game. Law firm Turner Hopkins is seeking investor support to sue the trustees. I wish them, and PwC, success.