Inside Money: Nathan Finance - an undiversified delusion

A former Nathans Finance director Roger Moses. Photo / Dean Purcell

The distinction between desperation and delusion is a fine one but Justice Heath does a neat job of delineating the two emotional states in his landmark Nathans Finance judgment.

"By this stage," Heath notes on page 154 of the judgment, "the directors actions were closer to blind faith as opposed to hopeless optimism."

This is the judge's considered opinion of the Nathan's board business strategy as at August 6, 2007, when it was pinning its hopes on a sale of VTL (the vending machine software business that represented its major investment) to US firm Bacon Whitney.

"There was no reasonable basis for that view," Heath writes. "There were no realistic prospects of a significant cash injection in the foreseeable future and the structure of the transaction was more likely to benefit the [Bacon Whitney] interests."

Still, you never know. Hope springs eternal, and all that. Please note that for the minutes.

While I thought at the time that the Nathans/VTL offer was a loopy business idea, Heath's 156-page judgment goes beyond my wildest expectations.

It details a business virtually dysfunctional from birth, kept alive unnaturally by constant infusions of cash flowing from unwitting Nathan investors to VTL.

Heath's narrative would read as comedy if it didn't end with millions of Nathan investor dollars vended into thin air. By the end almost 80 per cent of Nathan funds were invested in dud loans to VTL - an unbelievable concentration of risk, a dereliction of diversification.

The Financial Markets Authority has "welcomed" the guilty verdict for Nathan directors Donald Young, Kenneth Moses and Mervyn Doolan. I know a lot of other people who welcome it too. Many of them, and let's hope they're not being delusional, are looking forward to a judicious, concentrated sentencing on September 2.