By Tony Field
Three directors of Capital + Merchant Finance have been sentenced to jail terms by the Auckland High Court.
Wayne Leslie Douglas, Neal Medhurst Nicholls and Owen Francis Tallentire were convicted of theft by a person in a special relationship.
Douglas and Nicholls have been sentenced to seven years and six months in prison, after being convicted on three charges.
The former chief executive Owen Tallentire was sentenced to five years in prison. He had been found guilty on two counts of theft.
Capital + Merchant went into receivership in November 2007, owing $167 million to around 7000 investors.
The charges relate to two transactions of around $19 million, which occurred between 2004 and 2006.
Prosecutor Nicholas Davidson said from the time of the offending in 2004 to the collapse of the company in 2007, Capital + Merchant should not have been functioning. The company "was living a lie" and "investors had lost the lot".
Investors were entitled to believe all was well with the company.
He said there is a risk with any investment, but in this case some funds had been lost for reasons that were not due to the normal risks associated with doing business. The three directors had "disregarded their obligations" to try to protect investors' money, and the trio had been motivated by self interest.
However Mr Davidson told the court that since the three men were convicted last month, he discerned "some elements of remorse that have hitherto been lacking".
He read excerpts from letters written by the directors since they were convicted, which reflected their realisation they were "out of their depth".
In his letter to the court, Nicholls said that at the time of the offending the financial markets were buoyant and he "viewed it as the beginning of an unending summer".
Mr Davidson said it was the directors' responsibility to have taken steps to try to safeguard the company against unexpected events like the global financial crisis.
Nicholls wrote that it was "now numbingly clear to me that my actions fell well short of the obligations that were required... I operated through rose-tinted glasses."
He also wrote that he could now see that he was not qualified or experienced enough for the position he held.
In his letter to the court, Douglas said it was now clear that he was acting in a cavalier way.
"I can't understand where my mind was at the time."
The directors faced a maximum of seven years in prison under each charge, but the Crown had sought cumulative sentences of nine to 10 years for Douglas and Nicholls.
Defence counsel Bruce Gray, who is representing both Nicholls and Douglas, said an appropriate starting point for the sentence was between three and six-and-a-half years.
But he also said there were mitigating factors. The men were of good character and had contributed to the lives of their families, friends and the community.
He said the letters the two men had written showed they were remorseful for their failings, rather than for themselves.
Mr Gray said this was a case in which the men had not set out to do wrong – rather they had failed in their duty to investors. He said they'd been surrounded by well-paid experts and there was a reasonable inference they had tried to get things right.
He told the court the high-water mark for this sort of case was Bridgecorp. Its former managing director Rod Petricevic was sentenced to a total of six years and 10 months in prison after being found guilty on charges brought by the Financial Markets Authority, and admitting subsequent charges brought by the Serious SFO.
Mr Gray questioned why the prosecution was seeking sentences that were 50 percent higher.
He said that although Douglas and Nicholls received money from the transactions, they'd lost those funds and were not in a position to pay reparation.
At the time they were convicted last month, SFO chief executive Adam Feeley said that although the collapse of Capital + Merchant had not received the same attention as some other failed finance companies, the investigations into its affairs had been one their highest priorities.
"Thousands of New Zealanders' lives were irrevocably changed for the worse from the collapse of Capital + Merchant. Its failure was as bad as anything which occurred in the industry, with $190 million invested in it by approximately 7,000 members of the public.
"Nothing has been recovered for them, in contrast to most other finance company collapses where at least some recoveries have been made."
He said that the case was one of the most important commercial fraud cases in recent years.
"This was a hugely complicated case involving deeply cynical transactions. The defendants used convoluted legal structures and opaque accounting methods to fool the public into investing for one purpose, and then using that money for other, unauthorised, purposes.
"The decision makes it clear that directors will be held accountable where they fail to act in accordance with their obligations to investors."
The charges related to transactions involving approximately $28 million that occurred between 2004 and 2006. It was alleged that these transactions (collectively known as the Clyde 1 & 2 and Numeria 1 & 2 transactions) were entered into in breach of the restrictions contained in the company's trust deed, and resulted in trusts controlled by the accused receiving benefits totalling approximately $15.9 million.
All three men were found guilty in respect of the charges relating to Clyde 1 & 2, and Nicholls and Douglas were also found guilty ion the charge relating to the Numeria 1 transaction.
Tallentire was found not guilty in respect of Numeria 1 & 2, and Nicholls and Douglas were found not guilty in respect of Numeria 2.
At a separate trial, Douglas and Nicholls were also found not guilty on three counts laid under the Crimes Act of theft by a person in a special relationship and of making a false statement by a promoter. Those charges related to a $14.4 million loan made in relation to a Palmerston North property development known as The Hub.
The SFO is appealing those not guilty verdicts.
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