R v Moses HC Auckland CRI 2009-004-1388
[2011] NZHC 944
•2 September 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CRI 2009-004-1388
THE QUEEN
v
KENNETH ROGER MOSES MERVYN IAN DOOLAN DONALD MENZIES YOUNG
Hearing: 2 September 2011
Counsel: C R Carruthers QC, B H Dickey and J Blythe for Crown
P J Davison QC and R Woods 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 for Mr Young
Judgment: 2 September 2011
SENTENCING NOTES OF HEATH J
Solicitors:
Crown Solicitor, PO Box 2213, Auckland
Cook Morris Quinn, PO Box 1295, Shortland Street, Auckland Lee Salmon Long, PO Box 2026, Shortland Street, Auckland Counsel:
C R Carruthers QC, PO Box 305, Wellington
N S Gedye, PO Box 2097, Shortland Street, AucklandD P H Jones QC, PO Box 1750, Shortland Street, Auckland
R V MOSES HC AK CRI 2009-004-1388 [2 September 2011]
Introduction
[1] Kenneth Roger Moses, Mervyn Ian Doolan and Donald Menzies Young, you each appear for sentence today having been convicted on five counts, under s 58 of the Securities Act 1978, of distributing offer documents of various kinds, containing untrue statements. The documents were issued by you, as directors of Nathans Finance NZ Ltd
[2] Your co-director, Mr Hotchin, had earlier pleaded guilty to involvement in the distribution of the first three offer documents: a prospectus, an investment statement and an extension certificate for the prospectus. The prospectus and investment statement were issued on 13 December 2006 and the extension certificate was signed by two directors at some time between 29 and 31 March 2007. Your responsibility extends to the issue of additional advertisements issued on 14 May
2007 and 6 August 2007. The last one was distributed about two weeks before
Nathans was put into receivership, on 20 August 2007.
[3] The maximum penalty for each of the offences you committed is a period of five years imprisonment or a fine not exceeding $300,000.1 Where the offence continues over a period of time a further fine not exceeding $10,000 per day may be imposed for every day during which the offence is continued.2 On my calculation, taking the offending as extending from 14 December 2006 to the date of receivership, 20 August 2007, the December offences continued for 250 days. That adds $250,000 to the maximum fine that would be available, meaning that the maximum available penalty by way of fine would be $550,000.
[4] I approach the task of sentencing in the following way. First, I will provide some general comments on the background to the offending. I will then deal with the legislative scheme and the nature of the offences. Next, I will consider the purposes and principles to be applied when imposing sentence. After brief reference to the submissions made by Mr Carruthers QC, for the Crown, I will sentence each of you in turn.
[5] As it will take some time for me to complete these remarks, you may be seated at this stage. I will ask each of you to stand when I deal with your individual circumstances and when I pronounce sentence on you.
General comments
[6] You were tried before me, without a jury. Full reasons were given for the guilty verdicts I entered.3 As you already know the basis on which the convictions were entered, I do not propose to refer to the facts in great detail in sentencing you. Nor do I intend to go through the various particulars on which the Crown advanced its case at trial. It will be clear from my reasons for verdicts that my conclusions were based primarily on the misleading impression conveyed to potential investors by the prospectus and the investment statement, as later incorporated by reference into the subsequent offer documents. It was also the materiality of the misleading
impression that formed the basis of my decisions.
[7] When I gave my reasons for returning guilty verdicts, I endeavoured to summarise the impression that I considered had been conveyed by the narrative portion of the prospectus and investment statement and compared that with a summary I had prepared to reflect what I regarded as the true position from the evidence I heard. To set the scene, I repeat those summaries.
[8] My summary of the impression conveyed by the prospectus and investment statement was as follows:4
Nathans is seeking up to $100 million to develop its business as a finance company. The company has delivered strong profit results for a number of years, including an audited net surplus of $4.97 million for the year ended 30
June 2006, an increase of 47% on the previous year’s results. A strong level of corporate governance, combined with robust credit assessment processes
have enabled all loan applications to be considered and determined on the
same basis. No bad debts have resulted. While a significant proportion of Nathan’s lending has been to its parent company, VTL, and its subsidiaries, those loans have been made on normal commercial terms, usually for periods of no more than 12 months. VTL and its subsidiaries are actively seeking to repay their debts in the country of origin. In addition, Nathans’
3 R v Moses HC Auckland CRI 2009-004-1388, 8 July 2011 (Reasons).
receivables book is both growing and expanding into diverse business sectors.
[9] I took the view that the evidence disclosed a situation which was materially different from that found in the investment statement and prospectus. Although Mr Carruthers has already referred to it, I think it is appropriate to repeat the summary I gave::5
The main purpose of the offer is to provide working capital to Nathans’ parent company, VTL, and its subsidiaries. While loans to those companies take the form of revolving credit contracts made on usual commercial terms normally for periods of no longer than 12 months, credit management processes used for other borrowers do not apply to them. Decisions about renewals of these loans are based on VTL’s needs. The inter-company advances, taken together with two major loans to companies operating as VTL’s master franchisees in the United States and Australia amount to [77.48% (as at 30 June 2006) or about 84% (as at September/October 2006)] of the total amounts owing by all borrowers to Nathans. VTL, its subsidiaries and the two master franchisees (IVL and AVS) are not able to repay their debts without selling all or some of their business units. Most of the interest on the VTL, IVL and AVS loans have been capitalised to date and there is an expectation that most (if not all) of the interest payable from now on will be capitalised during the period of the loans and that the loans will be renewed if those companies are not in a position to reduce or repay them when they fall due for repayment.
[10] There are significant differences between what was represented to investors and what the real position was, as you knew it to be.
[11] None of you acted dishonestly. There was no attempt to intentionally mislead investors. I took the view that the reason why the two summaries differed so markedly was that you had each failed to turn your mind to whether, as a matter of fact, the summary of business activities and risks truly reflected the actual position of Nathans, as you knew it to be. In that sense, your culpability rests on your complete failure to perform the statutory function cast on you as a director, namely to satisfy yourself that the offer documents did not contain any misleading statements.
[12] Those comments emphasise the true nature of your failings. This was always a case in which it was necessary to determine whether the information conveyed to potential investors reflected the true position, so that they could make informed
decisions about investment. In contrast, your defences rested on reliance on the literal accuracy of individual components of the narrative and on over-optimistic beliefs that the VTL business-related debts could be repaid from a significant sale of assets in the United States and/or Australia. You honestly believed that there was always a “big deal” around the corner that would salvage the position and, indeed, create wealth for VTL’s shareholders; even though all the objective evidence pointed in the opposite direction. You displayed a lack of appreciation of the fact that phrases that are literally correct can, when read together, create a misleading impression. That is why it was so important for you to read and understand what was conveyed and to compare it with the position as you knew it to be.
[13] There were aspects of your performance as directors that troubled me significantly:
(a) One was the failure to consider, in any meaningful way, whether the prospectus and investment statements conveyed materially accurate information to investors that was required for the investor to make a proper decision about investment risks.
(b)Another was the undue reliance on professionals and senior management personnel, to the extent that your functions and responsibilities of directors in determining whether the prospectus and investment statement conveyed accurate information was seemingly abdicated. In effect, your position was that you did not have to satisfy yourselves of the accuracy of the information imparted in the prospectus and investment statement because you had been advised by various professionals and management that various components were “compliant”.
(c) A third, which did not form part of the charges which came to light during evidence, was your apparent belief that there was nothing wrong in using moneys solicited from members of the public for the purpose of Nathans business being diverted to the parent company to allow it to honour a guarantee given to another VTL finance company,
Chancery. That was done so that Chancery could repay maturing investors that could not otherwise be achieved. Like me, when I heard that evidence, I am sure that an investor in Nathans would have been horrified to learn that you considered it was acceptable or appropriate to use funds from the public in that way.
[14] Having said all of that, I emphasise again that your offending did not involve any element of dishonesty. Rather, your performance in material respects as directors was inept. Your performance fell far below the standard that any investor ought to have been able to expect. Your failure to meet minimum standards of care to be expected from directors directly caused massive financial loss to investors, not to mention significant emotional harm and likely adverse consequences to their health.
The legislative scheme and the nature of the offences
[15] I accept submissions made by your counsel that s 58 of the Securities Act contemplates a spectrum of offending that must carefully be analysed to determine its level of seriousness and the degree of culpability that each offender bears. At the most serious end would be offending involving dishonesty, for example, an intention to mislead potential investors in order to secure funds for a particular venture or to obtain a personal financial gain. Immediately below that would be conduct that could be characterised as either reckless or grossly negligent. By gross negligence, I refer to conduct that involves a major departure from the standard of care expected when a director performs a statutory duty. Below that are cases involving innocent misrepresentation arising out of greater or lesser degrees of carelessness. For example, there may have been an error of judgment in respect of a particular issue that ended up being material to an investment risk. The task of a sentencing Judge is to determine into which category your offending falls in order to work out its place on the spectrum. The more serious the offending, the higher the starting point for sentence will be. The seriousness of the offending will be informed by the duration of it, its nature and extent as well as the opportunities that were available to correct the position as time progressed.
[16] For reasons which will become apparent I regard your offending as falling within the gross negligence category.
[17] Parliament’s decision to create a maximum penalty of 5 years imprisonment for an offence that might not involve criminal intent can be viewed as an attempt to emphasise the importance of the disclosure required in an offer document that solicits funds from the public. The underlying policy for that decision is that members of the public who decide to invest their hard earned income for (among other things) their retirement do so on the basis of accurate and complete disclosure of the true position of the company. Protection of the investing public is the public policy goal. The rationale is that the best protection of the public lies in full disclosure of the company’s affairs and of the security it is offering, so that an investor may make a truly informed investment decision. That, in turn, facilitates the
efficient functioning of financial markets.6
[18] That rationale has recently been reiterated by our Court of Appeal.7 In summary, the Court accepted that the section should be interpreted with a “broader view of the context of financial markets” in mind accepting that “information asymmetries between those soliciting and those investing funds” exist. The Court described the risk of untrue statements as a direct challenge to the integrity of a regime that is designed to ensure truthful disclosure of relevant facts to members of the investing public, at the time of investment.
[19] The type of investors to whom the protections are aimed is described in the statute as a “prudent but non-expert person”. I explained my view of the profile of such a person in my reasons for verdict. In summary, I said that such a person:
(a) While understanding that the higher rate of return the higher the risk, will fall somewhere between one who is completely risk averse and
someone who is prepared to take a high level of risk;
6 Re AIC Merchant Finance Ltd [1990] 2 NZLR 385 (CA) at 391-392 (Richardson J).
7 R v Steigrad [2011] NZCA 304 at paras [74]-[78].
(b)After seeking advice on the use of technical words or financial jargon that he or she may not understand, will be sufficiently intelligent and literate to understand the language employed in the narrative sections of an offer document;
(c) Will focus more on the narrative than on financial statements;
(d)Will obtain some assistance from a financial adviser and have the ability to comprehend competent advice;
(e) Is one of modest financial means; neither rich nor poor. A middle income New Zealander; someone who is often referred to as “a mum and dad” investor. Such a person is unlikely to have the financial capacity to obtain detailed accounting advice, much less a forensic analysis of the financial data.
[20] A prudent but non-expert person is not only concerned to assess the risks inherent in a particular investment but also to ensure that the people in whom he or she can repose confidence control the use of his or her funds. While it is immaterial to a purchaser of some commodity to know what the vendor will do with the purchase money when received, a person who advances money in response to an offer on a debt security is in a different position. He or she is providing funds that becomes part of the working capital of the company. To the investor, it is all important to know what sort of people will have the control of the money and how that money is to be applied. While some submissions have suggested that breach of trust is not an important issue, the fact remains that investors who provide money in this way trust the directors to act in their best interests and, in the way you acted, you breached that trust.
[21] The receivers of Nathans estimate a shortfall to secured debenture holders of something in the order of $168 million. However, your conduct has not led to the whole of that loss being suffered. You can only have responsibility for moneys that were advanced on the faith of the 2006 prospectus or investment statement.
[22] When Mr Hotchin was sentenced the Crown advised that something in the order of $26 million could be calculated as having been lost from the time the prospectus and investment statement were issued, up to 31 March 2007 when the extension certificate was signed. However, that does not take account of the fact that the investment statement and prospectus continued to provide the underlying information on which an investor would base his or her decision to advance moneys to Nathans. The Crown has calculated that a sum of about $66 million represents the losses suffered through new money being introduced, whether by way of investment or reinvestment, from the time the prospectus and investment statement were put into the market until the time of receivership. Breaking that down further it appears that some $25.2 million was invested or reinvested between the first advertisement letter sent out on 14 May 2007 and the date of receivership. That amount is probably the best estimate of additional losses for which you are responsible and in respect of which Mr Hotchin’s prior actions would take a lesser role.
[23] Reference has been made to the sentence imposed on Mr Hotchin. Of course, he pleaded guilty to the offences and he also offered assistance to the authorities. Those factors that were taken into account on sentencing him are not available to you.
[24] The losses to which I have referred represent financial harm done to individual members of the community from whom, in effect, you drew working capital for VTL. In addition there are the emotional and psychological costs caused to people who may have lost the benefit of much of their retirement savings. Common sense dictates that a number of those who have suffered loss will also have suffered from medical conditions brought on by the stress of what has happened and will, even accepting that your personal situations will deteriorate as a result of the reparation you have offered to pay, experience a situation significantly more dire as they enter their retirement phase.
Purposes and principles of sentencing
[25] Your offending is governed by the same purposes and principles that apply to the sentencing of any offender in New Zealand. Those purposes and principles are
set out in the Sentencing Act 2002. It is necessary for me to determine an appropriate sentencing response by reference primarily to the seriousness of the offending and the degree of culpability that each of you has for the harm caused by it.
[26] In a case such as this, the primary sentencing goals must be denunciation of the offending and deterrence of others from committing the same and similar offences. I agree with Lang J,8 when he sentenced Mr Hotchin, that there are three significant effects that flow from your offending to which those sentencing goals must respond:
(a) The likelihood that members of the public will be deterred from placing funds with finance companies for a very considerable period of time, due to the lack of trust in those responsible for looking after their money.
(b)The removal of adequate venture capital from the New Zealand capital markets that would otherwise be available for new and existing businesses, again through the lack of trust in those in whom investors would otherwise repose confidence to look after their money.
(c) The likelihood that members of the international business community may lose confidence in the integrity and competence of those responsible for running finance companies in this country, meaning a possible reduction in overseas funds available for entrepreneurial activity.
[27] A submission has been made that undue emphasis on denunciation and deterrence may create an unintended consequence of creating a disincentive for competent people to accept office as directors of companies such as Nathans. With respect, I cannot accept that submission. The purpose of denunciation and deterrence in this situation is to make sure that those who hold office as directors and
deal with money provided by members of the public comply with their obligations to
8 R v Hotchin HC Auckland CRI 2009-092-20927, 4 March 2011, at para [63].
perform their functions to an appropriate standard. The emphasis I put on denunciation and deterrence as part of this sentencing exercise is designed to send a clear message that directors who fail completely to perform statutory functions and cause significant loss to investors act in an unacceptable manner.
[28] That leads to a need for a firm sanction to meet the relevant offending. The extent of the need for denunciation will turn on the nature and seriousness of the particular offending. In assessing the seriousness of the offending there are a number of relevant criteria that I have applied. The first is the characterisation of the nature of the offending. It was gross negligence. If you had taken time to compare what was conveyed in the prospectus and investment statement with the real position as you knew it to be, you could not have let that document go out into the market. The second is the duration of the offending. The need to focus on duration is confirmed by the maximum penalty provisions that provide for increasing fines to reflect the continuation of an offence. The third is to consider the consequences of the offending. As I have said, the consequences are massive, both in terms of financial and emotional harm. The fourth is to take account of the opportunities that were available to reassess whether the prospectus and the investment statement remained accurate. You had that opportunity when the extension certificate was signed and the two advertisements issued in May and August 2007. There is no evidence that the board ever addressed that question in March, May or August of that year.
[29] Another important sentencing purpose is to hold you accountable to members of the community for your criminal acts and omissions. Allied to that is the need to provide for the interests of victims of your offending, to promote in you a sense of responsibility for and an acknowledgement of the harm done to the victims, and to provide reparation for that harm.
[30] Protection of the community can be achieved in different ways. It is clear that the Registrar of Companies has signalled an intention to take steps to disqualify each of you from being involved directly or indirectly in the management of a company. It is also clear that professional organisations are taking steps to discipline you for what is occurring. I take account of those likely consequences. In my view,
no further sanction is required from this Court to meet the requirement of protection of the public. Your names are well and truly in the public domain. You have faced public shame for what you have done. The reduction of the risk of reoffending has been achieved to what I now consider an immaterial level.
[31] There is no need to provide specifically for rehabilitation or reintegration into the community, hence the sentencing goals of assisting in those aspirations is not relevant.
[32] Reparation is a topic of some importance. There are two things I need to make clear both to you and to members of the public. The first is that an offer to pay reparation is seen as tangible evidence of remorse for the consequences of particular offending. That is why it is taken into account in determining whether an otherwise appropriate sentencing response should be reduced or replaced with some other type of sentence. In itself, reparation is regarded as a sentence. The second is that reparation should not be seen as a way of buying oneself out of an otherwise appropriate sentence, such as imprisonment. In each case it is the task of the sentencing Judge to determine the value of the reparation offered and the extent to which it requires an adjustment to any other component of the overall penalty to be imposed.
[33] Principles of sentencing also play a significant role in identifying the penalty to be imposed. In this case five assume particular importance:
(a) The need for a sentence to reflect the gravity of the offending.
(b) The need for consistency in sentencing. Consistency has two aspects.
The first is the need for similar sentences to be imposed on people who commit like offences. The second is the need for parity as among co-offenders, to reflect varying degrees of culpability.
(c) The need to respond adequately to the effect of the offending on victims.
(d) The need for a proportionate response, on behalf of the community.
(e) The requirement that I impose the least restrictive outcome appropriate to particular offending, in accordance with a hierarchy of sentences set out in the Act.9
[34] It is important that you and members of the public understand the process by which a sentencing response is constructed.10 The first step is to determine a starting point that takes account of aggravating and mitigating features of the offending, from the perspective of each offender. The next step is to take account of aggravating and mitigating factors of a personal nature. That results in the determination of an end sentence. However, once that has been determined, the Judge is required to reach an
evaluative judgment on the appropriate sentence to impose. In this case, the starting point will be determined by reference to the maximum penalty available and your respective culpability, having regard to relevant aggravating and mitigating factors relating to the offence.
Crown submissions
[35] Mr Carruthers QC, for the Crown, has contended that all of you should be treated equally, with regard to culpability for the offending. He has suggested a starting point of four years imprisonment. That represents 80% of the maximum penalty.
[36] In reaching that view, I think I can fairly summarise Mr Carruthers’ submissions as referring to the extent of loss caused to investors and the relative culpability of each of you in these terms:
(a) Mr Carruthers refers to Mr Doolan’s role as an executive director throughout the lifetime of the company and one who was responsible for signing many of the loan and rollover documents in relation to the
VTL business-related debts. Mr Carruthers refers also to the
9 Sentencing Act 2002, s 10A.
10 R v Taueki [2005] 3 NZLR 372 (CA) at para [8].
ownership of shares in VTL by a trust associated with Mr Doolan and a significant debt owed by the trust to Nathans that remains unpaid.
(b)Mr Carruthers refers to Mr Moses’ involvement as chairman of the board and to his long term involvement as a director of both Nathans and VTL. In addition, he refers to Mr Moses’ equity interest in VTL and involvement in signing loan and rollover documentation. Mr Moses’ experience in financial planning is also considered to increase his level of culpability, given his failure to protect the interests of investors adequately.
(c) While accepting that Mr Young played a more limited role in relation to the loan arrangements with VTL business-related entities, and was a director of Nathans for less time than others, Mr Carruthers submits that Mr Young’s culpability lies in his failure as an independent director to ensure investors were told the full truth about the extent of the lending to VTL business-related entities.
[37] While contending that there are no mitigating features of the offending, the Crown leaves it to the Court to assess the credit to be given for relevant personal mitigating factors for each of you.
[38] I now propose to deal with each of your individual circumstances. I do so in a different order from the indictment.
Donald Menzies Young
[39] Mr Young, please stand.
[40] You became a director of Nathans on 12 September 2005 and of VTL on 13
December 2006. By the time you joined the Nathans board the amount owed by VTL and its subsidiaries to Nathans was at least $60.78 million. In addition, the Californian master franchisee, IVL, owed $21.92 million and its Australian
counterpart, AVS, $13.54 million. From those figures, it is clear that Nathans was
reliant on VTL’s success to recover much of its loan book.
[41] I accept that from your appointment as a Nathans director until you were appointed to the VTL board you had limited access to information from the VTL, IVL and AVS sides of the transactions. You were reliant on your co-directors to provide relevant information. You were trusting of them to do so. You were not copied into much of the email correspondence that passed among other directors of Nathans and VTL and members of the senior management team. You were not involved in signing documents to lend or to rollover VTL business-related debts.
[42] However, you were involved in the email chain that dealt with the risk section of the prospectus and investment statement, in particular the emails of
30 November and 1 December 2006 that assumed some importance at trial. In addition, the assiduous way in which you prepared for and asked questions at board meetings meant that you were well aware of Nathans’ perilous financial position around this time.
[43] Mr Jones QC, on your behalf, has stressed the importance of my finding that you acted honestly and had an honest belief, at material times, in the truth of the statements made in the offer documents. He submitted, contrary to the position advanced by the Crown, that the sentencing purposes of accountability, denunciation and deterrence do not require an honest but negligent director to be sent to prison. Mr Jones submits that you relied on your fellow directors and on senior management when undertaking your tasks, a reliance that turned out to be misplaced.
[44] Mr Young, you were held out in the prospectus as having an extensive experience in general and financial management, in New Zealand and overseas. The prospectus disclosed that you were a chartered accountant who had held senior management and executive roles in a number of companies, including that of Chief Financial Officer. You were identified as the joint founding director of a successful company, Aqua-Cool Ltd.
[45] You were an independent director of Nathans, having no financial interest in the company or in VTL. You were not, directly or indirectly, indebted to the company.
[46] As has been well documented, there is no doubt that you were assiduous in going through board papers before Nathans meetings and in asking questions at them. In my view, that commendable practice was evident from the time you joined the Nathans board in September 2005. Your strengths lay in analysing work undertaken by senior management and reports prepared for the board. Your limitations were in the areas of policy and strategy. Sadly, for you, those aspects assumed the greatest significance in the reasons for Nathans failure.
[47] At the time that Nathans issued its December 2006 prospectus, you were not a director of the parent company, VTL. My impression was that, while you were given limited information about VTL’s operations and probably assured by your co- directors that its operations were sound, you had access to much less information than other directors. From about 13 December 2006, when you took a seat on the VTL board, the position changed. As time went on you became more culpable, in the sense that you continued to believe, against all objective evidence, that the prospectus and investment statement accurately depicted the investment risks even though the situation was worsening and, objectively, it was very unlikely the debts could be repaid.
[48] When sentencing Mr Hotchin, Lang J chose a starting point for sentence of 3 years imprisonment.11 There has been some debate about whether that starting point was too high. Given my characterisation of the offending as falling within the category of gross negligence,12 I consider that a starting point of 3 years imprisonment was open to the Judge. Tut, in my view, it was less than what might have been chosen if the Judge had had the benefit of hearing evidence. The range for the type of offending disclosed in this case could, in my view, justify a starting point of between 2 years 6 months and 3 years 6 months imprisonment. The
identification of the starting point will turn on factors such as the nature and extent
11 R v Hotchin HC Auckland CRI 2009-092-20927, 4 March 2011 at para [71].
12 See [15] above.
of the offending, its duration, the harm caused by it and the opportunities that were lost to correct the misstatements.
[49] Having regard to your lesser knowledge of the financial position of VTL business-related entities at the time the prospectus and investment statement and your lack of involvement in management functions, I consider you should be treated as less culpable than Mr Hotchin. On that basis, I choose a starting point for your offending of 2 years 9 months imprisonment. That reflects aggravating factors inherent in the decision to distribute the May and August 2007 advertisements.
[50] Had you been better known within the wider community and promoted to the public by Nathans as a face of respectability, I would have considered the failure to act much more serious. While you were undoubtedly well-known within the business community that was not a major source of Nathans’ funding. That is why I do not regard that factor as aggravating in nature.
[51] I do not consider there are any personal aggravating factors.
[52] I am satisfied that you have genuine remorse for what has happened and feel for the plight of those who have suffered harm. During the trial, you were the only director whom I discerned to express any real empathy for the victims or contrition for your own shortcomings. You were frank in responding to questions, whether or not they helped your cause. Your remorse has been backed by a significant offer of reparation, $310,000. You are the only one to have written a letter for me to read that expresses in clear and heartfelt terms the remorse you feel.
[53] In the context of the financial information available to me, payment of that sum will cause some reassessment of your lifestyle, as you, at the age of 68 years embark on your retirement years. In making that comment I take account of liabilities that have been disclosed.
[54] You appear before a criminal court for the first time. The references I have read and the other material made available to me demonstrates that you are a man of integrity who has done much for the community throughout his life. While Lang J
considered, when sentencing Mr Hotchin, that no account could be taken of prior good character when sentencing on charges of this type, I have a different view. It is one thing to deny credit for past good character in a case where an offender has used a prior reputation to instil confidence in a person from whom he or she obtains money by dishonest means. In such a case the prior good character is used for a dishonest purpose. In a case such as this, there was no intention to use your good reputation to cause loss to others. It happened because of your failure to meet required statutory standards of competence. In those circumstances, I see no reason why some allowance should not be made for past good character.
[55] My assessment of the appropriate credit for those factors is the equivalent of
9 months imprisonment. That will take the starting point of 2 years 9 months imprisonment, down to an end sentence of 2 years imprisonment, if imprisonment were imposed.
[56] The offending in this case all occurred during a period when home detention was available, irrespective of the period of imprisonment that would otherwise be imposed.13 I am required to consider whether it, alone or in conjunction with other sentences, is a more appropriate sentencing response than imprisonment.
[57] As from 1 October 200714 the stand-alone sentence of home detention was introduced in an attempt by Parliament to increase the focus on community-based sentencing and in an unashamed endeavour to reduce the prison muster.15 The sentence of home detention is regarded as the second most restrictive, next to imprisonment.16 It was intended by Parliament as a real alternative to imprisonment,
not a soft option.17
13 Sentencing Amendment Act 2007, s 57. See also R v Hill [2008] 2 NZLR 381 (CA) at paras [25]- [28].
14 Sentencing Amendment Act 2007, s 10, inserting s 15A of the principal Act.
15 R v D(CA253/2008) [2008] NZCA 254 at paras [34] and [35].
16 Sentencing Act 2002, s 10A(2)(e).17 R v D(CA253/2008) [2008] NZCA 254 at para [60], with reference to R v Hill [2008] 2 NZLR 381 (CA) at para [33].
[58] A sentence short of imprisonment may be imposed if imprisonment is unnecessary to respond to sentencing goals of denunciation, deterrence, accountability and protection of the community.18
[59] I regard you as the least culpable of the four directors of Nathans. There is no realistic prospect that you will reoffend. I accept that you were reliant for much of your time as a director of Nathans on information from your co-directors that was not given in as fulsome a manner as might have been expected. In those circumstances, and taking into account your personal situation, I have reached the conclusion that imprisonment is not necessary to respond to the relevant sentencing goals. However, a combination of sentences will be required to meet them.
[60] While I will pronounce later the formal terms of your sentence, it will embrace a period of 9 months home detention, 300 hours community work and payment of reparation in the sum of $310,000.
[61] Mr Young you may be seated.
Kenneth Roger Moses
[62] Mr Moses, please stand.
[63] Mr Davison QC, on your behalf, has submitted that an appropriate starting point for sentence is one of 2 years 6 months to 3 years imprisonment. In doing so, he emphasised my findings of honesty on your part and the need for the least restrictive outcome to be imposed.
[64] So far as mitigating factors are concerned he has referred to genuine remorse, evidenced by your active interest in the welfare of investors, your offer of assistance to the receivers and to the amount of reparation offered and your prior good character. Mr Davison has submitted that you should be regarded as less culpable than your co-directors having regard to your role as a non-executive director and the
absence of any involvement in the day-to-day management of the company.
18 Sentencing Act 2002, s 16.
Mr Davison has also emphasised your age, 69 years, and health problems from which you suffer.
[65] Although you played no executive role in Nathans, it is clear that you had an intimate knowledge of its financial position, in particular the state of the accounts as between Nathans and the VTL business-related entities. You had that knowledge from both sides of the transaction. You were aware of the escalation of debts and the decreasing ability for them to be met without sale of some or all of the relevant business units. In your role as chairman, you had an obligation to lead the board in its decision-making – a role that you performed inadequately when faced with approving the final form of the prospectus and investment statement. You were the signatory to the letters of May and August 2007 by which further funds were solicited from the public.
[66] Mr Moses, you were a director of Nathans from 11 August 2003, becoming chairman of the board in about September 2005, after Mr Hotchin resigned from that position. You were also a director of VTL from 4 May 2004. You participated fully in a strategic planning meeting that was held that month. At that meeting a risk management policy was developed for Nathans.
[67] In a document generated from that meeting it was stated that no borrower or borrower group should comprise more than 10% of Nathans’ total receivables book at any point in time. In evidence, you said that was intended to mean a total of 20% to reflect VTL and IVL’s borrowings. Even that, you described as a “perfect world” one. In June 2004, when the board proposed a “target composition of the receivables book ... by June 2006” of 66% VTL related receivables, you made a contemporary note that that ratio was “still too high”.
[68] At that time, in June 2004, VTL and its subsidiaries owed Nathans
$11.65 million. By 30 June 2006, that total had increased to $79.63 million. As at that same date, the total amount of VTL business-related indebtedness was
$106.10 million, representing 77.5% of Nathans receivables book.
[69] Between June 2004 and June 2007, there are a number of references to your continuing concern about the level of VTL related indebtedness. The simple response to your contention that you were concerned to reduce the indebtedness to an acceptable level (expressed by you in June 2004 as no more than 20% of the total of Nathans receivables book) was that the indebtedness grew by over $95 million in those three years.
[70] From 30 June 2006 to 30 June 2007 there was an increase in the quantum of debt owed by VTL business-related entities to Nathans. As a percentage of Nathans receivables book those debts increased from 77.5% to 84.9%, an increase in monetary terms of $29.89 million. This all occurred during a period when funds were being solicited from the public. Indeed, as at 31 December 2006, just after the public were being asked to subscribe to an offer for $100 million, the VTL business- related indebtedness stood at $132.25 million, over $30 million over the amount that was being sought from the public.
[71] As chairman of Nathans, one of your duties was to ensure the agenda for a meeting was properly formulated. Another was to guide discussion and to ensure the meeting was conducted efficiently and effectively. It was part of the chairman’s function to ensure that the board set policy to be implemented by management and to ensure that all directors received sufficient and timely information for them to perform their duties as board members.
[72] Despite your continuing expressions of concern about the level of VTL business-related indebtedness, nothing was done to achieve the goal of reduction that you articulated on so many occasions over the years. At the end, actions speak louder than words. Your words, by the end of the day, represented no more than a whisper. Indeed, it was my impression that a degree of lip-service was paid to the issue. There is no evidence of any concerted effort to repay or reduce the debts.
[73] You were held out to members of the public as having “significant and wide- ranging experience, especially in financial planning”. Potential investors were told that you had been “instrumental in the foundation and development of New Zealand’s financial planning industry”. For investors placing retirement funds in
Nathans, I am sure those qualities would have been reassuring. Although not disclosed in the prospectus or other offer documents, the fact that you had previously written books on topics such as retirement savings suggests to me that you regarded yourself as something of an expert in this area. Nevertheless, I had the impression that you were tending to downplay that aspect of your experience when giving evidence.
[74] Of particular concern is the way in which you, as chairman, failed to deal with the exchanges of emails that occurred not long before the December 2006 prospectus was issued. In an email you sent on 30 November 2006, you expressed the view, on the topic of risk disclosure, that: “We need to tread the fine line between being open and up front, but not overly obvious”. You sought a modification to the draft “to convey a true and realistic view of the risks without sticking it too far up the investors’ noses ... so to speak”.
[75] Then, there was Mr Hotchin’s email of 1 December 2006 in which he expressed the view that no cash would come in if the risk section remained as it was. You failed to bring the board together to discuss this issue, important as it was. Ironically, the most entrepreneurial member of the Nathans board, Mr Hotchin, was the only one who realised that this issue was quintessentially one for the directors to consider and not for management. This was an opportunity lost to review the position. It represented a watershed that was never overcome. I cannot believe that the prospectus and investment statement would have gone out into the market in the form it did, had you all had a sensible and forthright discussion about the way in which the company and its risks were portrayed when compared to the real position, as you knew it to be. You must take the blame for failing to bring the board together. Similarly, you must shoulder the blame for not ensuring that a detailed review of the content of the prospectus and investment statement was undertaken when the extension certificate was signed and later when the May and August 2007 advertisements were issued.
[76] Your offending took place over a longer period than that of Mr Hotchin. As I have said, a considerable sum of money was procured from investors from the time of the May 2007 advertisement. While you suggest that Mr Hotchin and Mr Doolan
had greater knowledge of the operations of VTL and its related entities, it is quite clear that you had knowledge of the financial situation disclosed at each board meeting. There is also the point that you, as chairman, ought to have led more inquiring discussions with Mr Hotchin to ensure his enthusiasm did not convey an over optimistic view of events that was not backed by hard financial data.
[77] In those circumstances, I consider that an appropriate starting point is one of
3 years 3 months imprisonment. That starting point is greater than that chosen for Mr Hotchin because of the greater duration of your offending, the additional loss that the 2007 letters would have caused and your failure as chairman to ensure reviews were undertaken in March, May and August 2007.
[78] You have offered the sum of $425,000 as reparation. That is not an inconsiderable sum though the financial information available suggests to me, that you may have access to other assets in the future. I suspect that you will enjoy a better lifestyle in retirement than most of the investors who have lost money in Nathans.
[79] You are entitled to credit for the offer of reparation, supporting your expressed remorse. Despite what has been said, I do accept that you have remorse for your offending and sorrow for the position in which the investors find themselves. You are also entitled to credit for your prior good character. You have done considerable good for the community throughout your life. I make an allowance for the fact that you have already made arrangements for reparation moneys to be held by your solicitors and paid immediately in terms of the Court order. In my view, those factors justify a credit of 13 months, which would leave an end sentence of 2 years 2 months imprisonment.
[80] I have considered whether home detention is a viable option. It is not. The extent of your knowledge of the financial affairs of Nathans and VTL, your failure to do anything about reducing the debt over a period when it climbed astronomically and your inability to turn your mind to the accuracy of the description of business activities and risk in the prospectus and investment statement mean that the
sentencing goals of denunciation, deterrence and accountability, in the senses I have described previously, cannot be met with a sentence short of imprisonment.
[81] You will be sentenced to a term of imprisonment of 2 years and 2 months and ordered to pay reparation in the sum of $425,000.
[82] Mr Moses, you may now be seated.
Mervyn Ian Doolan
[83] Please stand, Mr Doolan.
[84] Mr Gedye, on your behalf, has submitted that you fall at the “lowest end of the spectrum in terms of culpability”. It will be apparent to you that I do not accept that submission. Your culpability is slightly greater than that of Mr Moses, given your oversight of the management committee, company finances and your more direct involvement in the day-to-day management and operations of VTL and Nathans. Your knowledge of those company’s affairs was gained from extensive time working on the day-to-day operations from the New Zealand office.
[85] Mr Gedye submitted that a starting point of no more than 2 years 6 months imprisonment should be taken. In making that submission he contended that the starting point used by Lang J when sentencing Mr Hotchin was too high.
[86] In the prospectus and investment statement, you were held out to members of the public as a chartered accountant “with extensive international experience in corporate finance issues, international and domestic tax planning, mergers and acquisitions, corporate restructuring, and structured finance projects”. Reference was made to your work on “substantial structured finance projects” in New Zealand, the United Kingdom, Australia, Japan and the Netherlands. Your involvement as a partner in the well-known accounting firm of Ernst & Young was identified, with your role being described as a “tax principal”.
[87] Members of the public were told that your “current responsibilities” included “financial planning, structural development, systems implementation and overseeing the accounting and finance functions”. Those responsibilities were referable to Nathans at the time the prospectus was issued in December 2006 and no attempt was made to change that profile when the extension certificate was signed in late March
2007. I make that comment because, of course, your role in Nathans diminished at the start of 2007 but investors were not to know that. In my view, prudent but non- expert investors would have been entitled to regard you as well qualified to protect and grow their investments in Nathans, on the basis of the purposes for which public funds were being raised in December 2006, namely to “provide funds for the development of [Nathans’] business of providing financial accommodation and financial services”.
[88] I have already gone through the type of knowledge that Mr Moses had of the increasing indebtedness of VTL business-related entities and the staggering realisation that the extent of that debt only a few weeks after the prospectus and investment statement were issued exceeded the amount sought from the public under the offer of debt securities. Like Mr Moses, you had full knowledge of that financial information and the nature of the business conducted by VTL. Those comments hold good notwithstanding the fact that you relinquished executive functions in early
2007.
[89] You will have heard what I have said about the Crown’s submissions treating you and Mr Moses as equally culpable. The same factors arise. Each of you had access to information from both sides of the transactions and were aware throughout the relevant periods of the true position in relation to the likely collectability of debts from VTL business-related entities. In addition, a trust associated with you was the beneficiary of a significant loan from Nathans that cannot now be repaid.
[90] As with your fellow directors, if you had taken time to consider in any meaningful way the content of the narrative of the prospectus and investment statement that dealt with business activities and risk it would have been readily apparent that the picture painted for investors was much rosier than the true position. If Mr Hotchin thought that no money would come in on the draft he saw in early
December 2006, it was absolutely clear that little or no money could have been raised if the true position had been disclosed. Apart from anything else, the business media would have been likely to have recognised the inevitability of Nathans failure, in the absence of some sort of “big deal” that you and your co-directors always seemed to believe was just around the corner.
[91] On your behalf, Mr Gedye has emphasised your honest belief that the statements made in the prospectus were true and has buttressed that by asking me to take account of the high level of business optimism existing at the time. Mr Gedye also refers to your genuine remorse, prior good character and the offer of reparation.
[92] You are now aged 55 years. You have been unemployed since February 2008 when you ceased assisting the receivers. You have a wife and a nine year old son, both living on the Gold Coast in Australia. You are renting a property and your wife’s employment is the sole source of income.
[93] Mr Gedye has emphasised the considerable reduction in time that you spent in the management of VTL and Nathans from January 2007, at which time your salary was substantially reduced and your responsibility for Australasia transferred to Mr Hotchin. He has also referred to the fact that Mr Hotchin was the “dominant personality” among the directors and the “driving force” behind VTL’s business strategies in the United States and (from early 2007) Australasia. From what I have said to Mr Moses, you will appreciate I place no weight on Mr Hotchin’s personality and the effect it may have had on others.
[94] Mr Gedye has also referred to a likely change in the law that proposes criminal liability will only attach for “reckless” or “knowing” breaches. It will be plain to you that I do not regard any proposed changes as relevant. I am required to sentence on the basis of the existing law. In any event, I have characterised the seriousness of the offending as falling towards the top end of the gross negligence category which can properly be regarded as akin to the type of recklessness that has been promoted as a basis for criminal action.
[95] Although your culpability is greater than Mr Moses, the difference is, in my view, marginal. I consider an appropriate starting point for sentence, having regard to the factors to which I have referred when addressing Mr Moses, is 3 years and 4 months imprisonment. As with Mr Moses, there are no aggravating factors personal to you. It will be clear to you from what I have said to Mr Moses that home detention is out of the question and a sentence of imprisonment is inevitable.
[96] You have offered a sum of $150,000 by way of reparation. That is, as you recognise, of no significance to investors. It is, however, recognition of an acceptance of responsibility on your behalf. I am satisfied that it does make a difference as far as you personally are concerned. I am satisfied that the offer is the most that can be made, either from personal resources or those to which you have access to live and borrowings from family and friends. I adjust the end sentence of imprisonment downwards to reflect that offer, taking account of the nature of it.
[97] I allow for remorse, the difficulties inherent in you serving a prison sentence in New Zealand away from your family, and your prior good character. I allow a credit of one year. That leaves an end sentence of 2 years 4 months imprisonment, together with a reparation order of $150,000.
[98] Would each of you please stand.
Result
[99] The orders of reparation that I will make are all to be paid to the Registrar of the High Court at Auckland who shall hold those funds in his trust account, on interest bearing deposit, pending further order of the Court. That will be done so that arrangements can be made for the payment of reparation to be paid directly to those investors who fall within the definition of victims in the Sentencing Act. The amounts paid by way of reparation shall be distributed pro rata among those investors. At another time, I will hear from counsel on the precise orders to be made, once the receivers have identified the relevant investors for the Crown. I reserve leave for the receivers of Nathans to be heard on any consequential application dealing with that issue.
[100] Mr Moses, you are sentenced to a term of imprisonment of 2 years 2 months. You are ordered to pay reparation in the sum of $425,000. I direct that sum be paid by your solicitors immediately to the Registrar of the High Court to be held on trust on the terms previously mentioned.
[101] Mr Doolan, you are sentenced to a term of imprisonment of 2 years and 4 months. You are ordered to pay reparation in the sum of $150,000. That sum shall be paid to the Registrar of the High Court on or before 2 December 2011.
[102] Mr Young, you are sentenced to a term of 9 months home detention. So far as that is concerned you shall travel directly to 184A Upland Road, Remuera and remain there pending attendance by a probation officer and a representative of the electronic monitoring company. You shall not move from that address without prior written approval of a probation officer. Otherwise, standard conditions apply. You are also sentenced to serve 300 hours community work and to pay reparation in the sum of $310,000. The reparation shall be paid to the Registrar of the High Court on or before 2 December 2011.
[103] Given the existence of extant civil proceedings, I direct that all statements of financial position by each accused shall be placed in a sealed envelope on the Court file and not opened without leave of a Judge on an application made on notice to the Crown and all other offenders.
[104] Stand down please.
[105] I thank counsel for their assistance.
P R Heath J
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