04 March 2011

Nathans Finance: R. v. Hotchin

John Lawrence Hotchin escaped a jail term after pleading guilty in a plea bargain prior to trial for securities offences in relation to fundraising by Nathans Finance NZ Ltd. He is expected to be a crown witness in the later trial against fellow directors who have pleaded not guilty to similar Nathans Finance charges.

Nathans Finance went into receivership in August 2007, owing about $174 million to over 7000 investors. To date, receivers have repaid investors less than four cents in the dollar.

Hotchin accepted that Nathans Finance breached securities legislation in 2006 and 2007 when raising money from the public. In particular, it was alleged Nathans Finance misled investors about the level of related party dealing, the extent of bad debts and the finance company’s liquidity.

The court was told Nathans directors had detailed discussions with the company’s lawyers about the extent of disclosure required for its lending to a related company: VTL. At this point, $79.6 million of Nathans’ assets were tied up with VTL; 46.2% of its loans. Directors wanted to fudge disclosure of this level of loan concentration.

Wording settled on for the Nathans prospectus said a “significant portion” of its loans were with VTL, but added that these loans were made “on a commercial arms length basis”. Investors had been warned there was a substantial level of related party lending, but the court was told that the second statement was not accurate. There was a long list of sloppy commercial practice in relation to VTL loans: security for advances being taken years after the event, sums advanced in excess of an agreed loan facility and funds advanced after a loan facility had expired.

There was also criticism of statements in the prospectus that Nathans had an “unblemished record of bad debts written off”. This was literally true, but misleading. It was alleged tens of millions owed by VTL and its affiliates were seriously impaired at the time of the prospectus and the commercial reality was that repayment was not going to be made in full. The practice of capitalising interest to loan advances meant no hard decisions need be made about bad debts and future profitability necessary to fund repayment was assessed on the basis of five year and twenty year budgets supported by what were called flawed assumptions.

References to Nathans liquidity were also misleading. For the year to June 2006, Nathans received in cash $4.9 million from those loans where interest was not capitalised. Over the same period, it was paying interest to investors totalling $9.1 million. The company was dependent on renewed funding from the public to get sufficient cash to pay interest to public investors. Nathans business was not generating sufficient cash to pay investors. It was illiquid with significant negative cash flow.

Justice Lang said in determining an appropriate sentence for Mr Hotchin, the starting point should be three years imprisonment, being the benchmark in similar cases for breaches of securities legislation. In Mr Hotchin’s favour was that he pleaded guilty, agreed to give evidence against his fellow directors and offered to pay $200,000 to Nathans receivers’ for the benefit of investors. This would usually merit a substantial reduction in the period of imprisonment. In this case, Justice Lang ordered eleven months home detention, coupled with 200 hours community work and ordered reparation of $200,000.

R. v. Hotchin – High Court (04.03.11)

04.11.003