Guilty verdicts in Capital + Merchant Finance fraud trials

Guilty verdicts in Capital + Merchant Finance fraud trials

Two former directors and the Chief Executive of failed finance company, Capital + Merchant Finance Limited (Capital + Merchant), were found guilty in the Auckland High Court today on fraud charges brought by the Serious Fraud Office (SFO).

(See Appendix 1 for details of guilty and not guilty verdicts)

The three accused were Neal Medhurst Nicholls (56), Wayne Leslie Douglas (58) and Owen Francis Tallentire (65).

Four charges had been laid against Mr Nicholls and Mr Tallentire, and three charges against Mr Douglas, in an investigation relating 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 defendants were found guilty in respect of the charges relating to Clyde 1 & 2, and Nicholls and Douglas were also found guilty in respect of 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.

Mr Nicholls and Mr Douglas, also jointly faced charges each under the Crimes Act of theft by person in special relationship and jointly one charge of false statement by promoter.

These charges related to the non-disclosure of alleged related party lending totalling approximately $14.4 million, to a Palmerston North development known as ‘The Hub Properties'.

Both were found not guilty on these charges.

SFO Chief Executive, Mr Adam Feeley said that while the collapse of Capital + Merchant had not received the same attention as some other failed finance companies, the two investigations into its affairs had been one of SFO's 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."

Mr Feeley 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 SFO's two investigations in Capital + Merchant were conducted over a period of 16 months in total and were followed by two trials that lasted eight weeks in total.

Mr Feeley said that the case highlighted the complexity and scale of commercial frauds, and the skills required to successfully conclude them.

"This case involved of hundreds of hours of painstaking forensic analysis and the results are a tribute to the team that worked on it."

SFO commenced its investigation into the failed finance company in March 2010 following a complaint from receivers, Grant Thornton.

Mr Feeley said that the cooperation of the receivers was an important part of the success of the investigations and prosecutions.

"The support of the insolvency profession is critical to uncovering fraud, and we are grateful to the receivers for their assistance to our investigation."

Mr Nicholls, Mr Douglas and Mr Tallentire have been remanded in custody for sentencing on 31 August.

ENDS

For further information

Andrea Linton
Serious Fraud Office
027 705 4550

Note to editors

Background to investigation

Capital + Merchant Finance Limited (Capital + Merchant) was incorporated on 18 January 2002. It operated as a finance company providing financial accommodation and mortgage facilities for commercial and residential property development. Funds for lending were sourced primarily from the issue of securities to the public in the form of debenture stock and convertible capital notes.

Neal Medhurst Nicholls and Wayne Leslie Douglas were the founding directors and beneficial owners of Capital + Merchant. Owen Francis Tallentire was appointed Chief Executive of the company. Mr Tallentire was also later appointed a Director. Mr Nicholls was a Director until the company was placed in receivership in November 2007. Mr Douglas resigned as a Director in February 2007.

Capital + Merchant were placed into liquidation under the control of the Official Assignee in December 2009.

Crimes Act offences

Section 220: Theft by person in special relationship
(1) This section applies to any person who has received or is in possession of, or has control over, any property on terms or in circumstances that the person knows require the person-
(a) to account to any other person for the property, or for any proceeds arising from the property; or
(b) to deal with the property, or any proceeds arising from the property, in accordance with the requirements of any other person.

(2) Every one to whom subsection (1) applies commits theft who intentionally fails to account to the other person as so required or intentionally deals with the property, or any proceeds of the property, otherwise than in accordance with those requirements.

(3) This section applies whether or not the person was required to deliver over the identical property received or in the person's possession or control.

(4) For the purposes of subsection (1), it is a question of law whether the circumstances required any person to account or to act in accordance with any requirements.

Section 242: False statement by promoter, etc
(1) Every one is liable to imprisonment for a term not exceeding 10 years who, in respect of any body, whether incorporated or unincorporated and whether formed or intended to be formed, makes or concurs in making or publishes any false statement, whether in any prospectus, account, or otherwise, with intent-
(a) to induce any person, whether ascertained or not, to subscribe to any security within the meaning of the Securities Act 1978; or
(b) to deceive or cause loss to any person, whether ascertained or not; or
(c) to induce any person, whether ascertained or not, to entrust or advance any property to any other person.

(2) In this section, false statement means any statement in respect of which the person making or publishing the statement-
(a) knows the statement is false in a material particular; or
(b) is reckless as to the whether the statement is false in a material particular.

Role of the SFO

The Serious Fraud Office (SFO) was established in 1990 under the Serious Fraud Office Act in response to the collapse of financial markets in New Zealand at that time.

The SFO operates three investigative teams:

• Fraud Detection & Intelligence;
• Financial Markets & Corporate Fraud; and
• Fraud & Corruption.

The SFO operates under two sets of investigative powers.

Part I of the SFO Act provides that it may act where the Director "has reason to suspect that an investigation into the affairs of any person may disclose serious or complex fraud."

Part II of the SFO Act provides the SFO with more extensive powers where: "...the Director has reasonable grounds to believe that an offence involving serious or complex fraud may have been committed..."

The SFO's Annual Report 2011 sets out its achievements for the past year, while the Statement of Intent 2012-2015 sets out the SFO's three year strategic goals and performance standards. Both are available online at: www.sfo.govt.nz(external link)

Appendix 1: