Judge jails Knowledge House officials after blockbuster N.S. stock fraud

The jail terms come nearly 17 years after the e-learning company’s dramatic collapse, but the legal saga isn’t over yet.

A bail hearing will be held Thursday for Potter and Colpitts, who were taken into custody following the sentencing. The disgraced executives, found guilty in March of conspiracy to manipulate the firm’s share price and carrying out fraudulent activities in a regulated securities market, have appealed their conviction.

Knowledge House, the once high-flying Halifax technology darling, developed software the company promised would revolutionize the elementary, high school and post-secondary education systems.

“So confident were they in the inevitability of (Knowledge House’s) success that they decided to artificially maintain the share price until the company could secure the capital it needed to get its software into schools across the country and beyond,” Nova Scotia Supreme Court Justice Kevin Coady said in his 54-page decision.

The co-conspirators used multiple manipulative techniques to prop up the firm’s share price, including using margin accounts to dominate the buy-side of the market, suppressing sales and “high closing” the stock, or entering orders late in the trading day to boost the closing share price.

The tech company traded on the Toronto Stock Exchange before “the house of cards” they had spent 18 months meticulously building collapsed in August 2001, Coady said.

Three things happened in quick succession that summer that would send Knowledge House stock plummeting to 33¢ a share from $5.10, costing investors millions.

National Bank Financial cut the loan value on the conspirators’ margin accounts, triggering margin calls for some investors.

Then Potter’s former company, Information Technology Institute, went into receivership, generating margin calls for shareholders — many of whom also held Knowledge House shares.

And then an agreement with IBK Capital to raise $5 million through a private placement was not well received, prompting shareholders to aggressively sell off their shares.

“The stock never recovered, and (Knowledge House) ceased operations on September 13,” Coady said.

The Crown charged the three “lynch pins” of the operation: The CEO, the lawyer and the broker, Bruce Elliott Clarke, who was sentenced in April 2016 to three years in jail after pleading guilty.

Coady said Potter’s sentence of five years for each count, and Colpitts’ sentence of 4 1/2 years for each count, will be served concurrently, calling the crimes of conspiracy and fraud “inextricably intertwined.”

The judge declined to order either Potter or Colpitts to pay restitution in the case.

Coady said the Crown did not prove a precise amount of losses suffered by either individual investors or financial institutions.

The Crown had sought 16 restitution orders totalling more than $13 million, with National Bank Financial and BMO Nesbitt Burns seeking $6 million and $2.5 million, respectively.

But the judge said the Crown only charged three individuals — though there were others involved — and that it would be “inappropriate” to order Potter and Colpitts to pay restitution for the actions of others, in addition to their own crimes.

Though the Crown had estimated the fraud was about $86 million, the judge said he would not put a specific dollar figure on the scheme, instead calling it a “large scale multimillion-dollar fraud.”

Still, Coady considered the value of the fraud an aggravating factor in sentencing, in addition to the large number of victims, the violation of securities laws and regulations, and the abuse of trust or authority.

He also noted that the defendants were held in high regard in Halifax’s business and legal communities.

The judge said Potter and Colpitts “clearly recognized the value of prestige and image.”

“They attracted a veritable ‘who’s who’ of Nova Scotia businessmen to (Knowledge House’s) board of directors,” Coady said. “Both men were able to leverage their positions, reputations, and connections to recruit and defraud unsuspecting investors.”

For mitigating factors, the judge cited delays, publicity and stigma, as well as the conspirators’ ages and lack of criminal records.

The judge noted in his decision that both Potter and Colpitts have maintained their innocence throughout the lengthy criminal trial, refusing to express remorse and portraying themselves as victims.

“Despite the overwhelming evidence against them, they both maintain that they are innocent of any wrongdoing,” Coady said.

“In fact, they see themselves as victims in this affair … There were many victims here, but Dan Potter and Blois Colpitts are not among them.”

While not considered an aggravating factor, the lack of remorse “disentitles them to leniency that might otherwise have been extended,” the judge said.

The trial began in November 2015 and heard from 75 witnesses over more than 160 court days, and 184 exhibits were received — including thousands of documents.