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Verdict expected in 'complex and unique' Knowledge House stock fraud case

Last Updated Mar 8, 2018 at 11:20 am EDT

HALIFAX – A much-anticipated verdict is expected Friday in the multi-million-dollar stock market fraud case stemming from the collapse of Halifax’s Knowledge House e-learning company.

Former company president and CEO Daniel Potter and lawyer Blois Colpitts are jointly charged with a series of frauds.

Their trial began in November 2015 and heard from 75 witnesses over more than 150 court days, and 184 exhibits were received — including thousands of documents.

“Describing this trial as complex and unique would be a gross understatement,” Nova Scotia Supreme Court Justice Kevin Coady wrote in August 2017 in one of many mid-trial decisions.

Knowledge House Inc. was once a high-flying developer of educational software, trading on the Toronto Stock Exchange before collapsing in 2001.

The Crown alleges that between January 2000 and September 2001, Potter and Colpitts manipulated the price of the company’s shares.

Shares in Knowledge House began trading publicly on the TSE in 1999, and went from a few cents to more than $9 before suddenly collapsing.

Coady is expected to hand down a verdict on Friday, as well as a decision in a Charter application brought forward by the defence.

Colpitts and Potter were among three people charged in 2011 with conspiracy to commit fraud, fraud affecting the public market and fraud over $5,000, following a seven-year-long RCMP investigation.

The third, former National Bank Financial stockbroker Bruce Elliott Clarke, was sentenced in April 2016 to three years in jail after pleading guilty to conspiring to affect Knowledge House’s share price and defrauding a trust fund established by the United Brotherhood of Carpenters and Joiners of America of more than $5,000.

In 2015, Nova Scotia’s Court of Appeal ordered National Bank Financial to pay $3 million in punitive damages for the way it dealt with investors who lost money when the technology firm collapsed.

Justice Jamie Saunders had said the money was owed to four investors who were affected when the company failed.

The judge said National Bank had secured a confidential agreement with the Nova Scotia Securities Commission concerning the role it played overseeing the actions of a broker involved in the stock trades, and once that was revealed, it showed the bank didn’t properly oversee the actions of its broker.

Justice Jamie Campbell said at Clarke’s sentencing that he had defrauded a union pension fund of close to $900,000, and that “only a significant period of time in jail is the fit and proper sentence.”

Federal Crown prosecutor James Martin described in court at the time how Clarke used three main techniques to elevate the price of Knowledge House shares and spur on buying by investors.

He said he used different accounts to continually buy the stock to make sure the price didn’t decrease and, in the process, spent millions to keep the stock price rising. He said Clarke also actively discouraged people from selling their stocks.

“This was an incredibly sophisticated fraud,” Martin said. “He spent millions of dollars over the course of 18 months doing what they could to make sure the price of Knowledge House did not fall.”

Martin said the fraud amounted to $31 million in total.

The case against Colpitts and Potter has faced numerous delays. The pair have made every attempt to fight the fraud allegations. They even sought mistrial and stay of proceedings in July 2017.

In a decision rejecting to hear that application, Coady noted the defendants had brought forward a “significant number of motions” throughout the trial.

“These motions have consumed lengthy blocks of time and, for the most part, were not particularly successful. Many of these motions produced significant delay without any corresponding benefits to the trial process,” Coady said in a written decision dated July 26, 2017.

Six months earlier, Coady had issued yet another decision after concerns were raised by the court about the lengthy proceedings.

Before instituting a proposed schedule for the remainder of the trial, Coady noted: “This state of affairs cannot go on forever. The time has come for me to control this process which is presently chewing up massive judicial resources and blocking others from accessing the justice system.”