Knowledge House insiders guilty of fraud in collapse of e-learning company

Two key players at Knowledge House have been found guilty of fraud in the collapse of the Halifax e-learning company, which was once the darling of Nova Scotia's tech industry.

Justice Kevin Coady rendered his decision Friday morning against former president and CEO Dan Potter and company lawyer Blois Colpitts after a marathon trial in Nova Scotia Supreme Court that spanned more than 150 court days over two years.

The pair were found guilty for their roles in a stock-price manipulation that artificially maintained Knowledge House share prices before they imploded in August 2001, triggering the company's demise.

"This conduct not only put the economic interests of existing and potential [Knowledge House] shareholders at risk, but caused significant economic loss to numerous investors, known and unknown, and financial institutions," Coady said in a 207-page written decision.

While the judge found Potter and Colpitts guilty on all five counts of fraud in the indictment, he entered convictions only on the first two counts. In the Halifax courtroom Friday, the men showed no emotion.

The judge found the conspiracy to maintain share prices spanned 18 months and involved spending more than $11 million to buy 50 per cent of the Knowledge House shares that crossed the Toronto Stock Exchange (TSX).

Coady also rejected a charter application by the defendants to stay the proceedings based on the grounds the case was unreasonably delayed.

"The defendants in this case were not victims of the delay. Indeed, they went to great efforts throughout the entirety of this prosecution to create it," Coady wrote in a separate decision on the charter argument.

"It would be a miscarriage of justice to reward their efforts by staying charged against them for delay."

'Avalanche' of litigation

Knowledge House developed educational software and was once the pride of Nova Scotia's information-technology sector, employing 120 people by the late 1990s.

But it all came crashing down in the summer of 2001 when its share prices collapsed. Investors lost millions and dozens were thrown out of work.

The failure triggered what one judge called an "avalanche" of litigation, regulatory hearings and criminal prosecutions. 

Speaking to reporters in the wake of the decision, Potter said he was not surprised by the verdict. 

"I can't say I'm surprised, given the whole history of the thing; there's a very long and almost convoluted history," he said. "One can't be surprised about anything in this process."

"No comment," said Colpitts. "We're just going to review the decision. It's part of a process."

Mark Covan, one of three Crown prosecutors assigned to the case, said the massive amount of evidence and its complexity explains why the criminal case took so long.

"The documentary evidence is nearly 6,000 documents — that's not a page number, that's the document number," he said. "There were some 75 witnesses that testified over quite a lengthy period of time, some of whom were in the witness box for weeks at a time.

Covan said the effort was justified because the scheme undermined the integrity of the stock market. "When we have a large-scale commercial fraud like this, obviously the public interest is foremost in our consideration."

Other lawsuits connected with the case are still underway in Nova Scotia courts.

A third insider, National Bank Financial stockbroker Bruce Clarke, pleaded guilty to fraud in connection with the case in December 2015. He was sentenced to a three-year prison term and has since been released on parole. 

A sentencing hearing for Potter and Colpitts has been set for May 22.

The men have been released on their own recognizance after posting $100,000 bail and surrendering their passports.