Guilty of fraud, sentenced to jail: how did it come to this? The story behind Knowledge House Inc. and the longest criminal trial in Nova Scotia history
The moment to write the end of this endless story has finally arrived.
It is July 25, 2018, a stifling, sweltering summer morning in Halifax. Outside, the city is suffering through a province-wide Environment Canada heat warning. By mid-day, humidex values are predicted to soar past 36 degrees. Inside, however, the heat—and the suffering—are of a different sort.
We are gathered inside climate-controlled Courtroom 301 on the third floor of the Law Courts building in downtown Halifax awaiting the arrival of Nova Scotia Supreme Court Justice Kevin Coady. In a few minutes, Coady will close the legal book on the controversial, confounding, convoluted, seemingly never-ending case of Her Majesty the Queen v Robert Blois Colpitts and Daniel Frederick Potter.
It has been almost 17 years since Knowledge House Incorporated (then Nova Scotia’s best and brightest homegrown educational technology star) abruptly shuttered its doors, disappearing into the abyss of receivership and triggering a too-many-to-count, un-merry-go-round of allegations and investigations, lawsuits and counter-suits, decisions and appeals, followed by appeals of appeals, not to forget the longest criminal trial in Nova Scotia history.
Prosecutors would ultimately estimate the total monetary value of the fraud at $87 million based on the company’s market value when it was trading at $5.75 a share and the 33-cents each share would have fetched on the day the company folded. The human costs have been even higher.
On March 28, 2011—10 years after the company collapsed and seven years after the RCMP’s then-newly created white-collar crime squad launched a criminal investigation—prosecutors charged that Potter, Colpitts and a third man, investment advisor Bruce Elliott Clarke, “unlawfully conspired… by deceit, falsehood or other fraudulent means, with intent to defraud, to unlawfully affect the public market price” of Knowledge House shares.
In the seven years since, the case has careened and meandered through the thickets of the judicial system. There have been countless delays for countless reasons. In 2015, for example, Potter’s wife was struck by a car, so the trial had to be put on hold while he cared for her. In April 2017, an exhausted, overwhelmed Coady went on hiatus for three months simply so he could restore his own mental health and recharge for the next phase of the hearings. “The evidence thus far in this trial,” he wrote, “involves institutions, terminology and practices not well understood by the non-investing community. I count myself as one of that class.”
Before and during the trial, the defence filed dozens of motions. They attempted to have the judge removed for bias. Denied. They tried to force the crown to review the 85,000 documents that had been part of an earlier securities commission proceeding against them. Denied. They even moved to have the charges thrown out for “abuse of process”—because it had taken so long for the case to come to trial! The judge said the defendants were themselves to blame for many of those delays. “It would be a miscarriage of justice to reward their efforts by staying charges against them for delay.” Denied.
The hearing itself occupied 160 court days spread over 28 months. Seventy-five witnesses testified, 184 exhibits and 45 bankers’ boxes of documents were entered into evidence.
On March 9, 2018, Justice Coady finally rendered his 207-page summary and unequivocal conclusion: “The Crown proved beyond a reasonable doubt that the defendants, together with Clarke and 10 unindicted co-conspirators, developed and implemented a multi-faceted scheme to manipulate the KHI share price on the Toronto Stock Exchange.”
In the middle of the trial, Bruce Clarke had abruptly changed his own plea to guilty. It was an ignominious end to a poor-boy-makes-very-good tale that had begun back in 1964 when 19-year-old Clarke launched his investment industry career as a lowly messenger in Montreal. In 1975, he returned home to Nova Scotia and opened his own brokerage firm, which was ultimately swallowed up by National Bank Financial Ltd. (NBF), the fourth largest investment bank in the country.
The month after Knowledge House folded, NBF fired Clarke, pinning the entire blame for the scandal on its “rogue dealer.” Clarke eventually reached a settlement with the Nova Scotia Securities Commission, acknowledging his role as a “willing and competent technician” in Knowledge House’s “maintain-the-price” stock manipulation scheme. He agreed to pay a $75,000 penalty, $75,000 more toward the cost of the commission’s investigation and gave up his stockbroking licence for five years.
But that was far from the end of his troubles. He and his former employer became targets in a seven-and-a-half-year civil suit that cost him—and NBF—even more in penalties, legal fees and reputation.
And then, in 2011, the RCMP filed its criminal charges.
By the time Clarke raised his legal white flag five years later, the once wealthy stockbroker lived off his Canada Pension and Old Age security, earning a few extra bucks here and there as a seasonal tour guide for cruise ship passengers. He had been reduced to asking the judge to let him skip the daily grind of endless court sessions because he couldn’t afford the $20-a-day for gas and parking. The judge turned down his request.
In 2016, Clarke was sentenced to three years in prison; he served six months before being paroled.
Today, his two former fellow defendants sit with their lawyers in this modern, blond-wood courtroom waiting to learn their own fates.
They have become pale shadows of the successful, strutting men about town and business they once were. And they definitely were once men about town and business.
In April 2001, just a few months before it all came tumbling down, the Nova Scotia government named Dan Potter first chair of the board of Nova Scotia Business Inc., a high-powered, privatesector- led crown corporation designed to spur economic growth. “Dan Potter brings the best of that private sector expertise to the table,” declared the economic development minister of the day.
Potter, then still a hyper-ambitious, hyper-energetic 49-year-old Halifax lawyer-turnedentrepreneur, had begun dabbling in the technology spaces in the early 1980s. He helped establish Novatron Information Corp., a pre-Internet computer company that created “computer directory systems.”
Although the firm eventually collapsed in what Potter would describe as a “soft bankruptcy… we were kind of ahead of our time,” he allows, then adds, “[but] I got my $6-million MBA.” Knowledge House was supposed to be his PhD in business success.
Instead, he sits quietly at the defence table, alone, more bookish than business, a thin, almost gaunt, white-bearded 66-year-old grandfather in wireless spectacles, seemingly resigned, reluctantly, to whatever will happen next.
During Blois Colpitts’ best business days (between 1999 and 2001), he had been a larger-thanlife corporate lawyer with Stewart McKelvey Stirling Scales. He billed close to 3,000 hours a year, juggled 300 to 500 emails a day, invested and sat on corporate boards, serving as the go-to-guy for 85 per cent of out-of-province companies needing to file prospectuses with the Nova Scotia Securities Commission. His client base was “too big,” he admitted in court; he “couldn’t keep up.”
That is no longer an issue. He is still physically larger than life, but the swagger is long gone. In 2003, in the early stages of the investigation, he parted company with Stewart McKelvey after having been charged with trying to buy sex from an undercover officer. “My priority is to understand and address with counselling the underlying issues which cause this type of unacceptable behaviour,” he said in a public mea culpa at the time. Later, he launched his own one-man law firm (RBC Law Inc.) but later “voluntarily” stopped practising to focus on his legal woes. After blowing through more than $1.7-million in legal fees, he has served as his own lawyer for much of the trial.
Now 55 years old and a caretaker to his aging mother, Blois Colpitts sits stoically in the courtroom beside his lawyer, staring straight ahead. He is dressed in a dark blue sports jacket, dressy blue jeans and an incongruous pair of pale grey, loafer-like slip-ons. Potter, dressed as usual in a crisp dark business suit, is more animated. As he waits, he texts on his phone, sips water from a paper cup, runs his fingers along his beard, pushes his glasses up and down along the bridge of his nose.
Both Potter and Colpitts know that—whatever successes have gone before in their lives and careers, whatever might still be ahead in appeals and life—this is their bring-your-toothbrushto- court day. They won’t be going home when court adjourns.
Despite the longevity and the notoriety of the case, there are few here to witness its whimpering ending. Fewer than two dozen occupy the courtroom. Besides the defendants and their lawyers, most of the people taking up space are reporters. There are also a few lawyers, a couple of retiree court watchers. There are, perhaps surprisingly, no family or friends in attendance. So there is no need for Potter or Colpitts to look back toward the gallery. And they don’t.
“All rise,” the court clerk declares. It is exactly 9:30 am. Mr. Justice Kevin Coady has entered the courtroom. The end is about to begin.
The Knowledge House story didn’t begin as a courtroom drama, of course.
If you had to pick one single moment to capture the heady optimistic beginning of this rags-toriches- to-jail tale, you could do worse than to walk a few blocks south of the courthouse to a boardroom inside the city’s Pier 21 museum, and then time travel back 19 real years and at least a couple of psychic lifetimes ago.
It is August 11, 1999, and close to 100 people—35 of them button-poppingly optimistic company executives and shareholders, the rest intrigued guests the company hopes to turn into investors—have gathered for the first annual meeting of the newly christened Knowledge House Inc.
KHI had begun 15 years before as Knowledge House Publishing Limited, the brainchild of a tech-savvy Nova Scotia doctor-entrepreneur named Bernard Schelew. The company’s goal: “design promotional software for pharmaceutical companies.” Schelew’s modestly successful venture pinballed between slight profitability and light red ink. By the time the company went public with a listing on the Montreal Stock Exchange in 1988, Potter had joined its board of directors.
Seven years before, in 1991, Potter had bought a half interest in another local tech start-up, the Information Technology Institute (ITI), whose goal was to educate post-graduate students in the ways of technology. ITI succeeded well enough that, in 1998, Potter sold his interest in that venture to Torstar (“I did very well”), and invested the proceeds in Knowledge House, where he instantly became its controlling shareholder.
Potter’s grand vision (and it was both grand and visionary) was to transform the shell of Knowledge House into “a full-service education programs and solutions company,” creating a “friendly revolution” that would employ newly emerging technology to goose collaborative learning in the P-12 and post-secondary education sectors in a way that would remake education into a successful-for-him, successful-for-all, successful-for-all-time private-public partnership.
To shape his vision, Potter formed strategic alliances with global tech giants like IBM and Lotus; gobbled up other forward-looking local companies—with techie names like MicroNet Information Systems, Innovative Systems Limited, Silicon Island Art and Innovation Centre and the Centre for Distance Education—and integrated most of their computer-savvy founders into his new management team; then went out and raised $3-million more in limited partnership units to fund more acquisitions, more sophisticated program development.
By the time of that first annual meeting in the summer of 1999, in fact, KHI had grown from five employees to 80, beefed up its management team by hiring a former Nova Scotia government deputy minister as executive vice president and COO, recruited a new, more business-savvy board and even reported a first-quarter profit of $55,111. That was modest, to be sure, but it was 300 per cent higher than the year before and—in those heady early days of the internet—even the sky seemed not to limit entrepreneurial dreams.
“This is a new beginning,” Potter proudly told the annual meeting. “We have completely repositioned the company and have a clear focus where the company is going in the future.”
At first, that future seemed incandescent. On Dec. 6, 1999, Knowledge House began trading on the Toronto Stock Exchange. In March 2000, the company reported a fiscal-1999 profit of $528,000 on revenues of $18 million. It had sealed a $17.6-million contract to provide technology to 15 new Nova Scotia schools, with the added bonus that the company would reap another 20 years of additional payments to maintain and upgrade the technology. There was also news of a “strategic national partnership” with IBM to “jointly market, install and support their collective portfolio of offerings.” Potter confidently, and seemingly with good reason, predicted the company would be worth $200 million within five years.
The local press overflowed with glowing headlines: “Halifax Firm High on Learning,” “Dan Potter… on a Mission to Market Education,” “Firm Taking High School High Tech.” Knowledge House was chosen as Halifax’s “New Business of the Year;” Potter earned a spot among Atlantic Business Magazine’s Top 50 CEOs in 2000.
At first, even the bursting of the dot.com technology bubble in March 2000 seemed not to affect Knowledge House. Its stock—which had traded at just nine-cents-a-share three years before—peaked at $9.85 near the end of that March, and then remained “relatively stable” for the rest of the year. In November, the company even “stole the show” at a Commonwealth Education Ministers meeting in Halifax “with an online demonstration that enabled students in Canada and Bermuda to collaborate on a study of global warming.”
But the tsunami of global bad business news that swept the world in what became infamously known as the 2000 “tech wreck” continued deep into 2001, and began to bring to ground even the highest-flying technology companies. Including Knowledge House.
Despite Potter’s best efforts, the share price eventually plummeted to just 65 cents.
On September 13, 2001, just two days after 9/11, Knowledge House Inc. announced it was laying off its workforce and ceasing operations, owing creditors $3 million and costing Nova Scotia taxpayers another $1.2-million already advanced to create educational programs.
On the face of it, the story of Knowledge House seemed to be yet one more sad tale of grand ambition brought down by circumstances beyond anyone’s control.
That’s one version of the story.
There is another version. It’s the one prosecutors tell.
It begins on Dec. 1, 1999, just days before Knowledge House began trading on the TSE and a full four months before the dot.com bubble burst. On that day, Dan Potter sent an email to KHI’s senior vice presidents and directors describing what he called the “Share the Future Program…”
While that might have sounded like a “benign employee stock option promotion” (which would have been perfectly legal), prosecutors allege Potter’s purpose was far more sinister. Just how sinister—and illegal—only finally became clear in April 2005 after the RCMP seized three Knowledge House-connected computer servers and obtained access to a massive cache of 140,000 corporate emails.
“I am initiating a push to create overall increased demand for KHI shares on the market,” Potter wrote in that first email. “My personal target is to have an average of 10,000 shares a day trading on the exchange by the end of Jan. 2000.” In other words, Potter wasn’t encouraging his email recipients to buy company stock for its own value but to make it appear that more ordinary investors were buying shares than actually were, thus pumping the stock price higher than it would otherwise be.
That same day, Potter put the squeeze on Bernie Schelew, who was still a major KHI shareholder but was starting a new company and looking for his investors among KHI’s existing shareholders. Potter wanted Schelew—out of self-interest, if nothing else—to discourage them from selling their shares in Knowledge House. Nothing wrong with that either, except if the intent was to mislead. And that is exactly what prosecutors claimed was the intent: to keep share prices from dropping. “Right now,” Potter told Schelew, “the emphasis needs to be on the ‘Goose that lays the Golden Eggs’ — KHI.”
And that was how it began. Over the next 20 months, Potter and up to a dozen others— directors, investors, investment advisors, the company lawyer—forked out more than $11 million to acquire 50 per cent of all KHI shares available on the Toronto Stock Exchange’s trading floor in an increasingly frenzied, increasingly desperate and ultimately futile effort to artificially prop up KHI’s share prices.
They even fiddled with the timing of their purchases, buying up blocks of shares just before the close of trading to make KHI’s daily and weekly closing prices (the prices that get reported in the press and are used to value stocks) seem higher than they really were. While that sort of thing occasionally happens incidentally in typical trading too, prosecutors insisted the pattern with KHI was anything but accidental.
All that market gamesmanship helped make the company appear successful when it wasn’t. Consider the company’s good news of March 29, 2000. That was the day KHI shares peaked at $9.85 in spite of the ongoing collapse in the broader tech sector. In order to paint such a positive picture for potential investors, however, prosecutors say “suspect” accounts had shelled out close to $740,000 that month just to buy KHI shares.
As Dan Potter eventually acknowledged in a January 2001 email to company insiders— imploring them to seek even more equity investors—only $2.5 million of the $14 million the company had raised in 2000 through “new block share purchases” had actually ended up in the company treasury. Most of the rest had been used to support “market transactions.”
Clarke, who served as the investment advisor for most of those who the crown would later describe as the “co-conspirators,” employed a margin account in his own numbered private investment company (2317540 Nova Scotia Limited) where insiders could shovel cash and securities to fuel buying and selling of KHI stock in ways that masked their identities and their purpose, “soaking up any KHI shares coming to the market while avoiding insider trading reporting requirements.” The man who ultimately controlled that “540” account, prosecutors say, was Dan Potter.
While the court would ultimately identify a total of 13 co-conspirators in the scheme to mislead investors, most were minor witting and unwitting participants who were never charged. Many of them were technology entrepreneurs who’d sold their own companies to KHI. The complication was that they hadn’t actually been paid in cash, but in Knowledge House stock. Most then joined the company in senior management positions as part of the sales agreement. Over time, some decided they wanted to leave KHI and/or cash out at least some of their shares. But if they did, they discovered, they risked driving down the share price, and the supposed value of their investment. It was a Catch 22 that Potter, Clarke and Colpitts exploited. Prosecutors say the three used every tool at their disposal—“incentives, pressure tactics, ignoring sell orders, collusion among large shareholders, requiring permission before selling and withholding share certificates,” even sometimes threatening bogus legal action—to keep them all inside the tent. And inside the conspiracy.
Outsiders were dragged in unwittingly too. Lowell Weir, the president of Enervision, a public company, had an investment account with Clarke that was worth $600–700,000. Since those funds represented the company’s working capital and it couldn’t afford any losses, or surprises, Weir instructed Clarke to park most of it in dependable certificates of deposit or GICs. While Weir was out of town in June 2000, however, Clarke quietly dipped into the account to buy more than $200,000 in KHI shares. When Weir later instructed him to sell the shares, “Clarke did not follow Weir’s instructions.”
The next month, Clarke siphoned more funds from a United Brotherhood of Carpenters and Joiners Welfare Plan Trust Fund. It was supposed to provide benefits to members of the union. Instead, Clarke shoveled the funds into Knowledge House. By the time he was finished, Clarke had “defrauded the pension fund of close to $900,000.”
None of it actually helped Knowledge House.
On November 26, 2000, an increasingly desperate Potter emailed those he called Knowledge House’s “founding shareholders:” Bernie Schelew; Calvin Wadden and Ray Courtney, the former owners of Micronet who’d traded their businesses for KHI shares and executive positions; and Ken MacLeod, a former owner of Silicon Island who’d exchanged his company for shares, a job and membership on KHI’s board of directors. The subject line of the email: “Major Shareholder Co-operation and Help needed to Support KHI.”
In it, he laid out the dilemma: “We all know that each of us is highly leveraged. Ken has bought over 135,000 on margin since Aug[ust]. I have a $1.3 million margin loan with virtually no buying room left. Calvin needs to have funds to pay down high margin loans and do projects, Ray needs to pay down his margin and other loans. Bernard needs to finance Handsmiths [his new venture]. These are all valid needs for liquidity, but in the current conditions, we really need to be more concerned about protecting the value of our KHI shares—without support from us, it is clear that there will be further price erosion and, in fact, the market could fall significantly and rapidly in the next few days. Unless we all put our liquidity requirements aside for the short term and turn our attention to finding ways of supporting the shares in the market,” he concluded, “there will be no liquidity opportunities for any of us worth having.”
His RECOMMENDED PLAN OF JOINT ACTION involved still more share buying, borrowing, lending, fiddling and finangling. “Unless we do something in a united way like this,” Potter concluded, “I’m afraid it’s going to be a case of: ‘United we stand, divided we fall!’ And, if we fall, we’ll all fall with a heavy thud! And so will the other shareholders.”
Despite their best efforts, however, their room for movement continued to narrow as the vice—and the noose—tightened around them. On December 15, 2000, the Royal Bank of Canada, which could see inside the company’s books more clearly than most, slashed KHI’s operating line of credit from $3.5 million to $500,000.
Although the company did manage to sell an e-learning program for high school students in May 2001 to the Nova Scotia Department of Education for $10 million over five years, that announcement only served to highlight another uncomfortable reality: at this point, the Nova Scotia government was KHI’s only significant customer.
By August, Knowledge House was forced to acknowledge the undeniable. It had racked up a $2.7-million loss in the first half of 2001. That same month, ITI (the Information Technology Institute which Potter had sold three years before), went into receivership. Unfortunately for KHI, some of Knowledge House’s investors were also investors in ITI and their bankers began issuing margin calls against their now worthless stocks, forcing them to come up with cash to cover their margins in a hurry.
Potter’s last-second, Hail Mary pass—hiring IBK, a Toronto investment banker, in August 2001, to raise the $5-million in desperately needed operating capital it could no longer attract on its own—backfired badly, spooking the market even more and driving down the company’s share price to just 65-cents.
In the end, there was nothing left to do but close the doors and hand over the keys to the receiver.
Knowledge House had joined Bre-X Minerals and Nortel Networks in the dismal pantheon of infamous Canadian financial scandals.
And that’s when things got really messy.
It would take at least another volume to fully document all the legal pretzel twists and hairpin turns that followed Knowledge House’s spectacular September 13, 2001 collapse, none of them good for the reputation of the company, its key players, or anyone even remotely associated with it. There are no white hats here.
Consider how only one of the many “minor” legal sideshows spawned by the receivership played out. Initially, National Bank Financial blamed “rogue” employee Bruce Clarke for the entire scandal, fired him, sued him and set itself up as an aggrieved party in the welter of lawsuits that followed. But it turned out that, in 2005—in the middle of litigation—NBF had actually signed a secret agreement with the Nova Scotia Securities Commission, admitting that the bank itself had violated securities law and failed to properly supervise Clarke. That agreement remained secret until a new securities commission director of enforcement publicly disclosed the admission eight months after the first Knowledge House civil case had ended.
Five years later, in 2015, the Nova Scotia Court of Appeal—“recognizing the 10 years of misery, humiliation and expense suffered by all of the claimants at the hands of the Bank [was] so egregious as to strike at the very heart of the administration of justice”—ordered NBF to pay four Knowledge House investors a penalty of $750,000 each.” That same year, the bank reached an out of court settlement with Potter, ironically paying him $5 million for his pain and suffering. Even more ironically, prosecutors in the criminal trial would later ask the judge to order Potter and Colpitts to pay $13 million in restitution for their sins, including $6 million to National Bank Financial.
Will he? We will soon know.
Justice Coady takes a sip of water, peers out into the near empty courtroom.
“I’ll now commence,” he says finally. He won’t read the full 55-page decision, he explains, just a Cliff’s Notes version, but verbatim, so there will be no misunderstandings.
He proceeds to revisit the evidence itself, the basis of his guilty verdicts. He calls Potter the plot’s “silver-tongued mastermind… Without Potter, there could be no conspiracy.” Colpitts was the fraud’s “enforcer,” the absent Clarke its “engineer.”
Coady turns over the rocks of the various and sundry crown and defence sentencing submissions, parses their cases and case law, considers the precedents they claim. He spins out the various potential mitigating factors, the potential aggravating factors, the might-have-been mitigating factors—the respect in which the defendants were held in the local business and legal communities, for example—that instead became aggravating factors because they showed how Potter and Colpitts had abused that trust in furtherance of their fraud.
The Crown, pressing its case to—and beyond—its logical limits, had demanded the judge sentence the defendants to 10–12 years in prison on each of the two counts, the terms to be served one after the other. That would mean, in effect, sentences of 20–24 years. Additionally, prosecutors wanted Coady to order them to pay $13-million in restitution to those they’d defrauded; and even—oddly in a financial crime—provide a DNA sample against future crimes of some sort or another.
The Crown’s broader argument in favour of all these draconian measures was that Potter and Colpitts had been motivated by financial self-interest, “clearly the singular motive of the conspiracy’s membership group.” In the end, the judge himself did not agree. The two men, Coady said, were “not driven by pure greed… The defendants did not set out to cheat KHI investors while lining their own pockets. There was no version of the defendants’ plan where they got rich at the expense of innocent investors. It is obvious that Mr. Potter and Mr. Colpitts firmly believed that KHI would be a big success, revolutionizing education in North America and beyond, and that investors, including themselves, would reap the rewards of their belief in the company’s potential.”
In the end, that may have been the real tragedy of this story. Robert Blois Colpitts and Daniel Frederick Potter were men who shared a dream but not only became blinded by that vision but also were willing to employ whatever wrong means necessary to achieve what they saw as that greater end.
“I sentence Mr. Potter to five years on each count, to run concurrent to each other,” Justice Coady announced finally, 59 minutes after he’d begun. “I sentence Mr. Colpitts to four-and-onehalf years on each count, to be served concurrently.” He refused to order the two men to pay restitution, partly because that would have let Clarke and the other unindicted co-conspirators off the hook, and partly because he said the Crown hadn’t made a case that would enable him to order it. He made short work of the prosecutors’ request for DNA samples. No DNA samples.
“And that’s my verdict.”
“All rise,” the clerk said again. And with that, the judge left.
It still isn’t over, of course. Within a day, both Potter and Colpitts will be out on bail. Even before they’d been sentenced, both men had filed appeals of their convictions. Hearing those appeals, they have forewarned, will require much longer than one single court day. The never-ending case may really never end.
For now, however, two sheriff’s deputies, who’d been hovering in a hallway outside the courtroom, enter now and join two others already waiting inside. The next steps have been orchestrated. One of the deputies nods to Colpitts, who silently follows him out a side entrance for the beginning of the next step in his jail journey.
For his part, Potter seems almost reluctant to leave the sanctuary of the court room, but finally he hands over his cell phone, then his briefcase to a deputy.
“You have Fiona’s coordinates?” he asks his lawyer.
“I do,” she says. She will convey the latest news to Potter’s wife.
Potter takes one last sip of water from his paper cup. And then disappears out the door too. He doesn’t look back.