Former CEO, lawyer of Knowledge House found guilty of fraud

HALIFAX A Nova Scotia Supreme Court judge has found two key players in the dramatic collapse of a Halifax e-learning company guilty in a multi-million-dollar stock market fraud case.

Justice Kevin Coady released a 207-page ruling Friday convicting former Knowledge House Inc. president and CEO Daniel Potter and lawyer Blois Colpitts.

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

In his decision, Coady said the defendants knowingly carried out fraudulent activities in a regulated securities market.

“Their goal was to artificially maintain the (Knowledge House) stock price while they secured new investors, who, as a result of the defendants’ conduct, would be making investment decisions based on a misleading impression of the level of demand for the stock,” he wrote.

“The defendants acted with an intent to defraud.”

Coady said the defendants’ actions spanned an 18-month period, which included the dot-com crash.

“During this time, the conspirators spent more than $11 million buying over 50 per cent of the (Knowledge House) shares that crossed the exchange,” he wrote. “The defendants succeeded in artificially maintaining the share price.”

While the judge found Potter and Colpitts guilty on all five counts of the indictment, he entered convictions only on the first two counts.

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.

A sentencing hearing has been scheduled for May 22.

Meanwhile, Coady also released a 54-page decision dismissing their charter application on the grounds of delays before and after they were charged, finding that their rights had not been infringed during the lengthy proceeding.

“The defendants in this case were not the victims of delay,” he wrote in the decision. “Indeed, they went to great efforts throughout the entirety of this prosecution to create it.”

Coady added: “It would be a miscarriage of justice to reward their efforts by staying the charges against them for delay.”

The downfall of Knowledge House, once an East Coast tech darling, has dominated discussion in the business and investment community in Nova Scotia for 17 years, Coady said in his introduction to the saga.

The company was founded in 1984, and was reinvented under Potter in the late 1990s to become a learning and information technology company, he said.

The vision was “the complete overhaul of the K-12 and post-secondary education system through the introduction of collaborative, problem-based learning programs,” Coady said.

Knowledge House quickly began acquiring companies through share options, and cashing in on government contracts.

By late 1999, the company had grown to 120 employees, and was closely followed in the local press.

But in 2001, a series of events led Knowledge House stock price to free fall, from which it never recovered, Coady explained.

Without financing to keep the doors open or make payroll, the company ceased operations on Sept. 13, 2001.