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Judge Jails Knowledge House Officials After Blockbuster N.S. Stock Fraud

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Judge Nails Former president and CEO Daniel Potter and lawyer Blois Colpitts were found guilty in March

Two of Nova Scotia’s most notorious white-collar criminals were sentenced to prison Wednesday after the longest criminal trial in the province’s history, a complex fraud and conspiracy case involving a blockbuster multimillion-dollar stock market manipulation scheme.

Daniel Potter, the 66-year-old former CEO of defunct tech firm Knowledge House, was sentenced to five years in prison, while the company’s 55-year-old former lawyer, Blois Colpitts, was sentenced to 4 1/2 years — nearly 17 years after the e-learning company’s dramatic collapse.

The disgraced executives were found guilty in March of conspiracy to manipulate the firm’s share price and carrying out fraudulent activities in a regulated securities market, a fraud the Crown estimated at $86 million.

Nova Scotia Supreme Court Justice Kevin 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.”

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,” Coady said in his decision.

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.

The stock price plummeted to 33¢ a share from $5.10, costing investors millions.

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.

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 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 the largest amounts of $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.”

In a 207-page ruling in March convicting the pair, Coady said they artificially maintained the company’s stock price while securing new investors, who would make investment decisions based on a misleading impression of the stock demand.

Federal Crown prosecutors had argued for a sentence of 10 to 12 years in prison.

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.

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.

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