Citation: R v. Colpitts, 2018 NSSC 40  
Date: 2018-03-09  
Docket: Halifax, Nova Scotia, CRH No. 346068  
Registry: Halifax  
Her Majesty the Queen  
Robert Blois Colpitts and Daniel Frederick Potter  
The Honourable Justice Kevin Coady  
November 16, 2015 to November 7, 2017, in Halifax,  
Nova Scotia  
March 9, 2018  
Written Decision:  
Criminal law; securities; conspiracy; fraud; intent to defraud;  
fraudulently affecting the public market price of shares; co-  
conspirators’ exception to the hearsay rule; Section 465(1)(c)  
conspiracy to commit market fraud contrary to s 380(2);  
Section 465(1)(c) conspiracy to commit fraud contrary to  
s. 380(1)(a); Section 380(2) market fraud; Section 380(1)(a)  
fraud on the public over $5,000; Section 380(1)(a) fraud  
on persons both known and unknown, over $5,000.  
The defendants were charged with fraud and conspiracy to  
commit fraud related to the market price of Knowledge House  
Inc. (“KHI”) shares on the Toronto Stock Exchange. It was  
alleged that between January 2000 and August 2001, the  
defendants, together with B. Clarke and ten unindicted co-  
conspirators, developed and implemented a sophisticated  
market manipulation scheme to artificially maintain the price  
of KHI shares to counteract the impact of the dot-com crash,  
attract new investment, maintain access to credit sources, and  
protect their personal net worth. It was alleged that the  
defendants and other conspirators defrauded numerous  
individuals and financial institutions of amounts in excess of  
$20 million.  
(1) Were the defendants (or any of them) guilty of  
conspiracy to commit market fraud contrary to s. 380(2)?  
(2) Were the defendants (or any of them) guilty of  
conspiracy to commit fraud contrary to s. 380(1)(a)?  
(3) Were the defendants (or any of them) guilty of market  
fraud contrary to s. 380(2)?  
(4) Were the defendants (or any of them) guilty of fraud on  
the public over $5,000 contrary to s. 380(1)(a)?  
(5) Were the defendants (or any of them) guilty of fraud on  
persons both known and unknown over $5,000 contrary to  
s. 380(1)(a)?  
The Crown proved beyond a reasonable doubt that the  
defendants, together with Clarke and ten unindicted co-  
conspirators, developed and implemented a multi-faceted  
scheme to manipulate the KHI share price on the Toronto  
Stock Exchange. The conspirators employed a variety of  
manipulative techniques to artificially maintain the KHI share  
price including buy-side domination, sell-side suppression,  
material non-disclosure, undisclosed incentives, parking  
stock, and high closing the stock.  
The Crown proved beyond a reasonable doubt that the  
defendants, together with the other conspirators, acted with an  
intention to defraud. Their objective was to artificially  
maintain the KHI share price creating a false impression of  
retail demand for the stock for the specific purpose of  
attracting new investors. They suppressed sales and regularly  
high-closed the stock in advance of large investments to  
ensure that the deals would close.  
From March 2000 to August 2001, the conspirators spent  
more than $11 million buying over 50% of the KHI shares  
that crossed the Exchange. Their conduct, which largely  
immunized the stock against the significant downward  
pressure on the share price caused by the dot-com crash,  
created an artificial price for KHI shares.  
The actions of the defendants not only put the economic  
interests of existing and potential KHI shareholders at risk,  
but caused significant economic loss to numerous investors,  
known and unknown, and financial institutions.  
In accordance with the Kienapple rule against multiple  
convictions for the same wrongdoing, each defendant was  
convicted of conspiracy to commit market fraud contrary to  
s. 380(2) and market fraud contrary to s. 380(2).  
Citation: R. v. Colpitts, 2018 NSSC 40  
Date: 2018-03-09  
Docket: Halifax, Nova Scotia, CRH No. 346068  
Registry: Halifax  
Her Majesty The Queen  
Robert Blois Colpitts and Daniel Frederick Potter  
Decision on the Prosecution  
The Honourable Justice Kevin Coady  
November 16, 2015 to November 7, 2017, in  
Halifax, Nova Scotia.  
March 9, 2018  
Written Decision:  
James Martin, Mark Covan and Scott Millar, for the Crown  
Brian H. Greenspan and Jane O’Neill, Q.C. for Daniel Potter  
R. Blois Colpitts, Self-Represented  
Page 2  
By the Court:  
[1] The saga of Knowledge House Incorporated (KHI) has dominated  
discussion in the business and investment community in Nova Scotia for the past  
17 years. This publicly-traded e-learning company collapsed in August 2001,  
resulting in significant financial losses to both individuals and financial  
institutions. Daniel Potter was KHI’s Chief Executive Officer. Blois Colpitts was  
legal counsel and Lead Director. Bruce Clarke was an investment advisor at the  
Halifax office of National Bank Financial Ltd. (“NBFL”) where KHI insiders  
conducted much of their securities business.  
[2] The circumstances surrounding the demise of KHI attracted the attention of  
the Nova Scotia Securities Commission. The Commission investigator concluded  
that several KHI officials, including Messrs. Potter, Colpitts and Clarke, may have  
been involved in a scheme to manipulate the price of KHI shares on the Toronto  
Stock Exchange (“TSX”) in 2000-2001. These concerns resulted in a referral in  
2003 to the RCMP for the purposes of a criminal investigation. On March 17,  
2011, the Crown preferred an indictment against all three, alleging fraud and a  
conspiracy to commit fraud related to the market price for KHI shares. The years  
between preferring the indictment and the start of the trial on November 16, 2015  
were consumed by various pre-trial applications, mostly concerning disclosure  
[3] This has been an extremely lengthy, complex and challenging trial. The  
Crown called 57 witnesses and Mr. Colpitts called 18 witnesses, including himself.  
Mr. Potter elected not to call evidence. Mr. Clarke entered a guilty plea in the  
early weeks of the trial and was sentenced to three years’ incarceration. The  
evidence and submissions consumed in excess of 160 trial days over a two-year  
period. Additionally, the defendants advanced 16 mid-trial applications. The  
parties exhibited thousands of documents contained in 184 exhibits, including  
Exhibit 1, which contains 5,672 electronic documents and over 800  
communications. The evidence lacked narrative, as most of the testimony  
consisted of commentary on the documentation. At the conclusion of evidence, the  
parties filed post-trial briefs and made oral submissions. The Crown’s post-trial  
brief was 247 pages in length.  
Page 3  
[4] The events surrounding the demise of KHI also resulted in several civil  
actions brought by and against a number of KHI insiders including Mr. Potter and  
Mr. Colpitts. Those actions were heard and decided in 2012. They produced  
voluminous documentation that formed part of the evidence in this criminal trial.  
History of KHI  
[5] In order to fully understand this lengthy and complex prosecution, it is  
helpful to review the history of KHI. This company was founded by Dr. Bernard  
Schelew in 1984 as Knowledge House Publishing Limited. In 1988, the company  
obtained a listing on the Montreal Stock Exchange. Daniel Potter was a member of  
the Board of Directors at that time.  
[6] In 1991, Daniel Potter and Gary Blandford founded a company called the  
Information Technology Institute (“ITI”). Its purpose was to educate post-graduate  
students in information technology systems. In 1998, Mr. Potter sold his interest in  
ITI to Torstar, resigned from the Board and took a controlling interest in KHI. Mr.  
Colpitts, the company’s legal counsel, assumed Mr. Potter’s seat on the Board of  
[7] With Mr. Potter as Chief Executive Officer, the company reinvented itself.  
It transitioned from a medical education software developer to “a learning,  
performance support and information technology company.” The vision for KHI  
was the complete overhaul of the K-12 and post-secondary education system  
through the introduction of collaborative, problem-based learning programs.  
[8] Although management’s end goal was for KHI to be a pure e-learning  
company, the business began as a provider of school technology infrastructure. In  
the summer of 1999, KHI acquired Micronet Information Systems Limited and  
Innovative Systems Limited, two Nova Scotia companies with lucrative  
government contracts to supply computer hardware, software, warranty support,  
and installation services to a K-12 public education system. These contracts,  
which were good until early 2001, provided KHI with an early revenue stream.  
Also in 1999, KHI acquired Silicon Island Art & Innovation Centre Limited and  
the Centre for Distance Education (“CD-Ed”). The former was a business  
incubation centre while the latter was a distance learning centre.  
[9] The acquisitions of these companies were not done with cash. Instead, their  
principals received large blocks of KHI shares (4.5 million plus) that were to be  
held in escrow and they agreed to become employees of KHI. They were also  
Page 4  
provided with warrants which gave them the opportunity to purchase further KHI  
shares from treasury in the future at an agreed-upon price.  
[10] In addition to the government contracts, KHI brought in significant revenue  
through a limited partnership offering (the “KHLP” or “LP”). Limited partnership  
units were sold to investors throughout 1998 and 1999, raising $3.45 million for  
the company. The revenues were earmarked to finance research and development  
of KHI’s proprietary learning programs. Other smaller sources of revenue for the  
company included tuition sales of career skill development courses offered by CD-  
Ed and rental revenue from Silicon Island.  
[11] By the end of 1999, KHI had grown from less than 20 employees to 120. At  
that time, as a result of restructuring of Canadian capital markets, the Montreal  
Stock Exchange ceased trading in equities. Notwithstanding KHI’s small  
shareholder base, the company began trading on the Toronto Stock Exchange on  
December 6, 1999. One week later KHI entered into an agreement with the  
Ashford Group, builders and operators of technologically-advanced schools in  
Nova Scotia. Under the agreement, KHI, in partnership with IBM Canada  
Limited, would provide technology and services for 15 schools being constructed  
in 2000. The agreement was valued at $17.6 million, plus additional annual  
amounts of approximately $750,000 for 20 years, for maintenance and updating of  
technology in the schools. On January 21, 2000, KHI also reached an agreement  
with the Strait Regional School Board to collaborate in developing a new  
curriculum for distributed learning environments.  
[12] The early success of KHI was closely followed in the local press. For  
example, the Halifax Chronicle Herald published an article in its March 30, 2000,  
issue entitled, “Knowledge House Embarks on Road Show with IBM; Halifax  
Firm High on Learning. In later editions, articles with the following headlines  
appeared: “Lifelong Learning – Dan Potter of Knowledge House on a Mission to  
Market Education” and “Firm Taking High School High Tech”. The future for  
KHI looked bright.  
[13] In March 2000, the tech bubble1 burst, causing public interest in  
technology stocks to decline dramatically. Starting in April 2000, stock prices in  
the technology sector would fall until well into 2001.  
1Also known as the “dot-com bubble”.  
Page 5  
[14] On March 23, 2000, KHI released its annual report for the fiscal year ending  
December 31, 1999. The company’s revenue for that period was $18,238,000 a  
dramatic increase over the $813,319 reported the previous year. KHI reported a  
profit of $528,000, up from $123,390 the previous year. On March 29, 2000, KHI  
announced a strategic national partnership with IBM Canada to work together to  
jointly market, install, and support their collective portfolio of offerings.  
[15] On May 25, 2000, KHI released its first-quarter results. Revenue for the  
three-month period was $7,582,724 compared with $364,587 in the first quarter of  
the previous fiscal year. Net earnings were $102,070 as compared with $75,796 in  
1999. On August 25, 2000, KHI released its second-quarter financial results for  
the period ending June 30, 2000. Revenue was $15,397,712 compared with  
$979,394 the previous year. Profits increased to $105,000 compared with $55,111  
in the second quarter of the previous year.  
[16] The months of August and September 2000 saw three individuals make  
significant pre-arranged market purchases of KHI stock. On August 3, Derek  
Banks, through his company Plastics Maritime, purchased $1 million worth of  
shares from Mr. Potter’s RRSP account. Between August 29 and September 8,  
Ben Barthe, a German investor, purchased $1.7 million worth of shares. On  
September 7, 2000, David Fountain, through his company Longwood Investments,  
purchased approximately $2 million worth of shares.  
[17] In October 2000, Dr. Lutz Ristow, a friend of Ben Barthe, became interested  
in investing in KHI. On November 15, 2000, the two friends signed a Subscription  
Agreement under which they agreed to purchase 500,000 units of KHI for a total  
price of $3,250,000. Each unit was comprised of one KHI common share and one  
warrant to purchase another KHI share from treasury at a later date. The parties  
agreed that the investment would be paid for in four equal installments of  
$812,500, payable on November 15, 2000, February 15, 2001, May 15, 2001, and  
August 15, 2001.  
[18] KHI released its third-quarter financial results on November 20, 2000.  
Revenue for the period ending September 30, 2000, was $12,540,842 as compared  
with $3,493,087 in the previous fiscal year. Net earnings were down somewhat.  
KHI attributed the level of net income to the fact that the company had grown  
rapidly over the previous two years and had invested in increased staff and  
infrastructure. By the end of 2000, publicly-available information suggested that  
all was well at KHI. Despite the dot-com crash in March, the stock price had  
Page 6  
remained relatively stable. The company was receiving positive attention in the  
local media. Significant investments by Mr. Fountain, Mr. Banks, Dr. Ristow and  
Mr. Barthe were in place. On the outside, KHI appeared to be an “up-and-comer”  
that was beating the odds. Behind closed doors, however, the company was in  
financial distress.  
[19] On January 15, 2001, Mr. Potter circulated a memo to KHI Directors  
advising them they urgently needed to raise $3 million in new equity to support the  
company’s growth and operations. He explained that the company had made a  
“significant error” during 2000 by directing too much of its new investments to  
market (non-treasury) share purchases. Of the $14 million in new block share  
purchases received in 2000, only $2.5 million was invested in the treasury of the  
company. Mr. Potter further advised that on December 15, 2000, Royal Bank of  
Canada had reduced KHI’s operating line of credit from $3.5 million to $500,000.  
This development added urgency to the need for new investment in the company.  
KHI struggled to attract new investors and, as time went on, the company’s  
financial situation became dire. Meanwhile, in April 2001, Mr. Potter was named  
Chairman of Nova Scotia Business Inc., the agency in charge of using taxpayers’  
money to help businesses.  
[20] Having been unable to raise the necessary capital itself, KHI announced on  
August 17, 2001, that it had entered into an engagement agreement with IBK  
Capital Corp of Toronto. IBK would raise up to $5 million on KHI’s behalf by  
way of private placement of common shares or other securities. The news was not  
favourably received. That morning, several KHI shareholders received margin  
calls as a result of the collapse in the share price of ITI, Mr. Potter’s former  
company. KHI’s own stock price began a free fall, from which it never recovered.  
On September 13, 2001, KHI announced that it could not continue its operations  
due to a lack of available financing. Unable to make payroll, the company closed  
its doors.  
The Charges Against Messrs. Potter and Colpitts  
[21] The Crown alleges that Mr. Potter, Mr. Colpitts, and Mr. Clarke, along with  
ten other co-conspirators, developed and implemented a plan to artificially  
maintain the share price of KHI stock throughout 2000 and 2001. These KHI  
insiders and shareholders focused their efforts on maintaining the KHI stock prices  
rather than enhancing the company’s product. Their alleged activities resulted in  
the following charges being preferred against Mr. Potter and Mr. Colpitts:  
Page 7  
Bruce Elliott Clarke, Robert Blois Colpitts and Daniel Frederick Potter of Halifax,  
Province of Nova Scotia, stand charged:  
THAT between the 1st day of January, 2000, and the 13th day of September,  
2001, at or near Halifax in the Regional Municipality of Halifax, Province of  
Nova Scotia and elsewhere in the Province of Nova Scotia, and at or near  
Montreal in the Province of Quebec, and at or near Toronto in the Province of  
Ontario, and elsewhere in Canada and places outside of Canada:  
They did unlawfully conspire together with Bruce Elliott Clarke, Robert  
Blois Colpitts and Daniel Frederick Potter, the one with the other or others of  
them, and with person or persons unknown or unnamed, by deceit, falsehood or  
other fraudulent means, with intent to defraud, to unlawfully affect the public  
market price of shares of Knowledge House Incorporated contrary to Section  
380(2) of the Criminal Code and did thereby commit an offence contrary to  
Section 465(1)(c) of the Criminal Code.  
PLACES AFORESAID they did, by deceit, falsehood or other means, with intent  
to defraud, affect the public market price of shares of Knowledge House  
Incorporated, contrary to Section 380(2) of the Criminal Code.  
PLACES AFORESAID they did by deceit, falsehood or other fraudulent means  
defraud the public in respect of the market for shares of Knowledge House  
Incorporated, of a sum exceeding five thousand dollars, contrary to Section  
380(1)(a) of the Criminal Code.  
PLACES AFORESAID they did by deceit, falsehood or other fraudulent means  
defraud persons, both known and unknown, in respect of the market for shares of  
Knowledge House Incorporated, of a sum exceeding five thousand dollars,  
contrary to Section 380(1)(a) of the Criminal Code.  
[Omitted, as it relates to Mr. Clarke only.]  
They did unlawfully conspire together with Bruce Elliott Clarke, Robert  
Blois Colpitts and Daniel Frederick Potter, the one with the other or others of  
them, and with person or persons unknown, or unnamed, by deceit, falsehood or  
other fraudulent means, to defraud the public, and persons both known and  
unknown, in respect of the market for shares in Knowledge House Incorporated,  
of a sum exceeding five thousand dollars, contrary to Section 380(1)(a) of the  
Criminal Code and did thereby commit an offence contrary to Section 465(1)(c)  
of the Criminal Code.  
[22] The Crown alleges that from January 2000 until the collapse of KHI in  
August 2001, these defendants maintained the price of the stock at an artificially  
high level. The Crown alleges these actions were taken to maintain access to credit  
Page 8  
sources, to entice new investments and to protect the defendants’ personal net  
worth. The Crown alleges the defendants utilized the following techniques:  
1) Market Domination:  
[23] Domination of the buy side involves the intentional maintenance of the stock  
price by purchasing a high percentage of the shares offered for sale by retail  
shareholders. This conduct compensates for a lack of retail demand and creates a  
misleading impression of liquidity in the market. Unsuspecting investors who  
assume that the current price is the product of genuine supply and demand are  
duped into paying more for the stock than they otherwise would. Price and  
liquidity are key considerations for investors and manipulative market domination  
creates misleading impressions of both. The Crown’s expert, Langley Evans,  
described market domination at paras. 51 and 52 of his report:  
With sufficient financial resources, it is possible to artificially influence the price  
by overwhelming the market and buying all the stock made available. One person  
or a group with sufficient money can buy enough of the stock to move the price  
up or maintain price at the level of their choosing for as long as their financial  
capacity allows.  
For very large publicly traded companies, such as a large chartered bank in the  
Canadian markets, the amount of buying required to move the price can make  
manipulating the price an impractical undertaking. However, for the securities of  
smaller public companies that are more thinly traded (i.e. illiquid), it can be  
feasible to influence the price and do so with far less funding. For this reason,  
targets of stock manipulation are frequently micro-cap or small cap public  
[24] Mr. Evans recognized in his testimony, however, that purchasing a high  
percentage of the shares available on the market is entirely lawful if those  
purchases are made for legitimate investment purposes. After all, every legitimate  
trade can have an impact on share prices. It is only where the purchases are made  
with the primary intent of affecting the stock price that they become manipulative.  
2) Sales Suppression  
[25] Suppression of the sell side means taking steps to ensure that as little stock is  
sold as possible. Sales suppression eliminates downward pressure on the share  
price by preventing existing shareholders from selling their shares on the market.  
This can be accomplished by way of incentives, pressure tactics, ignoring sell  
Page 9  
orders, collusion among large shareholders, requiring permission before selling and  
withholding share certificates. The Crown’s expert discussed this technique at  
para. 58 of his report:  
Selling stock puts downward pressure on the stock price, so any selling activity is  
contrary to persons who wish to artificially raise or maintain the stock price.  
This technique interferes with the natural laws of supply and demand and lends to  
the impression that investors are confident with their investment.  
3) High Closing the Stock:  
[26] The closing price of a stock is the final price at which a security is traded on  
a given day. It represents the most up-to-date valuation of a security until trading  
commences on the next trading day. High closing refers to the practice of entering  
the market, usually late in the day, and purchasing (or offering to purchase) stocks  
at increasing prices to give a false impression of favorable performance. The  
closing price is important to investors for at least two reasons. First, regardless of  
how well a stock performs throughout the day, it is the closing price that is  
published in the media. Second, the closing price is used to set a stock’s value for  
margin account purposes. The Crown’s expert discussed high closing at para. 38  
of his report:  
Closing prices are particularly important because they are used for margin  
calculations and portfolio valuations, and are widely publicized in market  
information systems and financial newspapers. This makes affecting the closing  
price an attractive objective to persons wishing to manipulate the market of a  
specific securities [sic]. The technique of ‘high closing’ is often used to meet this  
objective. High closing is the practice of entering one or a series of orders for the  
purpose of raising the closing trade price or the closing bid price for the security  
from what it would otherwise be if left to the ordinary forces of supply and  
The most dramatic and easily recognizable examples of high closing involve  
purchase orders that are entered very near the end of a trading session and that  
increase the last trade price for the security by a significant amount.  
[27] Not every instance of the market closing high is a manipulation. A stock  
might end on an uptick any given day, purely by chance.2 A legitimate bid  
2An uptick is when the stock trades at a higher price than that of the previous trade.  
Page 10  
entered early in the trading day might not be hit until minutes before the market  
closes. Manipulative intent can be demonstrated through direct evidence in the  
form of statements of intention, or it may be inferred through the surrounding  
circumstances, such as frequency, patterns and context. The advantage gained by  
high closing is short-lived because the market starts fresh the next day.  
Consequently a pattern of high closing is required to maintain an artificially high  
stock price over a period of time.  
4) The Use of Margin Accounts:  
[28] In addition to allowing clients to purchase shares with cash, many  
brokerages offer margin accounts. Trading on margin plays a significant role in  
this trial and warrants a detailed explanation. Margin trading allows clients to buy  
securities with borrowed money. The collateral for the borrowed funds is the  
securities in the investor’s account. Trading on margin increases an investor’s  
purchasing power, enabling them to buy more stock than they can afford to pay for  
out of pocket. Margin trading is a double-edged sword. It can lead to greater gains  
when stock values increase. It also exposes the investor to far more substantial  
losses when values drop.  
[29] To buy securities on margin, you must sign a margin agreement with your  
dealer and deposit enough cash or securities to meet the margin requirement for the  
securities you intend to purchase. The margin requirement dictates the minimum  
amount of equity that a client must contribute toward the purchase. It is usually  
expressed as a percentage of the current market value of the particular security.  
Margin requirements are set by the Investment Industry Regulatory Organization  
of Canada. In 2000-2001, they were set by its predecessor, the Investment Dealers  
Association. The margin requirements set by these bodies are only minimums,  
however, and individual brokerages may set more conservative requirements. Any  
equity available that exceeds the margin requirements for the securities in the  
account is known as excess margin. Excess margin can be used to purchase new  
securities or to add to an existing position.  
[30] Margin account holders must always maintain adequate margin in the  
account to meet margin requirements or they are at risk of receiving a margin call.  
A margin call is a demand that the investor deposit additional cash or securities to  
bring the account back up to the margin requirement. The dealer reserves the right  
to sell the securities in a margin account in order to bring the account back to good  
standing. Once you receive a margin call, you must decide whether to deposit  
Page 11  
sufficient cash or securities into the account or to liquidate some of your shares. If  
you fail to respond to the margin call, the investment dealer is entitled to sell some  
of the securities in the account.  
[31] One way to lower the risk of a margin call is to maintain a diversified  
portfolio in your account. If a single stock represents a significant percentage of  
your portfolio, you have what is known as a concentrated position. Maintaining a  
concentrated position presents an increased risk because a drop in the stock’s value  
suggesting reduced demand in the market can trigger a chain reaction. The  
drop in the share price may bring the account below the margin requirement,  
resulting in a margin call. If you are unable to respond to the margin call by  
depositing cash or marginable securities into the account, your dealer may sell off  
some of your stock. Depending on the liquidity of the stock, adding more shares to  
the sell side of the market may increase downward pressure on the share price,  
further reducing the margin in your account, and so on.  
[32] The theory of the Crown is that the defendants and the alleged co-  
conspirators used their margin accounts to dominate the market, and that, when  
necessary, they worked to raise the price of the stock to avoid margin calls on their  
highly-concentrated accounts.  
5) The Use of Nominees  
[33] Nominees can be used to disguise the true nature of trading. The Crown’s  
expert described this technique at paras. 53-55 of his report:  
Nominees can be used to disguise the true nature of the trading. If all the trading  
emanated from one account, a manipulative scheme might become obvious and  
easily detected. However, if the activity is spread among several accounts, it can  
appear that the trading is coming from independent decisions, and lending more  
of an impression of consensus on the security’s pricing in the market.  
Fragmenting the trading into different accounts can also circumvent insider trade  
reporting requirements. Securities Acts typically require directors, officers or  
shareholders of greater than 10% to publicly report their trading, either 10 days  
after month end or 10 days after the trade, depending on the jurisdiction. By  
using nominee accounts in the names of persons outside these categories, the  
insider reporting requirement can be avoided and help keep trading by insiders  
hidden from public view.  
Nominees can vary widely in their knowledge of a manipulative scheme ranging  
from little or no knowledge to completely informed and active participants.  
Nominees are, however, generally at least aware that their accounts are being used  
Page 12  
in some way for trading in the security. Where a scheme relies heavily on the  
trading by a specific account or a handful of specific accounts, those accounts are  
sometimes referred to, in trading street slang, as the ‘box account’ or ‘box  
[34] The use of nominees by the defendants forms part of the Crown’s theory of  
6) Parking Stock:  
[35] Parking stock can be seen as a sub-category of sales suppression. It refers to  
placing large blocks of stock in the account of a complicit nominee or an unwitting  
client and ensuring that the stock never gets sold. The Crown’s expert discussed  
this practice at para. 56 of his report:  
This technique is a variation on the use of nominees and requires the assistance of  
a broker participating in the scheme. The broker buys and holds stock without the  
knowledge or consent of the accountholder. The stock purchases can be used to  
support the market and holding the stock in the account assists in restricting the  
supply of stock during the period of the manipulation. To park stock, typically  
the accountholder is vulnerable through a combination of complacency, lack of  
sophistication, or dependency on the broker.  
[36] This technique fulfills a manipulative agenda in that it responds to a market  
where there are few, if any, buyers in the market for a particular stock.  
7) The Use of Incentives:  
[37] The stock market is meant to be comprised of independent buyers and sellers  
making decisions based on legitimate investment goals. When a conspirator offers  
incentives either to buy or to refrain from selling, the recipient is no longer making  
investment decisions based solely on the stock itself, but on other considerations as  
well. If an incentive is not disclosed, the public is duped and the fair market  
breaks down. The Crown’s expert discussed incentives at para. 57 of his report:  
Creating artificial demand for the stock by providing financial incentives can also  
advance a manipulative agenda. Incentives can take different forms, such as  
making stock available at far below the quoted market in return for an agreement  
to make further market purchases of the security. Alternatively, existing investors  
who are potential sellers can be provided financial inducements to refrain from or  
delaying [sic] selling their stock.  
[38] Langley Evans gave evidence on this technique as follows:  
Page 13  
[If] the agenda is to artificially increase or maintain the price at a level higher than  
what it would be otherwise, you would see incentives provided to buy and  
penalties for selling or incentives not to sell. And those would be all ways of  
artificially influencing the supply or constraining it and enhancing the demand.  
8) The Use of a Box Account:  
[39] In 2000-2001, Bruce Clarke was an investment advisor at NBFL’s Halifax  
office. His son, Steven Clarke, also worked at NBFL providing administrative  
support to his father. Bruce Clarke was the investment advisor for Mr. Potter, Mr.  
Colpitts and the majority of the alleged co-conspirators. Mr. Clarke owned a  
private investment company named 2317540 Nova Scotia Limited. It held a  
margin account at NBFL that has become known as “the 540 account”.  
Historically, this account was relatively inactive.  
[40] The Crown alleges that between January and March 2000, the alleged co-  
conspirators (known as the “control group”) infused the 540 account with cash and  
securities to enable it to buy and sell KHI shares in the coming months. It is  
alleged that the alleged co-conspirators used this account as their principal box  
account to manipulate the price of KHI stock on the Toronto Stock Exchange.  
They often referred to it as “the orderly market account”.  
[41] The Crown alleges that Mr. Potter controlled the 540 account and, as such, it  
was his nominee account. By using the 540 account to make purchases, the  
defendants were able to soak up any KHI shares coming to the market while  
avoiding insider reporting requirements.  
9) Non-Disclosure of Material Information:  
[42] Investors’ decisions to buy, sell or hold must be fully informed. An investor  
has the right to know the material facts surrounding the business of a company and  
its stock. This right is protected by legislation. The Crown’s expert described  
material disclosure as follows:  
As a reporting issuer, KHI had continuous disclosure obligations, which included  
preparing and distributing financial statements and making timely announcements  
of any material changes in KHI affairs. Canadian reporting issuers must file all  
materials related to their continuous disclosure obligations of SEDAR.  
Page 14  
SEDAR is an organization that collects all publicly-available information for  
publicly-traded companies in Canada.  
[43] Non-disclosure of material information is an offence under securities law,  
but it is also a means by which a company can maintain the price of a stock. For  
example, if information that might induce a shareholder to sell is not disclosed, this  
can be a form of sales suppression.  
The Alleged Co-Conspirators  
[44] The Crown alleges that the 13 members of the “control group” collectively  
utilized the above techniques to manipulate the price of KHI stock on the Toronto  
Stock Exchange. This is not to suggest that all alleged co-conspirators utilized all  
of these techniques throughout the indictment period. The Crown alleges that each  
person in this group did something that contributed to the overall goal of the  
conspiracy, that being to illegally maintain the market price of KHI shares on the  
Toronto Stock Exchange. So who are the alleged co-conspirators?  
[45] Daniel Potter was the President and Chief Executive Officer of KHI. The  
Crown considers him to be the primary participant in this conspiracy. They allege  
that “he created it, he directed it and he controlled it.”  
[46] On March 8, 2000, Mr. Potter signed a “Guarantee Agreement” with NBFL  
in which he “unconditionally guarantees to National Bank Financial Ltd. all  
current and future debts and liabilities” of several individuals and private  
companies. The list is as follows:  
Ronald Richter of Middleton, Nova Scotia  
John F. Sullivan and Linda Sullivan of Guysborough, Nova Scotia  
Starr’s Point Capital Incorporated  
Gramm & Company Incorporated  
3020828 Nova Scotia Limited  
2532230 Nova Scotia Limited  
Knowledge House New Technology Limited Partnership  
Page 15  
Mr. Richter is Mr. Potter’s brother-in-law. Mr. Sullivan was a former  
superintendent of the Strait Regional School Board who took a position with KHI.  
The Limited Partnership was a subsidiary of KHI and the four companies were  
controlled by either Mr. Potter or his spouse, Fiona Imrie.  
[47] The Court heard evidence that the accounts covered by the cross-guarantee  
were treated as one account for margin purposes. The Crown alleges that this  
cross-guarantee allowed Mr. Potter access to these margin accounts and this  
arrangement meant that under-margin accounts could be balanced by above-margin  
accounts. It is the Crown’s theory that this guarantee gave Mr. Potter greater  
flexibility in implementing manipulative techniques. In addition, Mr. Potter had  
his own account for which he was personally responsible.  
[48] Blois Colpitts, in 2000-2001, was a very successful securities lawyer at  
Stewart McKelvey Stirling Scales. He was legal counsel to KHI and was its Lead  
Director and Chair of its Audit Committee. The Crown alleges that whenever Mr.  
Potter had a problem that needed fixing to ensure the object of the conspiracy  
continued, Mr. Colpitts stepped in to try and resolve it.  
[49] Bruce Clarke was an investment advisor in the Halifax office of NBFL in  
2000-2001. In the 1980s and early 1990s, Mr. Clarke worked as an investment  
advisor together with David Mack at a company known as J.D. Mack. Although  
the firm was named after Mr. Mack, Bruce Clarke was the controlling shareholder  
and Chief Financial Officer. In 1995, when J.D. Mack could not meet its capital  
requirements, the Canadian Investor Protection Fund took control of the firm.  
Bruce Clarke was disciplined by the Montreal Stock Exchange and J.D. Mack was  
acquired by Lévesque Beaubien Geoffrion in a mandated acquisition. Lévesque  
Beaubien Geoffrion was eventually absorbed by NBFL.  
[50] The Crown says Bruce Clarke was the broker who implemented the majority  
of the trading activity in the alleged conspiracy. A broker with access to a public  
market was an essential piece in the price maintenance scheme. The Crown  
alleges that he was in the hands of Messrs. Potter and Colpitts and, as such,  
managed the trading in all NBFL accounts for all of the alleged co-conspirators. It  
further alleges that his trading in these accounts dominated the buy side of the KHI  
market, pushing back the sell side which, if left unattended, would have driven  
down the price of the stock. Much of this buying was conducted through his 540  
Page 16  
[51] Steven Clarke is Bruce Clarke’s son and, in 2000-2001, was his employee at  
NBFL. He testified for the Crown. The Crown alleges he assisted in the  
conspiracy by entering orders at his father’s direction and regularly updating Mr.  
Potter on the status of the cross-guaranteed accounts and the margin available for  
purchasing KHI stock when there were no buyers in the market.  
[52] Calvin Wadden became part of KHI when he sold his share of Micronet to  
KHI in return for shares and a job. No cash changed hands. The Crown alleges  
that he was aware of the manipulation and, from time to time, participated fully.  
On the other hand, Mr. Wadden wanted to sell his shares to fund other projects.  
This dichotomy created considerable conflict between him and the other alleged  
[53] Raymond Courtney became part of KHI when he sold his share of Micronet  
to KHI in return for shares and a job. No cash changed hands. The Crown alleges  
that his primary role in the conspiracy was to buy shares off the market.  
[54] Ken MacLeod, along with Donnie Snow, was the former owner of Silicon  
Island Art & Innovation Centre Limited and the Centre for Distance Learning. He  
sold his company to KHI and in return received KHI shares, an executive position  
and a seat on the Board of Directors. The Crown alleges that Mr. MacLeod was a  
“core member of the conspiracy” and for the most part he was used by Mr. Potter,  
Mr. Colpitts, Mr. Clarke and Mr. Wadden as a primary source to buy excessive  
sell-side pressure on KHI stock through his account named “”.  
[55] Eric Richards was an investment advisor at Bank of Montreal Nesbitt Burns  
(“BMO NB”) in 2000-2001. He was responsible for the investment accounts of  
Mr. Wadden, Mr. Courtney and a local businessman, Steve Tsimiklis, who had  
significant holdings in KHI. The Crown says Mr. Richards knew there was no  
market for KHI shares and accepted that any sales must be conducted with the buy  
side arranged.  
[56] Steve Wilsack and Craig Dunham sold their company, Innovative Systems  
Limited, to KHI and received KHI shares as payment. The Crown’s theory is that  
Mr. Wilsack was involved in buying KHI shares on the market at increasing prices  
at the request of other members of the conspiracy. Additionally, he sought  
permission before attempting to sell his KHI shares.  
[57] Gerard McInnis, in 2000-2001, was KHI’s Senior Vice-President Finance  
and Accounting. The Crown’s theory is that in the Spring of 2001, Mr. McInnis  
Page 17  
agreed to participate in a warrant swapdeal to obtain KHI warrants that were  
then used as leverage to provide buying support for KHI shares.  
[58] Jack Sullivan and Jack Hill are also alleged to have participated in the  
Spring 2001 warrant swap deal concocted by Mr. Wadden. The theory of the  
Crown is that they acquired warrants for one cent and then exercised the warrants  
for $1.50 to acquire KHI shares from treasury. A condition of the deal was that  
once the KHI shares were in their margin accounts, the three would each borrow  
against those shares to buy 20,000 KHI shares off the market.  
[59] Shirley Locke, in 2000-2001, was an investment advisor and branch  
manager of BMO NB’s Halifax office, and a good friend of Mr. Colpitts. The  
theory of the Crown is that she encouraged her clients to buy KHI when Mr. Potter  
and Mr. Colpitts needed someone to “soak up selling pressure.”  
[60] Dr. Bernard Schelew founded the company that would become KHI. When  
he left the company, he held 1,241,725 shares. The Crown says that the defendants  
strongly discouraged Dr. Schelew from selling his shares. When he would not  
listen, the defendants revealed what they had been doing to support the market and  
Dr. Schelew became involved in the conspiracy, purchasing more shares to  
maintain the stock price.  
[61] The Crown called evidence from only two of the above conspirators: Steven  
Clarke and Gerard McInnis. Mr. Colpitts testified on his own behalf and called  
evidence from Bernard Schelew and Shirley Locke. While the defendants take  
issue with the Crown not calling additional co-conspirators, the Crown makes no  
excuses for that decision. The Crown relies on the co-conspirators exception to the  
hearsay rule to introduce contemporaneously-made correspondence between the  
alleged co-conspirators in 2000-2001. The Crown views the correspondence as  
more reliable than what the conspirators might say in oral testimony. After all,  
these exchanges were made over 15 years ago and the human memory may not be  
able to recover the detail outlined in the correspondence. There is also the danger  
the conspirators might not be forthright given their status as unindicted co-  
conspirators. Furthermore, if the defendants felt that any of the individuals who  
were not called had information friendly to the defence, they had the option of  
calling those individuals.3  
3On this point, see R. v. Cook, [1997] 1 S.C.R. 1113, [1997] S.C.J. No. 22, at para. 39.  
Page 18  
The Evidence  
[62] The Crown’s case against the defendants is built on hundreds of  
communications, a Match Trade Report (“MTR”) containing a historical record of  
every trade of KHI stock on the TSX during the relevant period, charts and  
summaries prepared by RCMP investigator Ian Black in relation to the trading of  
KHI, and opinion evidence from its expert, Langley Evans, who was provided with  
the MTR and materials prepared by Ian Black.  
[63] The defendants do not challenge the authenticity of the communications.  
They do not deny that the transactions described in those documents and confirmed  
by other evidence did indeed take place. They disagree, however, with the  
interpretation the Crown has placed on those communications and transactions, and  
the intent imputed to the defendants pursuant to that interpretation. According to  
the defendants, everything they did was legal and consistent with standard industry  
practice for management and insiders of a small-cap public company. With respect  
to allegations of high closing, they say that any illegal activity by Bruce Clarke  
was done without their knowledge.  
[64] The defendants also argue that the MTR prepared without reference to  
order tickets or contemporaneous market depth information does not paint an  
accurate picture of the market as it appeared to investors at the relevant times.  
According to the defendants, this deficiency makes the MTR, and the evidence of  
Mr. Black and Mr. Evans by extension, completely unreliable. In relation to Mr.  
Evans, they also say that his report was riddled with errors and that his conclusions  
are based on incomplete information. For this reason, they say his evidence should  
be rejected in its entirety.  
[65] I will begin by reviewing the Crown’s case against the defendants. I will  
then review the evidence led by Mr. Colpitts, and the defence submissions in  
relation to the alleged frailties of Crown’s case.  
The Crown’s Case  
[66] It is necessary to review the most important evidence led by the Crown in  
some detail in order to provide the necessary background for the defence evidence  
and submissions, and the Court’s analysis.  
The conspiracy begins  
Page 19  
[67] The Crown says the conspiracy began on December 1, 1999 when, in  
anticipation of KHI stock moving to the TSX on December 6, Dan Potter sent an e-  
mail to KHI senior vice-presidents, directors and Calvin Wadden about the “Share  
the Future Program. In the e-mail, Mr. Potter stated, “I am initiating a push to  
create overall increased demand for KHI shares on the market my personal target  
is to have an average of 10,000 shares a day trading on the exchange by the end of  
Jan. 2000.” On the same day, Mr. Potter sent an e-mail to Dr. Bernard Schelew:  
From the memo below you'll see that I am working to get the stock to progress to  
the next level. As part of this process, I will be asking each Director to help  
facilitate buy-side activity in the stock- it is a good time to do this for our  
respective friends and network because that [sic] stock has consolidated strongly  
around the $4.00 level and increased activity will tend to bring that up.  
In discussing this program with Bruce and David, they advised that Anthony  
[Phelips] wanted to sell 200,000 KHI shares - I assume that this may be connected  
to his investment your new company. I am asking you to help me in our  
initiative at this time and NOT to put sell-side pressure on the stock at this  
time. It will [sic] fine as we (with your help) find new buyers for the KHI shares,  
that Tony and anyone else wishing to invest in your company, sell so that they  
may do so. Right now, however, the emphasis needs to be on the "Goose that lays  
the Golden Eggs – KHI”)!  
Please confirm that you can keep Tony's shares from becoming a burden to  
the efforts I have initiated with David, Bruce and others to have the KHI  
stakeholders work together and support the company in this initiative.  
[Emphasis added]  
[68] According to the Crown, these e-mails show Dan Potter’s plan to get  
insiders to purchase stock with the objective of increasing the price. In addition,  
the e-mail to Dr. Schelew was the first example of Mr. Potter attempting to  
suppress sales of stock by KHI shareholders.  
[69] On December 9, Dan Potter e-mailed Bruce Clarke and told him that  
Bernard Schelew had spoken with Mr. Phelips who said he would “meditate on it”  
and call him back about his shares. One week later, Dr. Schelew e-mailed Mr.  
Potter and told him Mr. Phelips had decided “for tax reasons” to wait until January  
to sell 50,000 shares. Dr. Schelew added, “Actually, he may not sell KHI at all but  
may hang in.” Dan Potter replied to Dr. Schelew on December 16, and wrote, in  
Page 20  
By a copy of this to Bruce Clarke, I’m advising him of Tony’s decision. Please  
ensure that, when his selling intent wells up again, that we have lots of advance  
[70] On December 6, 1999, KHI’s first day on the TSX, the stock traded between  
$4.15 and $4.30. By December 29, the stock reached $6.75 before closing the  
month at $6.25. For the month of December, 353,752 shares of KHI crossed the  
Exchange. Suspect accounts4 purchased 23,300 of those shares.  
[71] As it transpired, on January 6, Anthony Phelips did sell 45,800 of his  
200,000 shares. All but 300 were purchased by clients of Shirley Locke. Her  
clients also bought 32,200 shares from 3027748 Nova Scotia Limited, a company  
associated with Donnie Snow and Ken MacLeod. According to the Crown, this  
was because Shirley Locke was helping the defendants find buyers so that the  
share price would not go down.  
Donnie Snow sells one million KHI shares  
[72] Donnie Snow, together with Ken MacLeod, was the former owner of CD-Ed  
and Silicon Island. Unlike Mr. MacLeod, Mr. Snow decided that he did not want  
to remain an employee of KHI. Instead, he preferred to sell his shares and pursue  
other opportunities. The plan, as set out by Dan Potter in an e-mail, was for Mr.  
Snow to sell 1 million shares of KHI at $5.90 to Charles Keating on the TSX.  
Bruce Clarke would act as Mr. Keating’s broker. To come up with the 1 million  
shares, Donnie Snow would sell 840,000 shares and exercise warrants on a further  
160,000. Mr. Potter explained that in order to effect the transaction, the balance of  
the escrow on the shares of Mr. Snow and Mr. MacLeod would have to be  
released. In the spirit of fairness, the balance of Ray Courtney and Calvin  
Wadden’s shares would also be released from escrow.  
[73] On January 11, Mr. Snow sold 1 million of his KHI shares to Charles  
Keating for $5.9 million. Due in large part to that transaction, 1,574,525 shares of  
KHI crossed the Exchange during the month of January. Suspect accounts  
purchased 238,300 shares. Bruce Clarke, using the account he shared with his wife  
(the “Clarke joint account”), purchased 21,100 shares at prices ranging from $5.90  
to $7.10. Without accounting for any commissions, Bruce Clarke personally spent  
$178,280 buying KHI during January.  
4The term “suspect accounts” will be used throughout this decision to refer to accounts connected to the alleged  
Page 21  
[74] As Mr. Potter set out in his December 1, 1999 e-mail, his goal was to have  
10,000 shares trading daily by the end of January. Out of 20 trading days in  
January, over 10,000 shares traded on 13 of those days. The plan was working.  
Dan Potter directs Craig Dunham and Steve Wilsack to Bruce Clarke  
[75] Gerard McInnis testified that Steve Wilsack and Craig Dunham had  
shareholder loans payable to the company as a result of purchase adjustments  
arising from the acquisition of their companies and KHI had decided to accept  
shares as payment for those debts. To that end, Mr. McInnis e-mailed Messrs.  
Wilsack and Dunham, with copies to Dan Potter and Calvin Wadden, on February  
25, writing in part:  
Spoke with Andrew Burke5 today and he asked for you each to contact him  
regarding making arrangements for you to take possession of the shares we  
released from escrow to allow you to pay off your shareholder loan. … I had  
recommended that you deliver the shares to Bruce Clark [sic] at National Bank  
who would hold them in trust, sell them into an orderly market and forward  
proceeds to us. If you choose to use your own broker we will allow this, however  
we still request you co-ordinate the sale with Calvin so they can be sold in an  
orderly manner as to not disrupt our market position.  
[76] Mr. Potter replied the same day, writing “Sorry for the back seat driving but  
we should insist on Bruce doing the selling!” Following Mr. Potter’s instructions,  
Mr. McInnis e-mailed Wilsack and Dunham back right away:  
I apologize for flip-flop on this one..but upon speaking with Dan again he was  
more insistent on having you deliver the shares to Bruce Clarke and having Bruce  
manage the selling transactions. I would be pleased if you would honor this  
[77] The Crown says this was an early example of a pattern throughout the  
indictment period of Dan Potter convincing or requiring shareholders to place their  
shares with Bruce Clarke so that the defendants, through Mr. Clarke, could  
effectively control the trading of KHI stock. In other words, to the greatest extent  
possible, no one was going to sell KHI shares without the defendants’ knowledge  
and approval.  
5At the time, Andrew Burke was an associate at Stewart McKelvey who often did work for Mr. Colpitts.  
Page 22  
Staffing Strategists deal  
[78] By February 2000, Dan Potter was in the process of finalizing a deal to  
invest in Atlantic Canada Careers Inc. (“ACC”) and Wilson Associates Inc., two  
companies founded by Jim Wilson. Mr. Wilson testified that Wilson Associates  
was an executive recruitment company that recruited senior executives for  
businesses in Atlantic Canada and, eventually, across the country. ACC was an  
internet recruitment advertising company owned by Wilson Associates.  
Companies would place advertisements on the ACC website which gave them a  
greater reach than traditional newspaper ads.  
[79] Jim Wilson testified that he met Dan Potter in 1999 when their children were  
attending the same school. He met Mr. Colpitts socially in late 1999 through Mr.  
Potter. The business relationship between Mr. Wilson and Mr. Potter began when  
KHI used ACC to post recruitment ads for KHI. Mr. Potter was pleased with the  
results and had several discussions with Mr. Wilson about ACC’s business model.  
He asked Mr. Wilson about his vision for the company and Mr. Wilson told him  
that he wanted to grow the business. They continued their discussions until they  
devised a plan where Mr. Potter would take an equity position in the company and  
they could execute on the growth plan together.  
[80] They agreed that Mr. Potter would pay $100,000 in cash, and another  
$800,000 in shares of KHI that would be deposited into an account with Bruce  
Clarke at NBFL. Wilson Associates and ACC would be collectively renamed  
Staffing Strategists, Inc. The new company would be an executive search and  
recruitment advisory business using the internet to give hiring organizations direct  
access to target candidates.  
[81] Mr. Wilson testified that his understanding was that he would be able to sell  
the Knowledge House shares when Staffing Strategists needed cash for expansion.  
According to Mr. Wilson, that’s not how things played out. Instead, when he  
called Bruce Clarke to try and sell KHI shares, Mr. Clarke told him that he  
shouldn’t sell, and should instead borrow against the shares to raise working  
capital. Mr. Wilson testified that whenever the company found itself in need of  
cash or subject to a margin call from National Bank, Mr. Potter and Mr. Clarke  
would come up with a way to infuse some cash or bring the account back on side  
without the sale of KHI shares. For example, in January 2001, when Staffing  
Strategists needed cash, Mr. Potter and Mr. Clarke arranged for a transfer of  
95,000 shares of Anitech Enterprises into the account from a relative of Dan Potter.  
Page 23  
Staffing Strategists then sold those shares for $1.05 per share. In March 2001, the  
account received a margin call for $155,000. According to Mr. Wilson, either  
Blois Colpitts or Dan Potter came up with an opportunity for the company to  
acquire warrants from Ken MacLeod. The idea was that Staffing Strategists could  
buy the warrants at a penny per share for $2,400, then execute them at $1.50 when  
the stock was trading at around $5.40. In other words, Staffing Strategists was able  
to acquire 240,000 shares at $1.51 per share while the market value was $5.40 per  
share. This had the dual effect of bringing the account back on side while creating  
an additional $100,000 of excess margin that the company could use to fund its  
[82] Despite further attempts by Mr. Wilson and Laura Quartermain, Staffing  
StrategistsVP Finance, to sell KHI shares, there were no sales of KHI from the  
account. Ms. Quartermain testified that Bruce Clarke was always willing to assist  
when the request was to draw on the margin account, but he would not execute  
orders to sell shares. She further testified that whenever the company needed cash,  
Dan Potter and Blois Colpitts would come up with other options, including a short  
term personal loan from Dan Potter’s wife, Fiona Imrie.  
[83] Unable to sell before the price of KHI tanked in August 2001, Staffing  
Strategists was left with a $776,000 debt to NBFL (50% of which belonged to Mr.  
Potter) that ultimately doomed the company.  
Trading volumes and share price for February 2000  
[84] During February 2000, 348,069 KHI shares crossed the Exchange. Suspect  
accounts purchased 63,000 shares. From February 2 to February 11, the Clarke  
joint account and the Bruce E. Clarke account spent a combined $253,475  
acquiring KHI shares. Accordingly, for the months of January and February 2000,  
Bruce Clarke personally spent a staggering $431,755 acquiring KHI shares  
(without accounting for commissions). In terms of the share price, the stock closed  
on February 1 at $7.25, the highest price it would reach for that month. The price  
dropped through the month and closed on February 29 at $6.60.  
Loading the 540 account and the dot-com crash  
[85] March 2000 was a particularly important month in the Crown’s case for two  
reasons: KHI insiders loaded the 540 account with shares and cash so that it could  
start trading in KHI, and the “tech bubble” burst.  
Page 24  
[86] As of December 31, the 540 account a corporate account belonging to  
Bruce Clarke contained cash ($169.21) and securities (12,970.34) amounting to  
$13,139.55 in value. It did not hold any KHI shares, but contained several stocks  
ranging in value from a low of six cents to a high of $1.48. On March 3, 2000,  
Dan Potter authorized the transfer of $100,000 to the 540 account from the NBFL  
margin account of 2532230 Nova Scotia Limited (the “230 account”), a company  
owned by Mr. Potter’s wife. Bruce Clarke was the investment advisor on the  
account. Six days later, the 540 account received 220,000 shares of KHI as a  
“loan” from Calvin Wadden. As a result of both transactions, the account’s equity  
increased from just over $13,000 to more than $1.6 million. With KHI’s margin  
requirement of 50%, the 540 account acquired $850,000 in loan-value-based  
buying power and immediately started buying KHI stock.  
[87] According to the Crown’s expert, Langley Evans, the 540 account was  
clearly a nominee for the control group. He wrote, at para. 106 of his report:  
Clarke’s status as a registered broker, combined with the receipt of assets from  
KHI insiders and associates coincident with the start of heavy KHI trading  
activity by the 540 account … lead me to the opinion that the 540 account was a  
nominee for the Group. The activity in the 540 account in the following months  
is also consistent with playing a nominee role in the Group’s trading. All these  
factors surrounding the 540 account are indicators consistent with a manipulative  
agenda. Clarke appears to be a fully knowledgeable and willing participant in the  
Group’s agenda.  
[88] Just as the 540 account was getting on its feet, the “tech bubble” burst.  
Interest in technology stocks plummeted. The Court heard evidence that from  
1995 until March 2000, investors were throwing money at anything and everything  
related to technology or the internet. Venture capital for technology-related  
companies was widely available, making financing relatively easy for untested  
business models. A tech company could go public without a proven track record  
of profitability and be rewarded with a high stock market valuation. These  
valuations were not based on fundamentals like cash flow and profit record, but on  
metrics like website traffic. Stock prices in the technology sector climbed and  
[89] This exuberant market lasted until March 2000, when the consensus  
emerged that most of these companies had been significantly overvalued. Once the  
market returned to more traditional ways of valuing stocks, the valuations for many  
tech companies dropped and the market crashed. In other words, the bubble burst.  
Page 25  
Many of the same companies that had thrived in the earlier boom market failed  
when their businesses proved unsustainable and they could no longer obtain  
[90] From this point forward, the Crown says there was tremendous pressure on  
KHI insiders to keep the stock price from plummeting like so many others had.  
Trading volumes and share price for March 2000  
[91] During March, 735,052 KHI shares crossed the Exchange. The stock traded  
in the $6.00 to $7.00 range until March 23, when KHI released positive financial  
results. The market reacted, driving up the share price. Trading volumes increased  
significantly over the next eight days, with the price reaching a high of $9.85 on  
March 29. On March 31, the stock closed at $8.40.  
[92] Suspect accounts6 spent $738,971 buying KHI stock in March. The 540  
account alone spent over $500,000. In his report, Langley Evans described the  
trading by the 540 account during March as “suspicious”. He explained at paras.  
The early trading by the 540 account is fortuitous. Between March 3 and March  
24, the 540 account accumulates over 30,000 KHI shares at prices between $6.35  
and $6.75. KHI released encouraging financial results on March 23. The market  
responded favourably to these results and price for KHI shares increased  
significantly. From March 28 to 31, the 540 account is a net seller of several  
thousand shares at prices ranging from $7.35 to $8.75.  
This trading is suspicious. Given that the trading immediately precedes the  
favourable announcement of company profits combined with Clarke’s association  
with insiders of KHI, the activity raised the prospect of illegal insider trading (i.e.  
trading with knowledge of undisclosed material information.  
Eric Richards joins BMO Nesbitt Burns  
[93] In April 2000, Eric Richards, an investment advisor with Financial Concepts  
Group, joined Bank of Montreal Nesbitt Burns. Several individuals from BMO  
NB were called as witnesses in this trial. Bruno Falvo, a member of the Risk  
Management Group at the relevant time, testified that he became aware of KHI in  
6The 540 account, Sandra Clarke, Clarke joint account and Starr’s Point Capital.  
Page 26  
April 2000 when he learned that Mr. Richards, a new investment advisor, wanted  
to bring in several heavily margined client accounts containing concentrated  
holdings in KHI. These included the accounts of Calvin Wadden, Ray Courtney  
and Steve Tsimiklis. Due to the size of the loans and the degree of concentration,  
the accounts could not be transferred in without review and approval by the Risk  
Management Committee.  
[94] Mr. Falvo looked into KHI stock and reported to Charyl Galpin, Chief  
Admin Officer and Chair of the Risk Management Committee, that the stock was  
very illiquid, trading only 3,000-10,000 shares per day. Mr. Falvo testified that a  
stock would not be considered liquid unless it was trading at least 100,000 shares  
per day. He described KHI as “not very liquid at all.” After hearing from Mr.  
Falvo, Charyl Galpin e-mailed Carole Cushing, Atlantic Divisional Manager, on  
April 27, 2000 and indicated that due to the limited liquidity, BMO NB should  
contemplate granting no loan value on KHI. Carole Cushing replied:  
Please grant the margin as these are principals of the firm, slowly liquidating this  
year to diversify. There is a good book behind these positions. If we have  
problems going forward we can always discuss, but I think this is a case where we  
should grant the margin while we get this business done.  
[95] Although the Risk Management Committee decided not to accept the margin  
loans, Carole Cushing successfully convinced Gilles Ouellette, head of the Private  
Client Group, to accept the accounts on the basis that Mr. Wadden and Mr.  
Courtney intended to sell 200,000 shares of KHI by the end of June 2000 and to  
have liquidated a total of 500,000 shares each by the fall. The acceptance was  
conditional, however, on elimination of the loans by the end of June.  
Trading volumes and share price for April 2000  
[96] The stock opened on April 3, 2000 at $8.55, the high price for the day, and  
closed at $7.60. For most of the month, it traded between $7 and $8, but by April  
25 had dropped back down in the $6.00-$7.00 range. On April 28, with significant  
buying by the 540 account, the stock closed at $7.20.  
[97] By the end of April, the effects of the tech crash were becoming apparent.  
The number of shares crossing the Exchange was 290,775, a 60% drop from the  
previous month. The 540 account was a heavy purchaser, spending over $1  
million buying KHI shares. The Clarke joint account spent $5,086. Together,  
Page 27  
these accounts purchased just under half of the KHI shares that crossed the  
Trouble in paradise and an investment on the horizon  
[98] By May 2000, the Crown says, cracks were forming in the relationship  
between Dan Potter and Calvin Wadden. E-mails suggest that Mr. Wadden  
planned to leave KHI by June. On May 4, he e-mailed Mr. Potter about  
“supporting the market” and expressed some irritation that he had not been  
informed that the 220,000 shares he loaned to the 540 account were going to be  
used as security to purchase over a million dollars’ worth of KHI shares. He also  
As I told you and Ray in April I have committed to my partners to support the  
company and not place pressure on the market but I fully expect that if  
opportunities arise to sell stock we are the three people to be offered the sale first.  
It has been my position for some time that I will need to sell stock by the end of  
June. I am still working under these timelines.  
[99] Dan Potter replied with a proposal that Messrs. Potter and Wadden, along  
with Ray Courtney, would provide equal support to Bruce’s ‘orderly market’  
account with 100,000 KHI shares each. Under this arrangement, Calvin Wadden  
would get 120,000 of his 220,000 shares back. Mr. Potter indicated that Mr.  
Courtney had already agreed to this idea.  
[100] Adding to Dan Potter’s problems, Bernard Schelew, the founder of the  
company, wanted to unload a million shares in KHI. He e-mailed Mr. Potter on  
May 23, 2000, setting out a schedule of how he would like to sell his holdings.  
Dan Potter forwarded the e-mail to Blois Colpitts with the message “fyi.”  
[101] But it wasn’t all bad news for KHI. On May 24, 2000, Dan Potter e-mailed  
Gerard McInnis and Blois Colpitts, informing them that “[a] German investor  
group led by Mr. Michael (Ben) Barthe is interested in investing in a minimum of  
500,000 treasury shares of KHI. His group is willing to make a long term  
commitment to hold the stock, but wants a discount of 20% to the current market.”  
The e-mail went on to discuss possible structures for the deal. A draft term sheet  
was prepared, contemplating a $3.5 million investment by Mr. Barthe.  
Trading volumes and share price for May 2000  
Page 28  
[102] Trading volumes in May dropped a further 65%, with only 104,805 KHI  
shares crossing the Exchange. The 540 account was a constant buyer, spending  
$285,149 to purchase 39.1% of the total shares traded. The share price remained  
fairly stable with the stock trading between $6.50 and $7.25 before closing the  
month at $6.90.  
Calvin Wadden gets his 120,000 shares back from Dan Potter  
[103] On June 6, 2000, Dan Potter arranged for Calvin Wadden to get his 120,000  
shares back from the 540 account. He e-mailed Bruce Clarke authorizing the  
transfer of 120,000 shares from the account of 3020828 Nova Scotia Limited, an  
account owned by Mr. Potter. Bruce Clarke followed up with a letter to Calvin  
Wadden, copied to Dan Potter confirming that 120,000 of the 220,000 shares Mr.  
Wadden loaned to the 540 account in March were being returned to him, and that  
100,000 shares remained in the account.  
[104] According to the Crown, the fact that Dan Potter used his own shares to  
replace the shares that Mr. Wadden had loaned to the 540 account is clear evidence  
that Mr. Potter controlled the 540 account and was aware of everything it was  
Ben Barthe investment market or treasury?  
[105] At the same time, Gerard McInnis was discussing the excess of sellers (the  
“seller overhang”) in the market with Dan Potter. In other words, there were more  
sellers than buyers. On June 6, Mr. McInnis e-mailed Mr. Potter with the subject  
“status of German Investor”, writing in part:  
You indicated briefly that you think he went for the $7 shares, $10 warrants.  
What is status?  
Re from treasury or from market. I know you are in constant contact with Bruce.  
My understanding is that there is big overhang in the market and moving some of  
these shares out from market would be good. Are you not concerned with the  
overhang or why would he (German) be opposed to some from market? I also  
believe the cash inside the company is good too! I presume that is your concern.  
[106] Dan Potter replied the next day:  
Page 29  
Still feeling positive about German investor group at 7 and 10 as offered. They  
want treasury and I don't want to question that both for optical and cash in  
company reasons.  
The overhang in the market is significant but not that BIG! We are working on  
that as well. …  
[107] According to Mr. Potter’s reply, Ben Barthe wanted his investment to go to  
the company’s treasury, where it could be used to fund operations, rather than  
going into the pockets of other shareholders through a trade on the Exchange.  
Steve Wilsack wants to sell  
[108] By this point in June 2000, Steve Wilsack had decided to leave KHI and he  
wanted to get his hands on the rest of his KHI share certificates. To that end, he  
sent an e-mail to Gerard McInnis on June 6. Mr. McInnis tried to dissuade him  
from selling until September, writing, “You have had sufficient shares released to  
allow for proceeds to paydown the loans. Dan does not want to see any more  
pressure on the stock (sell side) if possible until Sept. However if you need to sell  
more to raise the needed cash we would ask you co-ordinate with Bruce Clark  
[sic].” Mr. Wilsack was clearly unhappy with this response, writing on June 8:  
On a related note, I will co-ordinate with Bruce as much as possible the sale of  
shares to pay off this debt. As for the release of the rest of the stock, I may have to  
sell some stock due to my present financial situation and a renovation project I  
already started. At no time was there a mention of a condition about holding the  
stock until September as part of my settlement. As of yesterday, this was the first  
mention of this. I will also need funds for a source of income for the short time  
When I drop of [sic] the final amount of $141,475.50, (planning next week), I will  
pick up the balance of my share certificates.  
[109] At this point, Dan Potter stepped in, inviting Mr. Wilsack to come to his  
home. On June 18, Mr. Wilsack wrote to Mr. Potter, suggesting he’d had a change  
of heart:  
Thanks for KHI update today. Your deck is quite relaxing too!! As always I  
enjoyed our chat… Further to our conversation regarding my shares, I will set up  
an account with Bruce this week. I plan to settle my outstanding balance with  
KHI with a stock exchange. I will work with Bruce with any further liquidation  
of stock until the end of September. At that time, I will have the option of  
transferring my stock to another broker or continue on with Bruce. I will also  
give further consideration to Deteck. All the best dan.”  
Page 30  
[110] The Match Trade Report shows sales by Steve Wilsack prior to his meeting  
with Mr. Potter. From the date of the meeting until September, Mr. Wilsack did  
not sell any more shares, despite his reported high need for cash.  
[111] The Crown submits that the reason Dan Potter did not want anyone selling  
until September is obvious: he was trying to keep the share price stable in  
anticipation of the deal with Ben Barthe. To accomplish this, he needed to keep  
sellers he knew about off the market, while inducing Bruce Clarke and other  
insiders to buy up as many shares as possible from retail sellers that he could not  
The 540 runs out of buying power  
[112] During the early days of June, Bruce Clarke, using the 540 account, was a  
frequent purchaser of shares. But the account only had so much buying power.  
According to the Crown, when the account was nearing its limit, Mr. Clarke  
decided to use a client account to buy a substantial number of KHI shares without  
that client’s knowledge and contrary to his instructions.  
[113] In 2000, Lowell Weir was the President of Enervision, a public company  
that had an investment account with Bruce Clarke. Mr. Weir testified that  
Enervision typically had $600,000 to $700,000 invested in certificates of deposit or  
GICs. During his direct examination, he explained that Bruce Clarke had  
encouraged him to invest in public stocks. Mr. Weir agreed, but told Mr. Clarke  
that he was only interested in liquid, blue chip stocks. The money in the account  
was the company’s working capital and he could not afford any losses. Mr. Weir  
testified that he was out of town during June, and when he returned, he learned that  
Mr. Clarke had used the Enervision account to purchase $203,680 worth of KHI  
shares. He testified that he told Mr. Clarke to stop buying KHI and when he later  
tried to sell the shares, Mr. Clarke put him off. He did manage to sell some shares  
in November 2000, when Mr. Clarke used another client account to purchase them.  
On cross-examination, Mr. Weir clarified that he had understood that some KHI  
shares would be purchased in June but that it was not going to be all KHI, and not  
in the numbers purchased.  
[114] Mr. Potter’s wife’s account, the 230 account, was also a heavy purchaser in  
June 2000. According to the Crown’s theory, with the 540 account near its margin  
limits, the 230 account entered the market and became the primary purchaser for  
the group. From June 14 to June 29, the 230 account spent $212,355 acquiring  
Page 31  
Trading volumes and share price for June 2000  
[115] During the month of June, 157,200 shares crossed the Exchange. Suspect  
accounts7 purchased 57.7% of the total shares. Together with the Enervision  
purchases, the total spent was $611,480. In terms of the share price, the stock  
closed on June 1 at $6.70. In the weeks that followed, it traded between $6.40 and  
$7.50, closing at $6.95 on June 30, 2000.  
[116] Despite the BMO NB deadline of June 30 to clear the margin loans on the  
accounts of Calvin Wadden and Ray Courtney, neither sold any shares during the  
month of June. The Crown says this is because Shirley Locke and Eric Richards  
were working with the defendants to avoid putting sell-side pressure on the stock.  
BMO NB continues to push for margin loans to be paid off  
[117] In early July, Risk Management at BMO NB was still pushing to have  
Calvin Wadden and Ray Courtney clear their margin debts of $2.3 million. Carole  
Cushing managed to hold them off with assurances that the clients planned to  
deposit $1 million which would reduce the loan to $1.3 million. She asked for a  
one-month extension to pay off the rest. According to Ms. Cushing, the $1 million  
was going to come from KHI, and the company would decide during the following  
week’s Board meeting whether it would put the money directly into the accounts or  
set up a guarantor account with $1 million. She said the clients and company were  
aware that a failure to provide the funds would result in a margin call. Charyl  
Galpin told Gilles Ouellette that she could support it “as long as we agree that after  
July 31st there will be no more extensions.” Gilles Ouellette agreed.  
[118] In the weeks that followed, Carole Cushing, Eric Richards and Shirley  
Locke exchanged e-mails about the situation, with Ms. Locke advocating on behalf  
of Mr. Wadden and Mr. Courtney. On July 10, she wrote the following to Carole  
I actually believe that allowing no margin on this is actually not very fair as well.  
I think that they should at least allow something. This doesn't mean we don't  
follow the second route of having the third party but I can well understand why  
the client would feel a bit hard done by.  
The $1 million deposit by KHI never materialized.  
7Clarke joint account, 540 account, Blois Colpitts, Enervision and 230 account.  
Page 32  
Craig Dunham wants to sell  
[119] According to a series of e-mails sent in July, an agreement had previously  
been reached between Craig Dunham and KHI that if he decided to leave the  
company, all of his shares would be delivered to him by June 30, 2000, rather than  
released from escrow in stages over a five-year period. On July 28, 2000, Mr.  
Dunham contacted Blois Colpitts and explained that he had been trying to get his  
shares handed over since June 30, and that he had planned his new home  
construction around the shares being delivered at that time. The Crown says that  
the reason for the delay in getting Mr. Dunham his shares was that the defendants  
did not want him to start selling before the Barthe deal closed.  
Calvin Wadden goes “off the rails”, retains a lawyer  
[120] In July 2000, the relationship between Calvin Wadden and KHI imploded.  
Harold Greenwood, a former employee of KHI and a friend of Mr. Wadden,  
testified that at some point, likely in June 2000, Mr. Wadden told him he wanted to  
divest his shares and sever his relationship with KHI. Mr. Wadden told him he  
was becoming frustrated with the direction of the company and with his inability to  
sell the stock. Mr. Wadden asked Mr. Greenwood to help him, as a friend, to  
approach Dan Potter about what could be done to sell his shares. When asked  
whether he told Mr. Wadden to simply go to the market and put in an order to sell,  
Mr. Greenwood said they discussed it but Mr. Wadden said he was experiencing  
some difficulty having his orders executed.  
[121] Hal Greenwood testified that one of the first things they did was contact Mr.  
Potter to see if he could help them understand why there was a problem with  
selling shares. He said there were a number of discussions with Mr. Potter as to  
what could and could not be done with the shares and that at one point, Mr. Potter  
told him that all he had to do to stop Calvin Wadden from selling was to make the  
right phone calls. According to Mr. Greenwood, he and Mr. Wadden eventually  
decided to hire a lawyer. Dan Potter did not cross-examine Mr. Greenwood on his  
[122] On July 17, Brian MacLellan, a lawyer at Merrick Holm, e-mailed Calvin  
Wadden confirming his retainer and instructions to enter an agreement to sell Mr.  
Wadden’s KHI shares on the TSX. Mr. MacLellan e-mailed Blois Colpitts the  
same day and the two lawyers began drafting term sheets for the purchase of Mr.  
Wadden’s shares. As the term sheets evolved, the purchaser was identified as  
Starr’s Point Capital Incorporated, a holding company owned by Dan Potter. The  
Page 33  
term sheet also contemplated the return to Calvin Wadden of the 100,000 shares he  
had loaned to Bruce Clarke’s 540 account. On July 20, 2000, Mr. MacLellan  
wrote to Bruce Clarke at NBFL requesting the return of the 100,000 shares. He  
noted that Calvin Wadden had made similar requests on July 14 and July 17.  
[123] While Mr. MacLellan was negotiating with Mr. Colpitts, he received a letter  
from Michael Meredith, counsel for BMO NB, informing him that BMO NB was  
not willing to extend the liquidation deadline beyond July 31, 2000 and would  
commence liquidation of Calvin Wadden’s KHI holdings on August 1, 2000.  
Bruce Clarke starts buying with the Union account  
[124] In July 2000, Bruce Clarke purchased KHI shares with an account associated  
with the Local 83 and 1392 Welfare Plan Trust Fund (the “Union account”).  
Locals 83 and 1392 were two Nova Scotia unions affiliated with the United  
Brotherhood of Carpenters and Joiners of America. The revenue generated from  
the investment account was used to provide benefits to union members. Bruce  
Clarke had been the investment advisor for the Union account since the 1980s.  
[125] The Union account was a discretionary trading account subject to a  
statement of investment policies that was reviewed and approved by the Board of  
Trustees. The Court heard evidence that the Board had approved a portfolio  
consisting of 10% cash, 30% equities and 60% fixed income, and that the  
investment advisor for the account would be expected to take positions in  
Canadian securities that would provide a reasonable return with only a moderate  
risk. Allan Rodgers, former Trustee for the Local 83 and 1392 Welfare Plan Trust  
Fund, testified that the Board of Trustees would not have allowed Mr. Clarke to  
purchase speculative education technology stocks. Langley Evans discussed the  
Union account trading in his report at para. 113:  
The Union Local 73 and 1392 Carpenters Welfare Plan had a brokerage account  
with NBFL (the Union account) for several years. Clarke was the broker for this  
account and discretionary control over the account. This client appears to have  
relied entirely on Clarke’s advice. This client account fits the profile of an  
account that could be used to “park” stock.  
[126] From July 24 to July 26, Bruce Clarke used the Union account to purchase  
$30,335 worth of KHI stock.  
Negotiations with Derek Banks  
Page 34  
[127] While all of this was going on, a potential solution to the Calvin Wadden  
and Ray Courtney margin loan problem emerged in the form of an investor named  
Derek Banks. Mr. Banks was the owner of a company called Plastics Maritime  
that he sold in 1997, after which he became a client of Shirley Locke.  
[128] After selling his business, Derek Banks did some of his own investing. He  
testified that he first came into contact with Shirley Locke in 1998, not long after  
he sold his business. She recommended that he invest in the KHLP, which he did  
on December 1, 1999. About six months later, he heard from Shirley Locke again  
in relation to a potential investment opportunity. Ms. Locke told him that there  
were two employee investors at KHI who were having financial problems. She  
said these individuals, Ray Courtney and Calvin Wadden, had sold their businesses  
to KHI and then spent too much money, taking out margin loans with BMO that  
were now being called. He explained that the suggested investment was a $2  
million loan with interest, plus a fee in the form of KHI shares.  
[129] After speaking to Shirley Locke, Derek Banks was contacted by Blois  
Colpitts. They discussed the investment and Mr. Banks then conducted his own  
research into the company. After determining that BMO would not accept KHI as  
security, Mr. Banks told Mr. Colpitts that he was not interested in the deal. Shirley  
Locke called him again soon with another alternative -- purchasing $2 million  
worth of shares directly from Calvin Wadden and Ray Courtney. Mr. Banks said  
he was not interested in spending that much, but that he might consider $1 million.  
He then contacted Mr. Colpitts again.  
[130] Following several meetings with Dan Potter, Gerard McInnis and Jack  
Sullivan, Mr. Banks agreed, in negotiations with Blois Colpitts, to purchase $1  
million worth of shares from Ray Courtney and Calvin Wadden with an option8 to  
purchase more shares from them if he wished. Mr. Banks further testified that  
Shirley Locke was very involved in the negotiations, constantly asking how things  
were going and encouraging him to make the investment.  
Trading volumes and share price for June 2000  
8Options give the optionee the right, but not the obligation, to purchase shares at a particular price within a particular  
time frame.  
Page 35  
[131] In July 2000, 98,075 KHI shares crossed the Exchange. Suspect accounts9  
were active purchasers, spending over $300,000. From early July until the end of  
the month, the stock price ranged from $6.30 to $6.90, frequently trading between  
$6.60 and $6.75. On July 31, the 540 account and the Clarke joint account bought  
every share on the market and trading closed at $6.70.  
The Banks transaction goes ahead, with one change  
[132] Derek Banks testified that right up until he made his purchase, he understood  
that he would be buying his shares from Calvin Wadden and Ray Courtney in a  
private sale. On the day of the closing, however, he spoke with Blois Colpitts who  
told him that the deal would instead be done on the Exchange through BMO NB  
and that the shares would be coming from Dan Potter’s pension fund. When Mr.  
Banks asked why, he was told that it would be easier for Dan Potter to resolve Mr.  
Wadden’s and Mr. Courtney’s financial problems.  
[133] The Sales Terms prepared for the deal indicated that on August 3, 2000,  
Plastics Maritime Limited would purchase 156,250 common shares of KHI at a  
price of $6.40 per share, for a total of $1 million. Mr. Banks would also be entitled  
to options on 210,000 common shares at an exercise price of $3.50.  
[134] In the days leading up to the Banks transaction, the 540 account was a very  
active buyer. On July 31, the 540 and the Clarke joint account bought every share  
that was sold. On August 1, the 540 and the Clarke joint account were the only  
purchasers, other than the market maker10 who picked up an odd lot of 105 shares.  
On August 2, the 540 bought 3,700 out of 5,700 shares. The Crown says this  
buying activity was intended to keep the price up before the deal closed. The  
Banks transaction took place on August 3, with Mr. Banks, through his Plastics  
Maritime account, purchasing 156,250 shares of KHI from Dan Potter’s RRSP.  
Dan Potter goes on a buying spree  
[135] With $1 million from Derek Banks, Dan Potter went on a spending spree  
buying up KHI shares. From August 4 to August 18, he purchased 143,800 shares  
of KHI. Many of these purchases were from suspect accounts. Mr. Potter also  
9Clarke joint account, 540 account, 230 account, Meg Research, Union account and  
10The “market maker” is a concept that will be discussed in greater detail later. For now, it will suffice to say that  
the market maker is an individual appointed and regulated by the Toronto Stock Exchange who is responsible for  
supporting an orderly market for the stock.  
Page 36  
purchased several thousand shares from the BMO NB Error Account run by Bruce  
Ewing, the trader assigned to liquidate the Wadden/Courtney shares. Almost all of  
Mr. Potter’s purchases were at prices higher than the $6.40 paid by Mr. Banks,  
with the highest price being $6.75 per share. Langley Evans said the following at  
paras. 128 and 129 of his report about Dan Potter’s purchases during this period:  
The transactions from August 4 to 18 show a very high level of coordination in  
trading among the Group accounts. The Potter RSP redistributes the $1 million  
proceeds received from the Banks transaction by making market purchases of  
KHI shares from other Group accounts including:  
$300,000 from Courtney  
$50,000 from Wadden  
$168,000 from the 540 account  
$100,000 from Colpitts  
The Group accounts eventually benefit from about two-thirds of the proceeds  
from Banks purchases. The money received by the 540 account and Colpitts  
accounts is timely because both are at or near their margin limits at the time of  
these transactions. The rest of proceeds are used by Potter’s RSP account to  
support the KHI market. The transactions among the Group accounts have the  
appearance of pre-arranged trading, and give a misleading appearance as to the  
strength of the market during this period.  
Barthe term sheet is executed  
[136] A term sheet dated August 4, 2000 was signed by both Dan Potter and Ben  
Barthe. Mr. Barthe agreed to purchase 250,000 common shares of KHI from Dan  
Potter or his designates on the TSX at a price of $6.80 per share, and would receive  
options on 150,000 common shares at $4.00 per share, for a total purchase price of  
$1.7 million. The trade date to be “no later than August 31, 2000.” This was a  
significant change from the treasury purchase that Ben Barthe had initially  
requested. Diverting this investment to the market meant that the $1.7 million  
would go to Mr. Potter and not into the company to fund its operations.  
Blois Colpitts drafts a letter for the 540 account  
[137] Having received no response from Bruce Clarke to his earlier inquiry, Brian  
MacLellan sent a letter on August 2, 2000, to Eric Hicks, the Branch Manager of  
the NBFL’s Halifax branch, in relation to the return of Mr. Wadden’s 100,000  
shares. Mr. MacLellan testified that two days later he spoke with Blois Colpitts  
Page 37  
who told him that National Bank had referred the issue to its legal counsel, who  
would respond. Also on August 4, Blois Colpitts sent an e-mail with the subject  
“2317540 Nova Scotia Limited” to Bruce Clarke, copied to Dan Potter:  
here is the letter to send this morning:  
2317540 Nova Scotia Limited  
August 4, 2000  
Mr. Brian MacLellan, Q.C.  
Dear Mr. MacLellan,  
RE: Calvin Wadden Knowledge House Inc. 100,000 Common Share  
Further to your letter of July 20, 2000 to Bruce Clarke and August 3, 2000 to Eric  
Hicks at National Bank Financial Inc., we are writing by way of response.  
We had not responded earlier as 2317540 Nova Scotia Limited had understood  
that you were in discussions for your client which may have led to substituted  
security being generated.  
As you may be aware the certificate reference in your letter was deposited by your  
client as security for the margin account of 2317540 Nova Scotia Limited to  
facilitate market purchasing for the account of 2317540 Nova Scotia Limited.  
This certificate is not connected to your clients’ margin account at National Bank  
Financial Inc. and it can only be released when the account can be liquidated or  
when substitute security is provided.  
This was a private transaction between 2317540 Nova Scotia Limited and is not  
connected to his dealings with National Bank Financial Inc.  
Yours truly,  
BY: Bruce Clarke, President  
BC/cc: Eric Hicks, National Bank Financial Inc.  
Page 38  
Bruce Clarke sent an identical letter to Brian MacLellan later that day.  
[138] Brian MacLellan was shown the e-mail from Blois Colpitts to Bruce Clarke  
while he was on the stand. He testified that he was not aware that the letter he  
received was prepared by Mr. Colpitts, not Mr. Clarke.  
Ken MacLeod starts to buy  
[139] In August 2000, Ken MacLeod opened a margin account with NBFL called On August 17, he e-mailed Bruce Clarke, authorizing him to  
purchase up to 40,000 shares of KHI “[t]o give you a bit of breathing room on  
damage control.” He e-mailed Clarke again the next day, authorizing another  
20,000 to 25,000 shares. From August 17 to August 23, the account  
bought 64,000 shares at a cost of $410,710.  
[140] The Crown says the timing Mr. MacLeod’s buying was deliberate. With the  
Barthe investment deal soon to close and Dan Potter’s $1 million almost  
exhausted, Mr. MacLeod had to take over buying for the group in order to keep the  
price up.  
High closing pattern begins  
[141] On Friday, August 18, at 15:58:41, less than two minutes before trading  
closed, Dan Potter bought shares from AI Enterprises, a company belonging to  
Bernard Schelew’s brother and father. This trade raised the share price from $6.30  
to $6.40, where it closed. The next trading day, August 21,  
purchased shares at 15:44:25 that raised the price from $6.35 to $6.50, where it  
closed. On August 22, at 15:58:40, less than two minutes before the end of  
trading, bought shares from AI Enterprises that raised the share  
price from $6.30 to $6.50, where it closed. Finally, on August 23, at 15:58:50,  
Bruce Clarke bought 10,000 shares from AI Enterprises, raising the share price  
from $6.25 to $6.45, where it closed. The Crown says these transactions were no  
coincidence. Langley Evans wrote at paras. 131 and 132 of his report:  
High-closing transactions by Group accounts become a pattern with occurrences  
on August 18, 21, 22 and 23. These high close transactions occur in four  
consecutive trading sessions and coincide with final discussions with Barthe on  
his eventual market purchases. I am of the opinion that these high closes were not  
a coincidence, and these trades appear to be deliberately setting the stage for the  
large purchases that follow.  
Page 39  
In my opinion, the market price of KHI shares would have been significantly  
lower by August 25, 2000 without the intervention of Group in KHI market  
during this period. … This activity contributed to an artificially high price for  
KHI and a misleading appearance of the strength of the market for KHI shares.  
Absent this activity, in my opinion, the KHI trading price would have been  
significantly lower.  
Fiona Imrie’s account helps Clarke buy during the blackout period and Barthe  
purchases begin  
[142] From August 18 to August 25, 2000, KHI insiders were in possession of not-  
yet-public information about the company and were in a blackout period.  
According to the Crown’s theory, with KHI insiders unable to trade and the 540  
account near its margin limits, the defendants had to find a way to keep buying the  
stock. Their solution involved a series of transactions between Bruce Clarke’s  
personal account and the account of Fiona Imrie, Dan Potter’s wife. First, a  
Province of Nova Scotia bond was sold out of Ms. Imrie’s RRSP account,  
generating $223,920. Those funds were used to buy a block of 204,000 Anitech  
shares for $1.40 per share from Bruce Clarke. Mr. Clarke then used the cash from  
the Anitech sale ($282,743.40) to go on a KHI buying spree, spending $283,360  
between August 23 and August 28, the day before the Barthe investment.  
[143] Although the term sheet contemplated a purchase by Ben Barthe of 250,000  
common shares from Dan Potter at $6.80 per share, that is not what happened.  
Instead, Mr. Barthe’s money was used to buy shares from many different sellers on  
the TSX from August 29 to September 7. Over 85% of the proceeds were directed  
to accounts belonging to alleged unindicted co-conspirators like Ray Courtney,  
Steve Wilsack and Craig Dunham, who, according to the Crown, were being  
rewarded by Dan Potter for having complied with his instructions to wait until the  
fall to sell stock.  
[144] Blois Colpitts sold 73,300 shares to Mr. Barthe, but not before purchasing  
43,300 from Mr. Clarke. The Crown points out that Bruce Clarke could not sell  
directly to Mr. Barthe without obtaining his consent (due to Clarke’s position as a  
pro trader), so he sold instead to Mr. Colpitts, who could then sell to Mr. Barthe.  
This sale to Mr. Colpitts generated cash that Mr. Clarke then used to buy back the  
Page 40  
204,000 Anitech shares from Fiona Imrie’s account for $287,640, resulting in a  
profit to her account of several thousand dollars.  
[145] Also included among the lucky participants in the Barthe deal was Calvin  
Wadden, who had reconciled with Dan Potter on or around August 24. On August  
29, Mr. Wadden’s wife’s account sold 27,600 shares to Ben Barthe at $6.55 per  
share ($180,780). The next day, Bruce Clarke finally returned the remaining  
100,000 shares that Mr. Wadden had loaned to the 540 account in March, despite  
having refused to return them only weeks earlier when contacted by Mr. Wadden’s  
counsel. The 100,000 shares were actually transferred from the account of Ken  
[146] Langley Evans commented on the significance of the change from treasury  
to market purchases at para. 139 of his report:  
I find it significant that the Potter-led negotiations with Barthe and others directed  
the purchases to the marketplace where the Group accounts directly benefited  
from the proceeds. It would have been entirely feasible for these monies to be  
directed to a private placement of KHI treasury shares, where KHI could have  
used the funds to run the company. The choice of directing new investment  
towards market trading and price support instead of financing KHI was later  
acknowledged by Potter as a mistake in his January 15, 2001 memo to the KHI  
Trading volumes and share price for August 2000  
[147] The stock closed on August 1 at $6.60. For the rest of the month, the stock  
traded in the range of $6.00 to $6.80, closing on August 31 at $6.65. In total,  
718,811 shares crossed the Exchange in August. After removing 465,250 shares  
representing large prearranged transactions rather than true retail trade, the total  
volume of shares was 253,561. Of that, the suspect accounts purchased 221,500  
(87.4%), spending over $1.4 million. Out of 22 trade days, suspect accounts were  
involved in five alleged high closes.  
David Fountain invests  
[148] David Fountain is a private investor and well-known Halifax philanthropist.  
In the summer of 2000, he decided to invest in KHI through a purchase on the open  
market. Mr. Fountain testified that he contacted his broker, Tom Purves, and told  
him he wanted to invest a specific dollar amount. On September 7, 2000, Mr.  
Page 41  
Fountain’s investment company, Longwood Investments, purchased 300,000  
shares 150,000 from the 540 account and 150,000 from Knowledge House New,  
at $6.65 per share, for a total investment of just under $2 million. Mr. Fountain  
testified that he did not know who he was purchasing the stock from, he simply  
had his broker place the order on the market.  
Trade volumes and share price for September 2000  
[149] During the month of September 2000, 531,516 KHI shares crossed the  
Exchange. With the 540 account reducing its margin loan by more than $900,000  
through the Fountain sale, it re-entered the market as a heavy purchaser, spending  
$462,030. Despite pressure from BMO NB to clear his margin loans, Calvin  
Wadden bought 10,000 shares at $6.40 per share. The Union account spent  
[150] Also during September, suspect accounts were involved in alleged high  
closes on eight out of 20 days (40%). The Crown says these high closes were  
intended to keep the stock price up while Dan Potter was negotiating a $3.25  
million private placement by Ben Barthe and his friend, Dr. Lutz Ristow.  
The Barthe/Ristow deal takes shape and Dr. Schelew wants to sell  
[151] On October 22, 2000, Dan Potter e-mailed Gerard McInnis and others,  
copied to Blois Colpitts and Jack Sullivan, setting out the terms for a private  
placement of common shares from treasury agreed to by Dr. Lutz Ristow and Ben  
Barthe. The e-mail indicated that Dr. Ristow and Mr. Barthe agreed to purchase  
500,000 common shares from treasury at $6.50 per share ($3.25 million). They  
would also receive a warrant on 500,000 additional shares at $6.50 per share.  
Payment would be made in four installments of $812,500 occurring on November  
15, 2000, February 15, 2001, May 15, 2001, and August 15, 2001. Potter further  
Although it wasn't absolutely confirmed, the clear understanding was the [sic]  
Lutz/Barthe would open an account with Bruce Clarke at NBF in which to  
purchase and hold the shares.  
Page 42  
[152] Dr. Lutz Ristow testified that when he and Mr. Barthe first met with Dan  
Potter, Mr. Potter wanted them to buy existing shares, but Dr. Ristow refused. He  
explained that he only invests in treasury shares so that his money goes to the  
company, rather than into the pockets of existing shareholders.  
[153] With negotiations ongoing with the Germans, Bernard Schelew e-mailed  
Dan Potter, Gerard McInnis, Blois Colpitts, David Mack, and Bruce Clarke on  
October 28, 2000 with the subject, “Share Liquidation Strategy+Plan”. In the e-  
mail, Dr. Schelew explained that he had decided to personally finance Handsmiths,  
his new company, and, to that end, he intended to sell over 1.3 million KHI shares.  
He said he would sell the shares in a block at $6.00 per share and would actively  
seek private and institutional investors. He attached a letter he intended to send to  
institutional investors advising of his desire to sell. Dr. Schelew added that from  
November 2000 to March 2001, he intended to sell 10,000 shares per week, “so  
long as it does not put too much downward pressure on the stock.”  
[154] Dan Potter responded on October 30 indicating that he and Dr. Schelew had  
spoken that day and had agreed that KHI management would take on the job of  
finding a buyer for Schelew’s shares rather than him sending out a letter.  
Trading volumes and share price for October 2000  
[155] During October 2000, 147,921 KHI shares crossed the Exchange. The 540  
account, the only suspect account buying, was very active, spending $641,447 to  
purchase 63.4% of the total shares traded. The stock opened on October 2 at  
$6.70 and closed at $7.00. For the rest of the month, the stock traded between  
$6.50 (the price offered to the German investors) and $7.10.  
[156] With the Barthe/Ristow deal set to close in November, the high closing  
pattern increased in October. On 12 out of 21 trading days (57%), suspect  
accounts were involved in alleged high closes.  
Pressure from all sides  
[157] November 2000 was a very busy month for KHI. On November 5, Gerard  
McInnis e-mailed Dan Potter about a number of finance-related matters, with the  
subject “Wise Counsel required”. In the e-mail, Mr. McInnis queried whether the  
German investors should be offered options with their shares instead of warrants in  
order to address the seller overhang. He also pointed out that Blois Colpitts was  
concerned about the optics of using warrants as incentives on the treasury deal,  
Page 43  
writing, “concern is that need for the warrants indicates current trading price is too  
[158] At this point in late 2000, a deal was in the works wherein McKenzie  
College would acquire CD-Ed from KHI while KHI acquired shares in McKenzie  
College. Gerard McInnis wrote, in part:  
Blois says "he will not approve" the deal as contemplated. Thinks if we give them  
KHI shares … the shares will need to be escrowed. This was not contemplated in  
the agreement we made with McK when they approved the deal. I understand the  
problem of having KHI shares come to market as we need to eat them.  
[159] On November 13, 2000, Bruce Clarke e-mailed Dan Potter to advise that his  
accounts at NBFL had gone under margin by $20,000 and they needed to talk  
about it before head office called Mr. Clarke the next morning. At this point, even  
small fluctuations in the stock price had significant consequences for Dan Potter  
and others holding large concentrations of KHI. To avoid a margin call, Dan  
Potter sold several bonds from his account the next morning.  
[160] Adding to his problems, Dan Potter received an e-mail from Calvin Wadden  
informing him that Steve Tsimiklis, a KHI shareholder, “would like to have some  
type of proposal for liquidity.” Mr. Potter indicated that there was no liquidity  
solution at the moment, adding:  
As you know, we are closing on a $3,250,000 treasury issue to our German  
friends- we are hoping to get this completed (closed) on Mon. or Tues. (Nov. 20  
or 21). The price of this issue is $6.50 per share. If the market is driven down in  
advance of this issue it is quite likely that the investors will not close. This would  
be most harmful for the company and all of its shareholders, including Steve.  
Hopefully, he can be convinced to proceed with care, prudence and caution.  
[161] One week later, having gotten no traction with his earlier e-mail advising of  
his intention to sell 10,000 shares per week, Bernard Schelew wrote to David Mack  
and Bruce Clarke, with a copy to Dan Potter:  
During the month of November, I note that 161,800 shares of KHI have been sold  
for a total transactional value of $1,061,105. I also note that during the month of  
November, 0 shares of my KHI have been sold.  
Starting Monday, November 27th, I instruct you to sell 10,000 shares/week from  
my non-RRSP account. You can arrange this sale anyway you see fit during the  
Page 44  
week. I must also tell you that there will be no leaway [sic] given with these  
instructions. If you get behind by 1 week, I will have no choice but to move the  
shares to another brokerage house.  
Sorry about this but that’s the way it is. My situation is getting very tight.  
The same day, Dan Potter forwarded Dr. Schelew’s e-mail to Blois Colpitts, and  
wrote, “We need to talk about this! Unbelievable!”  
[162] On November 24, Dr. Schelew e-mailed Mr. Potter, attaching a spreadsheet  
detailing all KHI sales from January 1 onward. He wrote, “Of the $33 million KHI  
share $ value transacted, could you tell me the $ value of shares sold by insiders,  
i.e., Calvin, Ray, Ken, Donnie?”  
[163] The Crown says that in the e-mails that follow, Dan Potter “pulled back the  
curtain” on the conspiracy and revealed to Schelew that, contrary to what the  
trading volumes suggest, there was no retail demand for the stock. The market  
activity wasn’t real; it was a product of the conspirators’ efforts. The Crown  
argues that this Court could find a conspiracy on the basis of these e-mails alone.  
[164] The first e-mail was sent by Dan Potter to Dr. Schelew on November 24,  
2000, with a copy to David Mack. He set out all of the purchases and sales by KHI  
insiders since January 11, 2000, noting that only Donnie Snow had been a net  
seller. He then advised Dr. Schelew:  
In my opinion you should either be buying or supporting the buying of shares in  
the coming week and beyond. If you insist on selling shares (without having the  
buy-side arranged) as you have previously indicated, then I'd say all of our good  
work in attracting investors over the last several months may well prove to have  
been in vain. Now, more than ever, we need to work co-operatively to protect the  
interests of KHI shareholders, including you and the people you have brought into  
the company over the years. In this regard, I should add that Steve T warned us  
that he has to sell 50,000 shares by Dec. 1.  
I want to also say that I fully appreciate the pressure you are under to support and  
fund Handsmiths - I sincerely feel your pain in this area.  
I hope common sense and enlightened self-interest prevails.  
[165] Bernard Schelew responded on the same day, noting that according to Mr.  
Potter’s numbers, the net value of KHI shares bought by insiders or long-term  
investors was approximately $12 million. He asked, “Is it correct to say that this  
$12,000,000 was used to support the stock from unknown street sellers?” Before  
Dan Potter could respond, Dr. Schelew e-mailed him again. He expressed his  
Page 45  
belief that KHI was “fundamentally strong” and would “prove its business model  
over the next 12 months.” He wrote that “the selling pressure on the stock was  
temporary” and that Mr. Potter had “done a super job of eliminating this downward  
pressure.” He pointed out that Mr. Potter had been aware of his interest to sell  
since the summer, but that none of his shares had been sold, with Mr. Potter telling  
him to take his turn in the queue and that “the squeaky wheel gets the grease” and  
so on. Dr. Schelew went on to note:  
4. Although Handsmiths has a much less certain future than Knowledge House, I  
am prepared to bridge finance the company (to the tune of $2 million) thinking  
that by the second or third quarter I can bring outside investors in. The cash I need  
is for survival. I believe in my story enough to back it.  
5. Although Knowledge House has a much more certain future, you have  
indicated to me that my 10,000 shares/week will be the straw the [sic] breaks the  
camel's back and the stock could fall dramatically. This indicates to me that,  
although the board and management fully believe that the situation is temporary,  
further investment in KHI to support the stock (we're not talking survival here) is  
too risky for them. Fair enough. It is too risky for me! Everyone has their limits.  
So lets continue with the plan to sell 10,000 shares/week as outlined. I'll continue  
to work with you to incent the sale of a large block.  
[166] Dan Potter responded on November 25, with a copy to David Mack and  
Bruce Clarke, writing in part:  
Your analysis that leads you to the conclusion that you or any other major, non-  
retail KHI shareholder can achieve liquidity next week in [sic] completely wrong-  
there is NO WAY that can happen. You have seen the stock trade down to $6.00  
in the last several sessions. There is at least 30,000 shares of pressure on the  
market as of Friday PM, not including Steve T's 50,000 to come next week. You  
directors" cannot and will not be magically buying. You need to understand and  
believe this fundamental truth -there currently is no buying power in the KHI  
network. There can be again, if we are given the chance and support to go out a  
find more investors - but there is none now!  
As I mentioned to you before by telephone, it is most unfortunate that you have  
seen fit to include Bruce Clarke [sic] your communications re liquidity. It only  
serves to put more pressure of [sic] him - a person who has undertaken huge  
personal risks to invest in the company. It is grossly unfair to him, grossly unfair  
and I must say it is very upsetting to me to see you continue to include him in this  
Page 46  
I'm sure that it's somewhat true that "desperate people do desperate things". But I  
[sic] will be a sad irony if, in your desperation, to support Handsmiths, you, in  
fact, destroy the real source of your own financial well-being- your KHI shares!  
I'll continue to do my best to run the company in the interests of all shareholders  
as long as I have the support of the "founding" shareholders with the biggest  
stakes, but, if and when that cracks, all bets are off.  
I'm going to send an email (by noon tomorrow- Sunday) outlining the situation  
and my recommended action to each of the major shareholders with "founders  
shares" -you, Calvin, Ray and Ken with a recommended joint plan for cooperative  
action to support and protect the KHI stock over the coming weeks while we are  
bringing in more new investors. I strongly recommend that you keep an open  
mind to my recommended plan of action.  
If the major shareholders who have liquidity needs don't realize that this is not the  
moment for demanding liquidity, but rather the moment for coming to the aid of  
the company, then tens of millions of dollars in shareholder value will, I'm sure,  
be lost, including the value of each of such major shareholders. If cool heads  
prevail, we'll have future liquidity events for all- if there is no co-operation and  
concerted supportive action now, there will be no such future events.  
All of which is put to you with the utmost respect and in what I sincerely regard  
to be your own interests.  
[167] Blois Colpitts, who had obviously received a copy of the e-mails, was  
irritated by a comment from Dr. Schelew that Colpitts had netted out $50,000. He  
wrote to Dan Potter on November 26:  
Can you make sure that Bernie understands that my sales (aside from the  
$150,000 swap for Solutioninc) was relieving the margin pressure incurred in (i)  
exercising options to put money into the company- $250,000; and (ii) buying  
shares on margin to support the market- nearly $800,000 in total.  
He should also understand that some of the trades he totals included moving KHI  
shares into my wife's RRSP, kid's RESPs and my mother's RRSP to relieve some  
of the margin pressure. It is still there as you know.  
He should also understand that sales made were in conjunction with Barthe,  
Banks (not Fountain) that I spent the whole summer working on - to the exclusion  
of any vacation with the kids.  
He wrote again that day, “I also forgot my $200,000 of LP units – he wouldn’t  
even participate.”  
The best of times, worst of times  
Page 47  
[168] On November 26, Dan Potter made good on his statement to Dr. Schelew  
and prepared an e-mail outlining his recommended plan of joint action. He sent  
the following e-mail to Ray Courtney, Ken MacLeod, Calvin Wadden and Bernard  
Schelew, with the subject, “Major Shareholder Co-operation and Help needed to  
Support KHI. Due to the importance of this e-mail to the Crown’s case, it is  
reproduced in full below:  
I am putting the situation below to the 4 of you because together the 5 of us  
represent the major "founding" shareholders of KHI. I am not including those  
who have purchased major blocks over the past several months for the simple  
reason that they bought as investors and do not expect to be leaned on for every  
need of the company. To do this would only alienate them at this time.  
It [sic] the best of times and the worst of times.  
The best of times, because the company is entering a phase in its development and  
growth where substantial, high potential and valuable products are being brought  
to market: the GB, the KEY Certification program, Smarter Teams, Leadership  
Online, etc. With any luck at all, by the end of Q1 2001, we can expect most of  
these to have been bought in significant ways in corporate, education and  
government markets.  
The worst of times, because notwithstanding our success in bringing over $9  
million in new investment to the company (about $4.5 million to each of the  
market and the treasury) since July the most [sic] one of the most difficult stock  
market environments for small cap companies in over 10 years, the current retail  
market for KHI shares (like most other small caps) is almost non-existent. We  
have to go out and work hard every day just to generate enough demand to meet  
retail sellers. In fact, our sources of buying currently are exhausted. We need  
some more new investment.  
We have good potential - one fellow, Doug Rudolph, an accountant and financial  
advisor, who Ray brought to the table, believes he can place between 200,000 and  
300,000 shares over the next 2 to 3 months. He needs an option incentive program  
to do this on our behalf. Also, a friend of mine who just sold his stake in his  
education company in Atlanta for $35 million US is coming to CCEM this week  
to talk about a deal to become involved in KHI. Further, our Canaccord friend,  
Ron Sedran, is coming to Hfx this week as well to see us - as the market improves  
and we get our products out over the next couple of months, will be in a good  
position to be able to access Bay St. involvement and support as well.  
In the meantime, however, there is significant pressure on the market. As you  
have seen there has been increasing retail selling over the last couple of weeks.  
This is [sic] driven the price down and has exhausted buying support. Bruce Clark  
[sic] now owns over 265,000 shares and is fully leveraged. As of Friday  
Page 48  
afternoon, there was up to 30,000 shares on the ask side on the market. Further,  
Steve Tsmikilis, who still owns over 150,000 shares (we placed 50,000 of his with  
Barthe in Aug.) has advised that he needs to sell 50,000 more by Dec. 1 to finance  
a real estate project. He has been good about communicating his situation, but I  
have now [sic] doubt that he will start putting shares in the market soon. In fact,  
he started several days ago until Calvin personally bought 10,000 shares from him  
and convinced him to stop and work with us.  
We all know that each of us is highly leveraged. Ken has bought over 135,000 on  
margin since Aug. 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. 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, there  
will be no liquidity opportunities for any of us worth having.  
In the short term, I propose that:  
We each agree to buy 10,000 of Steve T's shares this coming week.  
Bernard lend 100,000 shares to Bruce Clarke's company for an interim period. I'd  
ask that Ray agree to put 100,000 shares with Bruce to replace Bernard's as soon  
as he (with our help) can get BMO Nesbitt Burns to release 100,000 from his  
margin arrangements at that brokerage. For information, I have already provided  
Bruce with 120,000 shares months ago plus $100,000 in cash, which he still has  
and Ken has provided 100,000 shares which he still has. Calvin had provided  
100,000 shares before Ken for several months.  
That we each agee [sic] to write options on 30,000 of our shares for 4 years at  
$6.50 (for a total of 150,000) to provide a package to Doug Rudolph. In fact, the  
options would be nominally for 2 years, renewable for another 2 provided the  
shares had a market value at that time of at least $9,00 [sic] per share. This is a  
feature to keep him from being forced to sell the shares to pay for the option price  
at the end of two year [sic]. He requested it and I think it's a good idea. The  
understanding would be here that he would find a buyer for 2 shares for each  
share optioned to him- in other words, for 150,000 options, he would have to  
place 300,000 shares. These purchases would support the retail market. For  
information I provided options of 210,000 of my shares at $3.50 for 2 years to  
Banks and on a further 150,000 at $4.00 to Barthe earlier in the year. For  
information, your RRSP can write such options if you have KHI shares in an  
Page 49  
That we agree on a formula for sharing in liquidity opportunities going forward  
and each agree not to sell any otherwise than as arranged under this arrangement.  
In this regard, I committed to Calvin some time ago that he would get the first  
200,000 share liquidity arranged by the company above the needs of the retail  
market. I think we should stick to this and give the next 100,000 to Bernard  
because of his high need and, thereafter we would each have the right to share  
equally over the next period of time- say two years. I'm not talking about any  
formal legal agreements here -just sensible, honorable gentleman's agreement  
among 5 business people with a huge business interest in common working  
together in a fair and straightforward way.  
Unless we do something in a united way like this, 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.  
I'd urge each of you to respond positively to this, bearing in mind that the stakes  
are big and the market will [sic] unforgiving if we are unable to act strongly  
I am going to be extremely busy for the next 3 days with the CCEM. I'd ask that  
each of you respond to this email (copying each of us) as soon as possible. We  
need to be able to give some direction and support to Bruce before the market  
opens on Monday (tomorrow).  
[169] Responses from the group were largely positive. Calvin Wadden agreed to  
buy some of Steve Tsimiklis’s shares, noting that he and Mr. Tsimiklis had agreed  
that “[Tsimiklis] will sell stock on the market unless he can get the 50,000 shares  
he requires by Friday.” Mr. Wadden also recommended an escrow agreement  
preventing the five major shareholders from selling more than 5,000 shares per  
month. Ray Courtney responded that he would provide a 100,000 share certificate  
to Bruce Clarke “to support the market”. Ken MacLeod was also on board.  
Bernard Schelew, on the other hand, was not interested. He explained that both he  
and his company faced “financial meltdown” unless he took action. He maintained  
his direction to David Mack to sell 10,000 shares per week, noting that Mack “can  
sell 2,000/day or whatever. (As you know, KHI trades on average 100,000  
Trading volumes and share price for November 2000  
[170] Trading opened on November 1 at $6.65 and closed at $6.70. Leading up to  
the German investment on November 23, the stock price stayed relatively stable,  
trading in the range of $6.30 to $6.70, but always closing at $6.50 or higher. For  
the rest of the month, the stock dipped slightly, closing several times at $6.40. On  
November 30, the stock closed at $6.45. The Crown says it was no coincidence  
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that the closing price never dropped below $6.50 (the price to be paid by Ristow  
and Barthe) until immediately after the deal closed. Out of 20 trading days,  
suspect accounts were involved in alleged high closes on 13 of them (65%).  
[171] During the month of November, 228,340 shares of KHI crossed the  
Exchange. Suspect accounts11 were very active buyers, spending just over $1  
million and acquiring 77% of the total shares traded.  
Dan Potter tries to manage Bernard Schelew  
[172] On December 1, Bernard Schelew e-mailed Dan Potter requesting that KHI  
purchase 23,000 shares from him in order to assist him to keep his company going.  
He indicated that it “would satisfy Handsmiths [sic] immediate needs and  
encourage me to sign the gentlemans [sic] agreement that we spoke of yesterday.”  
Dan Potter forwarded the message to Blois Colpitts and wrote, “SHIT!” He  
replied to Dr. Schelew on December 3:  
We're backsliding here!  
When we left our 4 hour meeting the other day, you said you were on-side with  
the orderly selling agreement and were going away to see if you could contribute  
50,000 shares. Your request that we "arrange to take [23,000] shares" comes as a  
real surprise after all the discussions we had and agreements we reached during  
our discussion.  
On the strength of the agreement among all 5 major shareholders, Calvin and I  
were able to get Steve Tsmikilis to agree not to sell 50,000 shares in the market,  
but rather wait and work with us! It was crucial to his decision that the major  
shareholders have an agreement only to sell according to an agreed plan. If there  
is in fact no such agreement, he'll bolt for sure!  
All the other major shareholders are on-side with the agreement idea. Please do  
the right thing and work with me on these [sic]. I really need to direct my  
attention to running the company and selling shares to new investors. With your  
help, this can be a big success. Without your co-operation, it can't work.  
By the way, last week I scrounged and (including kids RESPs) and [sic] bought  
13,000 shares. Ken authorized the purchase of 10,000. These are all to support the  
retail market.  
11The 540 account, the Union account,, Clarke Joint account, Calvin Wadden accounts and Daniel  
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[173] The two men continued back and forth, with Dan Potter forwarding an e-  
mail to Blois Colpitts and writing, “He just doesn’t get it! At least we’re talking  
and we’ll get him to the right answer eventually!” But Bernard Schelew persisted,  
writing Dan Potter a lengthy e-mail outlining his interpretation of their discussions  
to date, and proposing what he considered to be a plan that would satisfy the needs  
of both parties. Dan Potter forwarded the e-mail to Blois Colpitts and wrote:  
What a high maintenance fellow he has turned out to be. This is a classic case of  
someone who "just doesn't get it!"  
As much as I hate to bother you on this, it seems clear that we need to work on  
him together. …  
[174] On December 13, Dan Potter sent an e-mail to Bernard Schelew confirming  
that Messrs. Potter, Schelew and Colpitts had met in person and that “all of the  
major shareholders have now reached a deeper mutual understanding of all the  
issues and opportunities presented by our big ownership positions in KHI.” He  
went on to note:  
Ray Courtney is providing 100,000 shares for Bruce’s investment account.  
However, there will be some time lag up to a couple of weeks or so in getting  
this completed, so it would be most helpful if you could provide 50,000 shares to  
Bruce at this time. The logistics of this can be worked out between David and  
Bruce upon your instructions to David. Your prompt attention to this will be  
greatly appreciated.  
KHI decides to wind up the KHLP  
[175] In December 2000, KHI management was considering whether to wind up  
the limited partnership. Under the subscription agreement for the LP units, KHI  
had a call option to acquire the units in exchange for KHI shares. The call option  
did not contain any restrictions on the trade of KHI shares issued in satisfaction of  
the call option price. In other words, once the LP units were converted to shares,  
the unitholders would be free to trade their shares as they wished.  
[176] Gerard McInnis was concerned about the possibility of almost 650,000  
shares coming to market and he recommended that KHI formally escrow the shares  
for a period of twelve months. He suspected that “this will not be totally palatable  
to the unit holders” but “liquidity is an issue right now and it is in their best  
interests and the best interests of all shareholders that these new shares not be  
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immediately freely tradeable.” Dan Potter was initially reluctant to do a formal  
escrow, pointing out that there was a very small group of unitholders and “all can  
be kept on-side informally. The obligation to keep these holders from selling will  
rest with Blois and me.”  
[177] Also on December 12, Gerard McInnis contacted Jim Cruickshank at  
Stewart McKelvey and asked for advice, noting that “it is not entirely clear to me  
where we have the right to impose a restriction on these shares.” Mr. Cruickshank  
responded that “KHI has no right to force the escrow conditions” and that some  
limited partners may refuse to accept the deal. The next day, Blois Colpitts  
suggested that the TSX might consider the wind up to be a private placement and  
impose a six-month hold period. In his view, “that may be a softer way to impose  
a hold period.”  
[178] When it appeared that the TSX would not issue a hold period, KHI  
management decided to impose a six-month contractual hold period on the shares.  
Under the terms of the hold period, the shares could be margined but not sold. The  
decision was made not to have the shares legended, which would alert financial  
institutions who might accept the shares as security that they could not be sold  
until the hold period expired.  
[179] At paras. 157-158 of his report, Langley Evans described the six-month  
trade restriction as “unusual” and “consistent with a manipulative agenda”:  
Imposing trading restrictions at the time of the sale of a security is common. Hold  
periods due to regulatory requirements or as a contractual term of the purchase are  
typical examples. However, imposing these restrictions after the purchase and just  
prior to issuing the shares is unusual. There is no record of putting this change to  
a vote by the unit holders. The exception to allow use of the shares as collateral is  
also unusual.  
These restrictions were consistent with a manipulative agenda in two important  
ways. They keep the shares from being sold for at least 6 months. At the same  
time, the shares can be used as collateral in margin accounts. The Group was  
under financial pressure from extensive margin loans at this time. The depositing  
of these shares would have provided additional equity to the Group’s margin  
accounts and supplied additional potential buying capacity the Group could use  
for supporting KHI’s price.  
[180] At least one unitholder expressed concern and frustration upon learning of  
the hold period on the shares. Ros Aylward, accountant for unitholder David  
Thomas, contacted Gerard McInnis and pointed out that there had been no mention  
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of any restriction in the initial LP subscription agreement. She added that, under  
the terms of the document, if the call option was not exercised until after December  
31, 2000, the unitholders would be entitled to shares equalling 130% of the  
purchase price, and, as such, “it would seem to me that since the call option  
restriction is pushing the liquidity date until 2001, that it is reasonable to expect  
130% be returned.” Dan Potter advised Gerard McInnis to tell Ms. Aylward that  
all other unitholders had agreed to the restriction and that it was a reasonable  
measure given the current market conditions. During her testimony, Ros Aylward  
described herself as “thoroughly unimpressed” with the sales restriction in the call  
notice. When asked what her client, Mr. Thomas, decided to do, she testified as  
I believe at that point it was almost being forced upon us because we were given  
to believe all other unitholders had proceeded in allowing it and we didn’t really  
have much other option.  
[181] Dave Thomas also testified. When asked if he recalled the contractual trade  
restriction, he testified:  
A. Yes, I do. I recall it. I recall a discussion with Ros about it basically. And I  
cannot recall that I had further conversations with anyone from Knowledge  
House, but I certainly recall growling at Ros about it.  
Q. Can you explain why -- why would you be growling at Ros about that?  
A. Well I just felt it was an unreasonable term. And I believe I -- we discussed it  
and Ros was going to inquire further with regard to this clause.  
Q. Prior to learning of this restriction, what were your plans for these shares?  
A. My plan was to sell them. Basically my view was that Knowledge House had  
sort of taken a much broader mandate than they had been given with regard to  
what their plans were and so I just felt that it was probably an investment that we  
should exit at the earliest opportunity. Also it wasn't particularly easy to get  
Mr. Thomas further testified that he was never able to sell the KHI shares in  
relation to the LP and that he had to write off the investment as a loss.  
Steve Wilsack’s settlement letter  
[182] On December 12, Andrew Burke from Stewart McKelvey e-mailed Cate  
MacNutt, Senior Vice-President of Corporate Services at KHI, with a copy to  
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Gerard McInnis, in relation to a settlement letter for Steve Wilsack. It stated, in  
I have not made any further changes to the letter and assume that Gerard will  
insert the "gentleman's agreement" language as he feels is appropriate, given that  
it is intended to be soft/non-legal and he would have a feel for what will sell. I  
understand that you will put the letter on your letterhead and Gerard will bring it  
to closing (which is in your building). Let me know if you would prefer  
[Emphasis added]  
[183] Gerard McInnis then e-mailed Cate MacNutt:  
Cate please tuck this in at the end ..  
re Gentleman's agreement  
Steve, as per your discussions with Dan we understand it [sic] your intention to  
hold your shares as an investment for the time being and otherwise manage your  
account as necessary on advice from your financial advisor, Bruce Clark [sic], at  
National Bank Financial.  
[184] Cate MacNutt prepared the letter to Steve Wilsack the next day, using the  
language suggested by Mr. McInnis in the final paragraph. The Crown says Blois  
Colpitts, in his role as counsel to KHI, later relied on this “soft/non-legal”  
paragraph to threaten Mr. Wilsack with legal action if he sold any shares.  
Dan Potter advises Gerard McInnis to “rag the puck”  
[185] On December 17, Gerard McInnis e-mailed Dan Potter in relation to CD-Ed  
share options:  
We are "sitting on" the Treasury Direction (yet have banked the funds). I am  
getting calls literally 2 an hour about status. I appreciate there is no market for  
their shares but they have legal right to the shares as purchased via exercise of  
their options. Blois has asked that I "lag [sic] the puck" which we have been doing  
but will need to release the direction soon. Any advice  
[186] Mr. Potter replied:  
It’s a hassle, but the longer you can rag the puck the better. Not a great answer.  
I’ll keep thinking.