Strategy

Law: Slow pursuit of knowledge

A seven-year investigation into fraud at a Halifax software company drags on.

It was a high-tech company that sold dreams of fat profits and fast Internet-based learning, but the aftermath of the 2001 collapse of Halifax-based Knowledge House Inc. has been a slow-motion legal nightmare. On March 28, after a seven-year investigation, the RCMP’s commercial crime section filed criminal charges against three of the firm’s principals: former CEO Daniel Potter, who built the software developer into a TSE-listed firm with a market value of $100 million at the height of the dot-com bubble; Halifax securities lawyer Blois Colpitts, 48, a former director and the firm’s legal adviser; and Bruce Elliott Clarke, a 65-year-old former broker with National Bank Financial.

Potter, Colpitts and Clarke each face single counts of market fraud and conspiracy to commit fraud affecting the public market, and two counts of fraud involving more than $5,000. Clarke faces an additional count of fraud. The charges come after years of lawsuits and countersuits in the Nova Scotia courts, replete with allegations of stock manipulation and insider trading. Potter built KHI on the promise of supplying e-learning programs to schools, colleges and universities, and shares trading at 9¢ in 1997 peaked just shy of $10 in March 2000.

The stock had tanked to 15¢ by the time KHI imploded in September 2001. Among the investors stung were the late Charlie Keating, a Nova Scotia businessman who made his fortune in cable television, and a pair of wealthy Germans; their combined losses alone approached $12 million.

Almost a decade later, the case continues to wind its leisurely way through the courts. Nova Scotia’s Securities Commission accuses Potter and three other insiders of violating its Securities Act through stock manipulation and undisclosed trades, with hearings slated for early 2012. Clarke, fired from National Bank Financial soon after KHI collapsed, has already admitted brokering those trades. The commission levied $150,000 in fines and costs, and barred him from trading for five years.

National Bank Financial is suing several smaller investors to recover margin loans advanced to buy KHI stock. The investors have fired back, accusing the brokerage of failing to rein in Clarke and compounding their losses. A trial, expected to last at least three months, is set to begin in October.

Meanwhile, Potter, Colpitts and Clarke were headed to court in late April to answer to the criminal charges. The RCMP devoted more than a dozen investigators to the complex file and interviewed about 200 people in three countries, but Potter dismissed the probe as “flawed, unduly delayed and without merit” in an interview with Halifax business news website allnovascotia.com. “I will plead not guilty,” he vowed, “and I will fight 10 more years.”

Given how this case has progressed over the past decade, that may be the only sure bet in the Knowledge House saga.