National Bank Financial Ltd. Plaintiff/ Defendant by Counterclaim in Hfx. No. 174294 v. Daniel Frederick Potter, Gramm & Company Incorporated, Starr’s Point Capital Incorporated, 2532230 Nova Scotia Limited, 3020828, 2013 NSSC 248

SUPREME COURT OF NOVA SCOTIA Citation: National Bank Financial Ltd. v. Potter , 2013 NSSC 248 Date: 2013-08-07 Docket : Hfx 174294 (Debt Action) Hfx 206439 (Main Action) Hfx 208293 (Barthe Action) Hfx 246337 (National Bank/Weir Action) Hfx 216059 (Wadden/BMO Action) Registry : Halifax Between: National Bank Financial Ltd. Plaintiff/ Defendant by Counterclaim in Hfx. No. 174294 -and- Daniel Frederick Potter, Gramm & Company Incorporated, Starr’s Point Capital Incorporated, 2532230 Nova Scotia Limited, 3020828 Nova Scotia Limited, Ronald D.

Richter, Solutioninc Limited, John Francis Sullivan, Linda Fay Sullivan, Calvin W. Wadden, Craig Anthony Dunham. Douglas George Rudolph, Gerard B. McInnis, Janine M. McInnis, Lowell R. Weir, Blackwood Holdings Incorporated, and Staffing Strategists International Inc. Defendants/ Plaintiffs by Counterclaim in Hfx.

No. 174294 -and- Daniel Potter, Starr’s Point Capital Incorporated, Fiona Imrie, Gramm & Company Incorporated, 2532230 Nova Scotia Limited, 3020828 Nova Scotia Limited, Ronald Richter, Donald Snow, Meg Research.com Limited, 3027748 Nova Scotia Limited, Calvin Wadden, Raymond Courtney, Bernard Schelew, Blois Colpitts, Stewart McKelvey Stirling Scales, Bruce Clarke, 2317540 Nova Scotia Limited, Knowledge House Inc., The Estate of the Late Michael Barthe, represented by his Executrix Barbara Barthe, Lutz Ristow, Derek Banks and Plastics Maritime Ltd. Third Parties in Hfx.

No. 174294 And Between : Calvin Wadden, 3019620 Nova Scotia Limited and Andrea Wadden

Plaintiffs in Hfx. No. 216059 -and- BMO Nesbitt Burns Defendant in Hfx. No. 216059 Judge: The Honourable Justice Gregory M. Warner Heard : February 13 th to April 17 th , 2012, at Halifax, Nova Scotia Final Written Submissions : December 21 st , 2012 Counsel: James Hodgson, David Coles QC and Robert Blair, for NBFL and National Bank of Canada W. Dale Dunlop, and Sean MacDonald, for Calvin Wadden, Andrea Wadden, 3019620 Nova Scotia Limited, the Estate of Michael Barthe, Lowell Weir, Carol McLaughlin-Weir, Blackwood Holdings Inc., and Craig Dunham Linda Fuerst, for BMO Nesbitt Burns BY THE COURT : Paragraph Title 1 A.1 Introduction

7 A.2 Brief History of KHI 16 A.3 Brief History of Litigation 24 A.4 The Trial B Submissions: NBFL and Dunlop Clients 32 B.1 NBFL / NBC Submissions 41 Craig Dunham 51 Lowell Weir, Blackwood Holdings and Carol McLaughlin-Weir 60 Barthe Estate 71 Calvin Wadden 107 B.2 Dunlop Clients Submissions 117 B.2.1 Wadden Claim 126 B.2.2 Dunham Claim 138 B.2.3 Barthe Claim 142 B.2.4 Weir / Blackwood Claims 148 B.3 Supplementary Submissions - December 2012 155 B.3.1 Dunlop Clients Supplementary Submissions 175 B.3.2 NBFL’s Response to Supplemental Submissions 193 B.3.3 Analysis - Settlement Agreement C.

Clarke/NBFL legal relationship with the Dunlop Clients 206 C.1 The Starting Point Paragraph Title 213 C.2 Law Respecting Broker - Client Relationship 237 C.3 Stock Manipulation

247 Statutory Responses to Market Manipulation 254 Permissible Market Manipulation 262 Test for Market Manipulation 270 Position of the Parties D. Analysis of the liability issues of the Dunlop Clients against Clarke and NBFL 310 D.1 Liability to Dunham 371 D.2 Liability to the Weirs and Blackwood 453 D.3 Liability to the Barthe Estate 573 D.4 Liability to Wadden 671 E. Causation 708 F. The Defence of Ratification G. NBFL ’ s Third party claims against Barthe and Wadden 733 Against Barthe 747 Against Wadden 760 H. Waddens ’ Claims against BMO Nesbitt Burns I. Assessment of Damages against NBFL 857 I.1.

Dunham 858 Lost Value of Shares 871 Consequential Losses 876 Punitive Damages 883 Analysis Paragraph Title 898 I.2 Weirs / Blackwood

902 Analysis 927 I.3 Barthe Estate 932 I.4 Calvin Wadden’s Third Party Liability to NBFL 935 I.5 Costs A.1 Introduction 1 There are no winners in this story. The events give a black eye to the Canadian public securities industry. 2 Knowledge House Inc., a publicly-traded technology company, collapsed in August 2001 and closed in September. Eighteen months earlier its share value appeared to be $110,000,000.

The events leading to the collapse epitomize the concern expressed by David Dodge, a former Governor of the Bank of Canada, about Canada’s international reputation as the ‘Wild West’ of financial markets. 3 Along the way from penny stock to ‘tech darling’ to collapse, the entrepreneur behind the rise and fall, who took control of KHI in late 1998, immediately appeared to exponentially grow its size and sales, and, on paper, its value, by the purchase of three private technology companies in exchange for shares of KHI.

While the company had sales, it never had real income, a viable business plan or secure financing. 4 With the help of other insiders, including some of those who had sold their companies to KHI for shares, a lawyer, and Bruce Clarke, a stock broker employed by NBFL, the President of KHI, kept KHI afloat until August 2001 by manipulative and artificial trading in KHI shares, while attempting to create a viable business and secure financing, deter existing shareholders from selling their shares, and entice wealthy individuals and institutions to invest. 5 The primary instrument of the artificial and manipulative trading in KHI shares was Bruce Clarke.

The failure of NBFL to supervise Bruce Clarke facilitated that trading in a manner that was contrary to statutory and industry regulations, and NBFL’s own rules. 6 Only NBFL/NBC, BMO Nesbitt Burns, one insider and three “outsiders” were still parties to this litigation by the start of the trial. In this decision, claims of the three “outsiders” against NBFL are affirmed, the claims of the insider against NBFL and BMO are denied and NBFL’s third party claim against the insider partially affirmed.

A.2 Brief History of KHI 7 Knowledge House Inc. (“KHI”) was incorporated as Knowledge Publishing House Limited in Nova Scotia in 1984. Its controlling shareholder, president and chief executive officer was Dr. Bernard Schelew. It provided computer-based programs and software in the field of medical and pharmaceutical education. In 1988, it was listed on the Montreal Exchange and continued thereafter for 11 years as a publically traded penny stock with annual sales under $700,000.00. 8 Daniel F.

Potter (“Potter”), a lawyer by training, described himself since 1991 as a “technology information and education entrepreneur.” He founded “ITI Institute,” a post-graduate IT education institution in 1984. From 1991 to 1998, he was chair and CEO of ITI Education Corporation, its parent corporation. In 1998, Torstar Corporation invested 37 million dollars in ITI Education and became the major shareholder (39%). Potter gained a reputation for success with the rapid growth and the sale of ITI to a reputable national corporation. 9 Potter became a director of KHI in 1985.

When he ceased as CEO and chair of ITI in 1998, he became actively involved in KHI and, by early 1999, he was the chairman, CEO and, with his spouse, the largest shareholder. Through an aggressive acquisition program, Potter immediately caused KHI to embark in a new direction as an internet and IT-based education services business. 10 To add to KHI’s small pharma-education software business, KHI acquired over a six-month period in early 1999 three rapidly growing private technology businesses:

i) in February 1999, “Silicon Island” and “Centre for Distance Education Limited”. The former provided a computer and telecommunication infrastructure to host online education programs; the latter provided direct experience in distance education. As consideration for the acquisition of these two businesses, KHI issued to the principals, Don Snow and Dr. Ken MacLeod, 1.6 million KHI shares and hired them as senior executives. ii) in June 1999, Micronet Information Systems Limited. Micronet, founded in 1994, was in the business of selling computer hardware and software programs.

It was particularly successful in the provision of services to schools. At the time of acquisition, it had just been the successful bidder in a multimillion dollar, multi year tender to provide computers and IT support services to the Nova

Scotia public school system. As consideration for the acquisition of this enterprise, KHI issued to its principals, Calvin Wadden and Raymond Courtney, 2.2 million KHI shares and hired them as senior executives. iii) in July 1999, Innovative Systems Limited. Innovative was Atlantic Canada’s authorized reseller of Apple products and, like Micronet, had a rapidly growing business as supplier of Apple computers and IT support services to the public through four retail outlets, and to the Nova Scotia public school system.

As consideration for the acquisition of its business, KHI issued to its principals, Craig Dunham and Steven Wilsack, 300,000 KHI shares, and contracts to continue running Innovative. 11 In rapid succession, KHI entered into partnerships with some of its major suppliers, most notably, IBM Canada Ltd. 12 Through the activities of the three acquisitions, KHI’s revenues grew from $813,000.00 for the twelve months ending February 28, 1999, to 15 million dollars (on a consolidated basis) for the ten months ending December 31, 1999, and 39 million dollars for the year 2000. 13 In 1999, KHI lost 2.7 million dollars (23 cents per share) and in 2000, 6.5 million dollars (46 cents per share). 14 In December 1999, KHI moved its public stock listing from the Montreal Exchange to the Toronto Stock Exchange.

From partial trading records of KHI on the ME and after December 6, 1999 on the TSE, it appears that the trading activity, inclusive of block trades arranged by KHI insiders, crosses and other transactions that I conclude were the result of manipulation by KHI insiders and Bruce Clarke, was as follows: 1996 753,000 trades in the price range of $0.09 to $0.20 1997 2.7 million trades in the range of $0.09 cents to $1.00 1998 2.9 million trades in the range of $0.50 to $2.00 January to June 1999 2.1 million trades in the range of $1.80 to $4.00 July to December 1999 Records were not before the Court except for the period December 6 to 31, 1999, when the price rose from $4.05 to $6.25 2000 5.2 million trades in the range of $5.50 to a peak price on March 29, 2000 of $9.85 January to July 2001 1.1 million trades in the range of $4.25 to $6.25 from mid-August until the end of the month the price dropped to 4.5 cents per share 15 Based on the trading price, the shareholders’ equity in KHI fell from 111.9 million dollars on March 29, 2000, to about 2.8 million dollars when it closed its doors on September 13, 2001.

A.3 Brief History of Litigation 16 The history of this litigation can be read in many reported decisions, in particular National Bank Financial Ltd v Potter , 2008 NSCA 92 , and National Bank Financial Ltd v Potter , 2011 NSSC 407 . 17 In a decision of the Nova Scotia Court Appeal, upholding the refusal of NBFL’s motion for leave to amend its pleadings to delete claims of wrongdoing against its broker, Bruce Clarke, Cromwell JA (as he then was) briefly summarized the history as follows: [7] The parties are involved in complex litigation concerning the collapse of Knowledge House Inc. (KHI) in August of 2001.

NBFL started a number of actions against clients and former clients for unpaid margin debt arising from this collapse. Some of the defendants defended these claims by alleging that they had been the victims of a conspiracy involving NBFL ’ s employee, Bruce Clarke, and others to manipulate KHI share prices. [8] NBFL responded by pleading two main allegations. First, it defended the conspiracy claims by denying there was any conspiracy and any vicarious liability for Mr. Clarke ’ s actions. Second, in what is now known as the main action, NBFL issued a statement of claim

against Messrs Potter, Clarke, Colpitts, his law firm and others alleging that they conspired to manipulate the price fo KHI shares and that the conspiracy resulted in a fraud being committed against NBFL. [9] With respect to Mr.

Clarke ’ s alleged involvement, NBFL alleged that he acted on his own behalf and as the agent for an insider group of shareholders to conduct elements of the scheme, including trading in KHI shares in his numbered company account, his RRSP and other accounts in order to maintain the public market price of the shares, placing and carrying out orders of the other alleged conspirators, monitoring KHI ’ s order book and trading activity on the TSE, maintaining buy orders for KHI shares in the TSE order book, soliciting NBFL clients to purchase shares of KHI and discouraging those clients from selling KHI shares. [10] NBFL maintained in sworn testimony that, before making these allegations, it had thoroughly investigated the matter and concluded that it “ was never an issue [that]... we were going to sue Bruce Clarke ....

We believed that we had more than sufficient evidence to name every person [including Mr. Clarke] in that claim ... ” (AB 2828 - 2830). [11] Following the issuance of NBFL ’ s statement of claim in the main action, several of the respondents started actions against NBFL in which they incorporated by reference, NBFL ’ s allegations of conspiracy. In its various defences, NBFL, among other things, denied the conspiracy. 18 By 2008, there were more than 54 groups of parties named in 11 actions under case management.

At the commencement of trial on February 13, 2012, five actions involving six groups of parties remained. 19 The remaining defendants in NBFL’s Debt Action (174294) are Calvin Wadden, Craig Dunham, Lowell Weir and Weir’s corporation Blackwood Holdings Incorporated. NBFL sued for unpaid margin debt arising from the collapse of KHI. The defendants counterclaimed against NBFL for the actions of Bruce Clarke.

NBFL third-partied, among others, Calvin Wadden and Michel Barthe for any liability it may have in respect of the counterclaims. 20 The only remaining defendant in NBFL’s Main Action (206439), against KHI insiders for conspiring to manipulate the price of KHI shares resulting in a fraud against NBFL, is Calvin Wadden. 21 In the Barthe Action (208293) commenced by Michael Barthe and Lutz Ristow against NBFL for its failure to supervise Clarke and the wrongdoing of Clarke as alleged by NBFL in the Main Action, the only remaining plaintiff is the Estate of Michael Barthe.

In its pleadings, NBFL denied liability and claimed that Barthe was part of the stock manipulation scheme. NBFL third-partied Wadden in respect of any liability to Barthe. 22 In the Wadden Action (216059), Calvin Wadden, Andrea Wadden and a numbered company controlled by Calvin Wadden, sued BMO Nesbitt Burns alleging that its brokers were part of the stock manipulation scheme, and that BMO’s handling of their accounts between March and August 2000 was negligent and in breach of its contractual obligations to the plaintiffs.

BMO denied liability. 23 In the NBC/Weir Action (246337), National Bank of Canada sued Lowell Weir and Carol McLaughlin-Weir on a promissory note given by the defendants to the Bank to secure a March 2003 “loan”. The Weirs claim that the money was actually an advance on NBFL’s intended settlement of Weirs’ claims against NBFL and that NBFL represented it would complete after it had recovered from the other responsible parties in NBFL’s litigation. The Weirs defended and counterclaimed against NBC, based on NBC’s responsibility for NBFL and the conduct of Clarke.

A.4 The Trial 24 The trial commenced on February 13, 2012. It ended much earlier than scheduled, on April 17, 2012. The Dunlop Clients called eight witnesses, BMO, one short witness, and NBFL/NBC, no witnesses. 25 The order for presentation of evidence was determined in a pretrial written decision ( 2011 NSSC 407 ). 26 Three groups of parties remain:

i) The Dunlop Clients (all represented by lawyer W. Dale Dunlop) - Calvin Wadden (“Wadden”), Andrea Wadden (“Ms. Wadden”) and their numbered company 3019620 Nova Scotia Limited, Craig Dunham (“Dunham”), Lowell Weir (“Weir”), Blackwood Holdings Incorporated (the Weir company) (“Blackwood”), Carol McLaughlin-Weir (“McLaughlin-Weir”) and the Estate of Michael Barthe (“Barthe”).

These clients’ interests are not identical. ii) NBFL, and its parent, National Bank of Canada (“NBC”). iii) BMO Nesbitt Burns Inc. (“BMO”) (only in respect of the Wadden Action). 27 While the claims in the five remaining actions were, by agreement, heard together, BMO and the Dunlop Clients agreed, that the claims in the Wadden Action (216059) are more limited in substance, time line and events, than the claims between the Dunlop Clients and NBFL/NBC. 28 It was agreed by all parties that some evidence was admissible only in the Wadden Action, some admissible only in the four actions involving NBFL and NBC, and some admissible in all five actions.

Consequently, counsel for BMO did not attend at trial for all of the evidence.

29 The evidence admitted in the Wadden Action consists of:

i) documentary evidence contained in Joint Exhibit Books tendered by agreement of BMO Nesbitt Burns and the Waddens, and identified as such, subject to the conditions of admissibility set out in the indexes to these joint exhibits, and other exhibits tendered by agreement; ii) the oral evidence of Ms.

Wadden, Brian MacLellan Q.C. (“MacLellan”), Harold Greenwood (“Greenwood”), Derek Banks (“Banks”), Wadden and Robert Lowe (“Lowe”); and iii) other exhibits tendered through or referred to by these witnesses in their oral evidence. 30 BMO and the Waddens specifically agreed that, despite the pleadings, no claim was being pursued by the Waddens of involvement by BMO or any of its employees or agents in the allegations of wrongful manipulation of the share price of KHI shares. 31 The evidence admitted in the four actions between Dunlop Clients and NBFL / NBC, consists of:

i) documentary evidence contained in Joint Exhibit Books tendered by agreement between the Dunlop Clients and NBFL / NBC, subject to the agreed upon conditions of admissibility set out in the indexes, and other exhibits tendered by agreement; ii) the oral evidence of Andrea Wadden, Brian MacLellan, Harold Greenwood, Calvin Wadden, Bruce Clarke, Derek Banks, Craig Dunham, Lowell Weir and Carol McLaughlin-Weir; iii) other exhibits tendered through or referred to by these witnesses in their oral evidence; iv) the settlement agreement between NBFL and a securities regulator, admitted pursuant to a decision of this Court reported as 2012 NSSC 76 ; and

v) excerpts from the discovery examinations of Richard Rousseau, Barbara Barthe and Lutz Ristow as well as from the written responses to Interrogatories of Barbara Barthe and Lutz Ristow. B Submissions : NBFL and Dunlop Clients B.1 NBFL/NBC Submissions 32 NBFL and NBC sued on margin accounts for liquidated sums. There is no real contest that, subject to counterclaims and set offs, debts were incurred in the amounts claimed in respect of the margin accounts.

Dunham owed $353,021.96; Weir owed $60,177.68; Blackwood owed $10,403.74 and Wadden owed $1,086,072.00. 33 The Weirs acknowledge execution of the promissory note with NBC and the receipt of $100,000.00. NBFL presented no evidence, other than the note itself, to establish a debt. The Weir evidence (the only evidence on the point) is that the amount was, by agreement, an advance on NBFL’s settlement of the Weirs’ claims against NBFL (Weir and Blackwood). The money was advanced as a loan (without interest), because NBFL was in the process of suing others from whom it intended to seek some recovery.

NBFL wanted others to share in payment of the Weirs’ losses. The promissory note was executed at a request of NBFL to cover any bank audit inquiry about the advance. NBFL claims payment of $100,000.00 plus prejudgment interest, less the amount of any award (if any) of damages against NBFL. 34 The counterclaims of the Dunlop Clients are premised on the wrongful acts of Clarke and NBFL’s failure to supervise him. They allege fraud, negligence, and breach of contract.

They allege NBFL is liable for its own actions and non-actions, and is vicariously liable for the wrongdoing of Clarke. 35 For the first time in this litigation, in its post trial brief, NBFL admitted that it failed to adequately supervise Clarke. It admitted that it was under a duty to review the activity of Clarke’s “540" account, an account of 2317540 Nova Scotia Limited, a corporation owned and controlled by Bruce Clarke, a broker employed at NBFL’s Halifax office.

The numbered company (“540") opened a margin account with NBFL that was designated by NBFL as a “pro” account because it was controlled by one of its brokers, a designation that mandated extra supervision by NBFL management.

The effect of this admission is that, if Clarke is found to have acted unlawfully; that is, fraudulently, negligently or in breach of his contractual obligations to the Dunlop Clients or to any of them in connection with the 540 account, NBFL is liable to those Dunlop Clients for Clarke’s action both on the basis of NBFL’s own negligence and breach of contract, and on the basis of vicarious liability for the acts of Clarke who, it is not contested, was acting throughout in his capacity as broker employed by NBFL. 36 In a nut shell, NBFL’s submission is that the shareholders’ equity in KHI, which at one point appeared to exceed 100 million dollars, based on the market price of its shares, disappeared in August 2001 because KHI was not properly funded and ran out of operating capital before the e-learning projects it was developing became marketable.

The timing of its fall coincided with the receivership of ITI.

In effect, the Dunlop Clients did not lose the value of their investments in KHI by reason of NBFL’s margin calls in August 2001 or by reason of any wrongdoing of Clarke. 37 Alternatively, NBFL submits that the Dunlop Clients have failed to prove that the “market making” carried out by Clarke was unlawful or, if it was unlawful, that it caused the losses claimed by the Dunlop Clients. 38 Finally, NBFL submits that if the Court finds that Clarke’s activities at the relevant times were unlawful and constituted illegal market making, Wadden and the late Michael Barthe, two of the four remaining Dunlop Clients, were aware of and participated in the

illegal market making and are jointly liable with NBFL for any liability of NBFL to any of the other Dunlop Clients. 39 NBFL submits that KHI’s existence was based on Potter’s earlier success in developing and selling another e-learning technology corporation - ITI Education Corporation, to Torstar Corporation in 1998. KHI, which was new to the e-learning technology business, had real risks and unlimited prospects. One of its risks was whether it could raise sufficient capital to execute its business plan.

Its gross revenues soared with the acquisition of existing technology companies, such as Wadden’s Micronet, and its contract to supply e-learning technology services and hardware to the Nova Scotia school system, as well as its partnership with corporations like IBM Canada and other reputable national institutions. 40 Early in 2001, KHI’s revenue dried up at the same time as its new e-learning programs were taking longer to develop and KHI’s banker was reducing its line of credit. In short, KHI collapsed because it ran out of cash.

Between August 14 and 16, KHI shares were still selling in the range of $5.10 per share. On August 16, 2001, Torstar announced that it was writing off its investment in ITI and appointing a receiver. It had been Potter’s reputation for success in ITI that had fuelled shareholder excitement in KHI. The Torstar announcement precipitated, says NBFL, the dramatic fall in KHI’s share price to $4.10 on August 17 and $0.72 by August 22. It was only then that NBFL called in the margin debt owed by many KHI shareholders to it on the security of the KHI shares.

Craig Dunham 41 Craig Dunham and Steven Wilsack sold their Apple-based technology business, Innovative, to KHI on July 30, 1999, in exchange for 300,000 KHI shares (150,000 each) and contracts to continue running Innovative for KHI. Dunham had access to these shares at the rate of 30,000 shares per year (the rest were held in escrow). 42 NBFL says that Dunham was an educated and experienced business man. He had experience with brokerage accounts, although NBFL does not suggest he was an experienced investor. 43 The agreement to sell Innovative to KHI was subject to certain adjustments.

In the spring of 2000, Dunham was required to pay KHI $141,347.50 as his share of those adjustments. At the same time he was constructing a new residence, which he expected to build with the proceeds of the sale of KHI shares. He had no money to do either. Gerard McInnis, KHI’s controller, outlined in a February 4, 2000 e-mail, a plan whereby KHI would advance to Durham and his partner some of the shares held in escrow that “will be placed in trust with Bruce Clark[e] who will sell into the market on an orderly basis”, with the proceeds being paid to KHI to discharge the debt owed by Dunham and his partner.

Dunham did not know Clarke at this time, but contacted him to carry out the McInnis plan. All communication between Clarke and Dunham from February 2000 to August 2001, except one meeting and two or three phone calls, was by e-mail. 44 In March 2000, Dunham opened a margin account with Clarke for the purpose of selling 30,000 KHI shares that KHI was advancing to Dunham’s margin account to pay KHI the $141,347.50 that he owed KHI, with the balance of the sale proceeds to be withdrawn by Dunham. In April 2000, KHI closed the Innovative Retail Store in New Minas that was run by Dunham.

Rather than move to Halifax, Dunham resigned from KHI. Shortly thereafter he received from KHI another 30,000 KHI shares and in the summer of 2000 his remaining 90,000 KHI shares. These shares were transferred by KHI into Dunham’s margin account with Clarke at NBFL. 45 NBFL submits that Dunham understood the effect of opening a margin account and that he was borrowing money in a margin account from NBFL for personal and other purposes. 46 NBFL acknowledges that on three occasions Dunham gave Clarke specific instructions to sell KHI stocks and that Clarke ignored these instructions.

Following these instructions would have produced about $52,000.00 for Dunham’s account. Dunham received the records of purchases made into his account and sales made from his account. He knew that Clarke was not following his instructions but he made no complaint either directly to Clarke or to NBFL. 47 NBFL submits, in short, that Dunham ratified Clarke’s failure to follow instructions.

NBFL acknowledges that Dunham asked for advice from Clarke in diversifying his account, but at the same time notes that Dunham often gave instructions to Clarke with regards to purchases of technology stocks in respect of which he relied upon his own research. 48 NBFL’s submissions do not directly address Dunham’s communications with Clarke to the effect that Dunham was told he should sell KHI shares and diversify his holdings or Dunham’s evidence that he was relying upon Clarke to give him advice about, and carry out, the diversification of his portfolio. 49 Finally, NBFL submits that Dunham failed to prove that Clarke’s failure to follow instructions caused Dunham’s claimed losses.

Other than the three specific instructions to sell, which were not followed, Dunham received the benefit of the advances made on the margin account that he held with NBFL. 50 NBFL identifies and refutes Dunham’s claimed losses:

i) With respect to Dunham’s claim that he lost the value of the 120,000 KHI shares (worth $6.95 as of June 20, 2000), NBFL argues that no specific instruction to sell all shares was ever given. ii) With respect to Dunham’s claim for lost income at the rate of $40,000.00 per year from June 30, 2000 (when his resignation from KHI became effective) to December 31, 2002, NBFL notes that Dunham did not seek alternative employment.

Furthermore, there was no evidence relating his conduct, in resigning from KHI and not working, to anything that NBFL or Clarke did or failed to do. iii) With regards to Dunham’s claim for recovery of the interest charged on his margin account in the amount of $34,418.00, NBFL

again notes that other than in respect of purchases that Dunham had instructed Clarke to make from the proceeds of the sale of KHI shares (about $52,000.00) all advances on the margin account were for Dunham’s personal benefits. iv) With respect to Dunham’s claim for losses of $123,000.00 (which NBFL quantified as $113,000.00) that Dunham spent developing a website called “Fantasy Stock,” which he says he lost because he ran out of money he would have had if his portfolio had been diversified, NBFL notes that Dunham spent $83,000.00 before he mortgaged his house, and only spent $30,000.00 on the project after he mortgaged his house for $350,000.00.

In effect, neither NBFL’s nor Clarke’s wrongdoing caused this loss.

v) With respect to Dunham’s claim for certain legal and professional expenses, NBFL notes that there was no evidence relating these fees to NBFL’s or Clarke’s activities. vi) With regards to the claim for interest paid on credit cards and on the mortgage on his home (about $177,000.00), NBFL says there is no factual basis connecting these interest claims to NBFL or Clarke’s conduct; rather, what sparse evidence exists suggests they were incurred in respect of Dunham’s efforts to re-enter the computer business through his corporation, Highbury Traders.

Lowell Weir, Blackwood Holdings and Carol McLaughlin-Weir 51 With respect to the claim by NBFL on the Promissory Note, NBC acknowledges that if the Court determines that NBFL is liable in damages to Weir and Blackwood, then the amount owing under the Promissory Note should be deducted from those damages. 52 In respect of the claim by Weir, NBFL states that Weir only had two personal investments in Knowledge House shares, 5,000 KHI shares in his LIRA account and, on February 28, 2001, 28,175 shares received on conversion of his Knowledge House Limited Partnership Unit for $145,000.00 into shares.

NBFL states that Clarke and NBFL were not involved in Weir’s decision to purchase the Limited Partnership Unit, which Weir stated he did on the advice of his lawyer Blois Colpitts (“Colpitts”). 53 On January 19, 2001, Weir e-mailed Clarke telling him he was not comfortable with the investments that he, his wife and members of his family had in KHI and if the per-share price fell below $5.00 he was to liquidate and sell all their KHI shares.

NBFL submits that Weir was a sophisticated investor who watched the price of KHI shares carefully, and whose first complaint to NBFL about its failure to sell when the price fell below $5.00 came after the price of KHI shares had collapsed. In effect, Weir had ratified Clarke’s conduct in not liquidating the Weir family holdings in KHI shares. 54 NBFL also notes that the 28,175 KHI shares (converted from a KHI Partnership Unit) were placed in a margin account.

There were restrictions on the sale of those KHI shares and Weir used the margin debt to buy a car for his wife and to make RRSP contributions of about $19,000.00. 55 NBFL states that if the Court finds that NBFL is liable for Clarke’s failure to liquidate the Weir’s 31,175 shares as instructed, the loss to Weir was $165,875.00, which should be offset against the margin debt of $60,177.00 owed by Weir to NBFL and the $100,000.00 advance by NBC on the Promissory Note. 56 NBFL notes that Blackwood opened a margin account with NBFL in 1998 and began borrowing on this margin account to purchase various securities.

Blackwood held 10,000 KHI shares in its NBFL margin account as of March 1999 but sold 2,000 in December 2000 and 1,000 in March 2001.

NBFL states that if this Court finds NBFL liable for Clarke’s failure to liquidate Blackwood’s remaining KHI shares pursuant to the January 19, 2001, e-mail (other than the 1,000 on March 28, 2001), that the loss to Blackwood was $35,000.00 less the margin debt of $10,404.00 used by Blackwood Holdings to purchase other investments. 57 NBFL notes that Carol McLaughlin-Weir testified that she met with Clarke in May 2001 to discuss her children’s account and give instructions to liquidate KHI shares.

She testified that Clarke advised against selling shares because KHI was going to sign another government contract and the price would rise to $8.00 per share. As a result, she revoked her instructions to liquidate KHI shares.

On this basis, NBFL says it is not liable for Clarke’s failure to liquidate the shares pursuant to the January 19, 2001 e-mail. 58 Weir had testified that on September 4, 2001, he entered into an agreement with NBFL through its Halifax branch manager, with respect to NBFL’s margin call against Blackwood account, to the effect that no action would be taken on the Weir’s accounts while he was away in Europe on business. NBFL says the evidence shows that Weir returned from Europe on September 14, 2001.

NBFL did not act on its margin call and liquidate shares in the Blackwood account until September 19, 2001, five days after Weir returned from Europe; it says that it did not breach the agreement. 59 NBFL denied that it was vindictive and mean in the manner in which it exercised its right to liquidate the Blackwood shares to satisfy the margin debt. NBFL further states that the Weirs had many opportunities to mitigate their loss and failed to do so.

NBFL further submits that the damages claimed by the Weirs in respect of the liquidation of Weirs’ shares in Enervision, a publically traded company that Weir ran and had a significant investment in, was not caused by the manner in which NBFL liquidated Blackwood’s shares pursuant to its margin call. Barthe Estate 60 NBFL states that Barthe was a wealthy, successful and sophisticated businessman worth hundreds of millions of dollars. He purchased a residential property and made other investments in Guysborough County, Nova Scotia. Some of these investments were made jointly with Lutz Ristow (“Ristow”).

61 Barthe became interested in investing in KHI as a result of discussions with his neighbour in Nova Scotia, Jack Sullivan (“Sullivan”), an officer of KHI, who introduced him to Potter. Barthe conducted his own due diligence on KHI. He arranged for an analysis by an accountant who had formerly been employed by his German corporation, and by his Nova Scotia accountant, and by his lawyers. 62 He was first approached by Sullivan in 1999. In May 2000, he received a proposal to make a substantial purchase of new shares from KHI’s treasury, which proposal he did not act on.

On August 3, 2000, he entered into an agreement negotiated directly with Potter and Colpitts to purchase 250,000 KHI shares on the open market at $6.80 per share, for a total of 1.7 million dollars. He received an option to purchase additional shares from Potter for $4.00 per share. At this time, he did not have an NBFL account. 63 He contacted Colpitts, KHI’s counsel and a Director, to ask how the agreement should be implemented. He was advised by Colpitts to contact Clarke and open an account at NBFL. Barthe transferred 1.7 million dollars to an account opened in his name on August 28, 2000.

Clarke executed Barthe’s instructions to purchase the shares, sent Barthe confirmation slips for each transaction, and regular updates on his progress. Clarke was able to purchase shares for less than the $6.80 price in the agreement.

For the 1.7 million dollars, Clarke purchased 259,000 shares for Barthe and paid himself commissions of $13,848.00. 64 After August 30, no other transactions took place on Barthe’s NBFL account before the KHI share price collapsed. 65 NBFL notes that there were no restrictions as to whom the sellers to Barthe would be, and that, by reason of the August 3 rd agreement between Barthe and Potter, it was clear that Barthe was agreeing to purchase KHI shares from KHI insiders. 66 In October 2000, Barthe and Ristow decided to jointly purchase KHI shares from KHI’s treasury.

The purchase was negotiated directly with Potter and Sullivan. The terms of the private placement, set out in the Subscription Agreement, were approved by the Toronto Stock Exchange. Barthe confirmed an understanding that there were no assurances that the money that he and Ristow were injecting into KHI would enable it to continue its operations. The Subscription called for four payments of $812,500.00 directly to KHI’s Royal Bank account. The shares were being held in escrow for six months after the payments were made.

Ristow made the first two payments, the third and the fourth payments were due from Barthe on May 15 and August 15, 2001. These payments were not made through Barthe’s NBFL account. 67 NBFL submits that Barthe and Ristow were offered directorships with KHI and had information available to them that was available to directors. Ristow was formally appointed to the KHI board on June 29, 2001; he and Barthe were treated as if they were Directors from December 2000.

They were well aware of the cash flow problems of KHI at the time of the subscription agreement of November 15, 2000. 68 NBFL submits that there was no evidence that Barthe would not have invested in KHI had he knew that its share price was supported by the activities of Clarke and/or others. On the contrary, when Barthe was advised that the stock was being supported, he did not complain.

He even expressed a willingness to help, except for the fact that he did not at that time have the financial ability to do so. 69 NBFL submits that not only did Barthe not complain that he had been deceived or express concern when he was asked to support KHI’s share price, neither he nor Ristow complained that they would not have bought KHI shares if they had known the price had been supported. 70 NBFL argues that because at one point Barthe was offered the position as an alternative Director in the event Ristow could not attend Director’s Meetings and because he had access to insiders’ information that he is liable to NBFL for any wrongdoing arising from stock manipulation by Clarke.

Calvin Wadden 71 NBFL states that Calvin Wadden is a well-educated, experienced businessman with extensive employment history in banking and finance. He and Raymond Courtney (“Courtney”) founded Micronet.

Micronet purchased 100,000 KHI shares in December 1998 (later split between Wadden and Courtney, with Wadden placing his 50,000 shares in 3019620 Nova Scotia Limited, which opened an investment account with his best friend and broker Eric Richards at Financial Concepts Group (“FCG”)). 72 On June 30, 1999, Wadden and Courtney sold Micronet to KHI for 2.2 million shares (1.1 million each) and jobs as executives at KHI. The shares were held in escrow to be released over five years. The shares were valued at that time at $2.65 each. 73 In 1999, Wadden and Ms.

Wadden invested further into KHI: lxxiv They purchased 111,000 additional KHI shares on the market; lxxv He purchased a partnership unit for $150,000, converted in January 2001 into 28,125 KHI shares; and, lxxvi She purchased 62,500 shares as part of a private placement to raise operating capital for KHI. 74 In January 2000, the Waddens acquired 100,000 common shares from Don Snow (“Snow”), who was selling the bulk of his shares to Charles Keating (“Keating”), to assist in Snow monetizing his investment into KHI, and an additional 20,000 shares on the market. 75 Other than the shares obtained from the sale of Micronet, most of these purchases were financed by margin debt, issued on the Wadden’s accounts at FCG.

As of February 28, 2000, 80% of the Wadden family assets were in KHI equity, offset by 1.144 million

dollars in margin debt to FCG and $300,000 in margin debt at CIBC. At this time, FCG determined it would advance no further margin debt to the Waddens. 76 In March 2000 Wadden’s best friend Eric Richards (“Richards”) left FCG for BMO; the Waddens decided to move their accounts with him. 77 In the meantime, Wadden opened a margin account through Clarke at NBFL to access cash. In a March 7, 2000, e-mail, Wadden asked Clarke to advance $300,000.00 to CIBC to pay off a loan secured by 220,000 KHI shares and to cause those shares to be transferred to his new margin account at NBFL.

After opening this account, Wadden had made cash withdrawals of $607,500.00 by June 20 and purchased other shares on margin. 78 NBFL notes that in Wadden’s direct evidence, at a time when KHI was entering into larger deals and KHI’s share price was progressing from $6.00 to $7.00, Potter advised his partners that KHI’s ‘orderly market account’ was offside and Potter asked each of the major partners to put up 100,000 shares to maintain the orderly market account onside. Wadden immediately agreed. Wadden attended at Richard’s office to obtain the only share certificate available to him.

It was for 220,000 KHI shares. He then returned to KHI’s office to give it to Potter. Potter asked him to sign the back of it and give it to his executive secretary; he did.

He acknowledged advising the executive secretary that Potter said to send this certificate down to Clarke at NBFL. 79 Calvin Wadden’s lawyer Brian MacLellan Q.C., who was retained by Wadden on July 17, 2000, testified that Wadden described the account to him as “mother’s account”, “box account” and “orderly market account” and understood that he was being asked to “support the market” with his unencumbered stock in KHI. 80 NBFL submits that Wadden knew that the account was to be used to buy and sell KHI shares.

NBFL fails to note that Wadden was unaware that the shares were being deposited in Clarke’s 540 account. At trial, Clarke testified that the 540 account was his own account. It was not an account of KHI nor operated by Clarke on behalf of KHI.

NBFL’s submission is that it is irrelevant to Wadden’s consent to participate in the “box account” that he did not know that the account was in Clarke’s 540 account name, but it is important that Wadden understood (from the time of the transfer of the CIBC held shares to his NBFL account) that shares pledged as security for an account could not be returned unless the debt was paid off or he posted substitute security. 81 NBFL makes the point that while in Florida with his partner Courtney, immediately after arranging for his 220,000 KHI share certificate to be delivered to NBFL, Courtney told Wadden that he was not prepared to go along with Potter’s request that 100,000 of his KHI shares be placed in the “box account” but would agree to put $100,000.00 into the account.

There is no evidence that, after returning from Florida until May 2000, Wadden asked Potter whether the other partners had contributed, or asked Potter for the return of the extra 120,000 shares he deposited into the account. 82 Making the point that Wadden did not object to, or alternatively, did understand that he was advancing 220,000 KHI shares as security for an orderly market account, NBFL notes a May 11, 2000, e-mail in which Wadden stated that he would like to take Potter and Courtney up on their offer to “equally support the orderly market account with Bruce and that freeing up the 120,000 [shares] will definitely make things easier for me”. 83 On June 7, 2000, 120,000 KHI shares were deposited to Wadden’s NBFL account from one of Potter’s numbered company’s account.

Immediately thereafter Wadden made cash withdrawals from this NBFL margin account, which margin debt totalled 1.026 million dollars as of June 30, 2000. 84 NBFL characterizes the relationship between Wadden and Potter as becoming strained after June 30, 2000, when Potter failed to find a buyer for 250,000 of Wadden’s KHI shares. This relates to Wadden’s evidence that at the time he agreed to purchase 100,000 of Snow’s shares in January 2000 (to assist in Snow monetizing his investment in KHI), Potter had promised to find him a buyer for 250,000 of his shares.

Shortly after June 30, Wadden took steps to sell KHI shares from his account at BMO Nesbitt Burns. BMO would not allow him to do so. This led to Wadden’s retainer of a lawyer, MacLellan, on July 17, 2000. 85 On July 20, 2000, MacLellan sent a fax to Clarke requesting that Wadden’s 100,000 shares in the orderly market account be returned. He stated that this was a follow-up to Wadden’s own request of July 14 and July 17. Clarke was unable to return the 100,000 shares as they were held as security for margin loans owing to NBFL by the 540 account.

After Wadden resolved his disputes with Potter in late August 2000, Ken MacLeod (“MacLeod”), another shareholder and director, caused 100,000 KHI shares to be deposited into Wadden’s account. 86 On August 31, Wadden signed a letter acknowledging the return of all 220,000 KHI shares that had been deposited in the 540 account. On September 5, Wadden took delivery of the 100,000 KHI share certificate.

On October 4, he deposited the certificate into an account he opened at TD Waterhouse and immediately, on the security of that share certificate, made cash withdrawals from that margin account to purchase other shares. 87 NBFL suggests that there is no legal consequence to Wadden’s complaint that the 220,000 shares he deposited into the 540 account on or about March 7 were not the same 220,000 shares that were returned to him on June 7 and August 29, 2000.

It submits this claim has no relevance to whether Wadden in fact consented on March 7 to the deposit of the 220,000 KHI shares in the orderly market account operated by Clarke (through the 540 account). 88 With respect to Wadden’s claim that NBFL refused his sell instructions, it submits that the only evidence of a refusal to sell was a request to sell 3,000 shares at $6.50 made on the afternoon of August 11, 2000. 89 NBFL notes that, in respect of the July 19, 2000, telephone conference call between Wadden and Clarke from the boardroom

of MacLellan’s office, MacLellan and Greenwood were present. Wadden has no record to back up his claim that he gave Clarke instructions to sell KHI shares, and neither MacLellan nor Greenwood has notes or confirm that Wadden instructed Clarke to sell KHI shares during that phone call. Follow up correspondence between MacLellan and Clarke did not refer to any instructions to sell. 90 NBFL acknowledges that on August 11, when Wadden instructed Clarke to sell 3,000 shares at $6.50, Clarke called Colpitts and asked if the trade could be done.

On the basis of that phone call, Clarke refused to execute the sale instructions. NBFL notes that if Clarke was in breach of his obligation to Wadden with respect to that instruction, the proceeds would have been $19,500.00 less commission. This loss could have been mitigated if Wadden had sold the shares after he resolved his issues with Potter.

There were no instructions that would have prevented him from doing so after August 2000. 91 In pre-trial submissions, Wadden complains that NBFL breached its obligations to him with respect to the 28,125 KHI shares Wadden received on January 4, 2001, in exchange for his limited partnership unit. 92 NBFL notes that, at the trial, Wadden testified that in late December he received a call from Potter in which Potter spoke about market pressure on KHI share prices.

Potter advised Wadden that he was using the shares he was receiving as a result of the conversion of the limited partnership unit as security to purchase more KHI shares. Potter asked if Wadden would do the same and Wadden agreed. 93 On January 4, 2001, Wadden e-mailed Colpitts as follows: “Please forward my share certificate for the converted LP to Bruce as soon as possible.

I will be depositing to my margin account and will be able to help Bruce take 20,000 shares of KHI out of the market if we can do this today.” In fact, the share certificate was deposited to Wadden’s NBFL account and Wadden did purchase 20,000 shares on margin. 94 NBFL says the only evidence before the Court is that Wadden consented to the transaction. If these market support transactions were lawful, on the basis that the purchases were made in the expectation that the shares would increase in value, then Wadden has no claim against NBFL.

Alternatively, NBFL argues that if the Court finds that the motive behind the transactions was to manipulate the market illegally, then this is further evidence of Wadden’s willing participation in the manipulation and he is liable on the third party claims by NBFL with respect to any liability it may have to Dunham, Weir, Blackwood and the Barthe estate. 95 Finally, NBFL argues, in respect of its claim against Wadden in the Main Action, and in its Third Party claims, that if the Court finds that the market support was an unlawful activity, Wadden participated.

NBFL submits that Wadden’s participation, or at least his knowledge, as a KHI insider, commenced by February 3, 2000, when he received a copy of an e-mail from KHI’s controller to Clarke referring to shares that were going to become available “to support the market as needed or fill any orders you have pending” following which Wadden had discussions with Clarke. As previously noted, Wadden further deposited 220,000 shares into an account at NBFL with Clarke on March 7, 2000, in order to help support the orderly market account.

On March 9, 2000, Wadden sent an e-mail from Florida to Clarke entitled “Trading Account”, in which it is clear that Wadden understands his participation involved an orderly market account and efforts to find purchasers for KHI shares. 96 In a telling e-mail from Potter to Wadden (copied to Colpitts) dated November 19, 2000, Potter advised that he was hoping to close a 3.25 million-dollar treasury issue to “our German friends [Barthe and Ristow] in the next day or two at a price of $6.50". Potter added: “If the market is driven down in advance of this issue, it is quite likely that the investors will not close”.

Potter urged caution with respect to one of Wadden’s friend’s pressure to find a buyer for his shares. 97 In the fall of 2000, prior to this e-mail, Wadden had been a consistent seller of KHI shares but immediately after this e-mail he purchased 8,300 KHI shares. In December 2000 and January 2001, Wadden and his wife purchased approximately 55,000 KHI shares on margin.

As noted earlier, Wadden agreed that the 28,125 KHI shares he received on conversion of the limited partnership unit would be used to support the market and, in fact, purchased 20,000 KHI shares in January to take pressure off the retail market for KHI shares. 98 This is consistent with two e-mails from Potter to Wadden at this time. In one dated January 1, 2001, Potter advised: ... there is significant selling pressure on KHI on December 29 ... if you can be of any assistance helping to find some buyers, that would be great.

We have been and will continue to be working on this in the coming days but I am concerned that the selling may exceed any support bids we can engender in the next few days. 99 Again, on January 31, 2001, Potter e-mailed Wadden: “From the look of the market it seems we have had success in stabilizing the market and I hope that we can look forward to better days ahead.” Wadden referred in cross-examination to “we” as including all of the founding partners, directors, Colpitts and Clarke. 100 In February the founding shareholders met at Colpitts’ office and pledged to support the market price of KHI shares.

Wadden was placed in charged and paid a monthly fee for performing that function. E-mails expand on how Wadden undertook this job. In a February 9 e-mail to Potter he stated: I have been speaking with Ray, Blois and Ken throughout the day and they have been in supporting the market. Ray and I would really like to get the stock to $5.45 and try to solicit more support from the group going forward.

If we can get to $5.45-$5.50, I would like to see each of us put 5,000 shares into the support side and try to inch up towards $6.00 to $6.50 until we get some positive news on the street. 101 On February 13, Wadden sent an e-mail to Steven Wilsack (Craig Dunham’s partner), in which he tells Wilsack that he told “the whole table” that Wilsack was not in fact selling but rather buying and it helped him to convince others to support the KHI share price

and put the stock in the $6.00 plus range. He added: “I can honestly say I is the reason the damn stock ain’t at $4.00. I am working forthe shareholders.” 102 In February Wadden took a trading course and subscribed to a stock watch program and was spending a considerable amount oftime in front of his computer “tracking and trading stocks”. Wadden’s market support activities included more than KHI.

It showed aclear knowledge and understanding by Wadden that he was trying to assist insiders in more than one company to keep the market priceof publicly traded stocks elevated. 103 NBFL makes the point that after March 2, 2001, Clarke’s 540 account did not trade in KHI shares.

NBFL does not mention thatthe obvious reason for this was that Clarke had run out of margin in that account to continue the efforts that had persisted since at leastearly March 2000, when Wadden had deposited his 220,000 KHI share certificate and Potter had placed $100,000.00 cash into the 540account. 104 NBFL argues that if providing market support was unlawful, clearly Wadden was involved. B.2 Dunlop Clients Submissions 105 The Dunlop Clients submit that the KHI share price collapsed from above $5.00 to nil in less than two months, not because of acataclysmic event threatening KHI.

KHI had just announced an anticipated, substantial contract with the Province of Nova Scotia. 106 On the contrary, KHI collapsed because NBFL and BMO were increasing their purchases of KHI shares, while other brokerswere reducing their ownership. Weir was rebuffed by NBFL when he noticed this and asked Clarke that shares owned by him and hisfamily be sold if the price touched $5.00. 107 When the shares fell below $5.00, counsel submits that margin calls by NBFL occurred.

These margin calls occurred before thecollapse of KHI price and the margin call was the cause of the collapse. 108 A second cause of the losses to the Dunlop Clients was Clarke’s misdeed respecting the trading in KHI shares, including throughhis 540 account, which NBFL failed to stop. Counsel argues that the evidence shows that Clarke used the 540 account to borrowmillions of dollars from NBFL on margin, using money and shares provided by KHI insiders to support the KHI share price. This is thesubstance of NBFL’s allegations in the action it commenced known as the Main Action.

When the various non-NBFL parties attemptedto have NBFL’s Main Action dismissed or, alternatively, the other actions in which NBFL pleaded that Clarke was innocent of anywrongdoing, NBFL advanced its own research and investigations to support its allegation against Clarke and other alleged KHI’s insidersof misdeeds respecting the trading in KHI’s shares. 109 In this respect, counsel refers the court to affidavits filed in NBFL’s pretrial motions, the Brian Awad Memoranda, and thetendered discovery evidence of Mr.

Rousseau, an Executive Vice-President at NBFL in charge of its network of brokers. 110 The Court notes that some of the “evidence” relied upon by counsel in his submissions was not tendered at trial and is not beforethe Court as evidence. 111 Dunlop submits that NBFL’s pretrial machinations and shifting theories of the misconduct of Clarke and others negate NBFL’spretrial submissions to the effect that there was no wrongdoing by anyone, including NBFL.

He contrasts this with his clients’ consistentallegation that Clarke acted wrongly in several respects, which he summarized in his post-trial submissions in nine categories: (1)conflict of interest; (2) breach of confidence; (3) failure to inform or warn; (4) unsuitability; (5) over concentration in one stock; (6)improper financial dealings with clients to the detriment of others; (7) misrepresentation; (8) failure to follow and execute sale orders;and (9) unauthorized trading. 112 Counsel submits that NBFL itself was negligent in failing to properly supervise Clarke and, in addition, is vicariously liable forClarke’s wrongdoing.

All of Clarke’s nine misdeeds are relevant to Dunham’s claim; all but the fifth (over concentration in one stock)are relevant to the Weirs’ claim; all but the fourth, fifth and ninth apply to the Waddens’ claims; and that four of those misdeeds, thefirst, third, sixth and seventh, apply to the Barthe claims. 113 Counsel relies upon the IDAC settlement agreement with NBFL for the truth of its contents, and the evidence of Clarke, to proveClarke’s wrongdoing and NBFL’s negligence and breach of contract in not supervising him. 114 Dunlop notes that, at the end of the plaintiffs’ case, despite filing a lengthy list of proposed witnesses, NBFL called nowitnesses.

The Dunlop Clients submit that the Court should draw an adverse inference against NBFL because they called no evidenceand because of Clarke’s evidence with respect to his handling of the 540 account, his dealings with KHI insiders and with NBFL’smanagement, as well as the nine specific claims of wrongdoing by Clarke.

In this regard, counsel refers the Court to the Law of Evidence, 3rd Edition, by Alan Bryant et al, para 6.449, Falkenham Backhoe Services v Nova Scotia, 2008 NSCA 38, para 48;Constitution Insurance v Coombe, (ONSC), in which, at para 15, the Court cites Chief Justice Gale in Northern WoodPreserves v Hall Corporation Shipping (1973), (ON CA), 2 OR (2d) 335. 115 In all of their claims, the Dunlop Clients plead negligence and breach of contract. In the Dunham claim, counsel claims also thatNBFL breached its fiduciary duty.

Rousseau’s discovery evidence established NBFL’s heightened duty to supervise Clarke and the 540account. NBFL produced no evidence that it supervised Clarke. 116 The Court has already noted that, after Dunlop’s post-trial submissions were made, and for the first time, NBFL acknowledges,in its post-trial submission, that it failed to supervise Clarke in respect of the 540 account. NBFL did continue to claim that Clarke did

nothing wrong. B.2.1 The Wadden Claim 117 Dunlop submits that the wisdom of Wadden’s sale of his interest in Micronet for shares in KHI is not in issue. As of March 7,2000, 440,000 of Wadden’s freely tradable KHI shares were “lodged with NBFL” and had a market value of about three million dollars. 118 How 220,000 ended up in Clarke’s 540 account is important. Wadden says that he agreed to assign these shares, at the request ofPotter, as security for a KHI account that was “off side” and needed for a short term support. The existence of the KHI account at NBFLwas not a secret.

Wadden knew nothing of the 540 account that his shares actually went into. 119 While admitting that Clarke in fact used Wadden’s shares as security to buy and sell KHI shares through the 540 account,Wadden relies first on NBFL’s position that Clarke did nothing wrong with the 540 account.

Alternatively, if Clarke acted wrongly, thatWadden, whose credibility was not impeached, had no personal contact with Wadden about how his 220,000 KHI shares were to beused; did not know that these shares were being used to support Clarke’s 540 account; refused to sign a document drafted by Clarkeacknowledging a loan of shares to Clarke and hired a lawyer to get the share certificates for these shares back.

All of this establishes thatWadden did not voluntarily loan his shares to a broker’s private account. 120 Counsel argues that Clarke acknowledged taking instructions from Colpitts and sometimes from Potter on whether to execute sellinstructions from Wadden. When Wadden put NBFL on notice of Clarke’s wrongful use of his KHI shares, NBFL accepted absurdexplanations from Clarke rather than check the conduct of Clarke in respect of his 540 account. 121 Counsel argues that only then did Wadden “capitulate” and get some of his KHI shares released.

What counsel meant by“capitulation” is not explained in his submission. 122 Wadden claims the value of 440,000 shares lodged with NBFL in March 2000, when their market value was $6.80 per share, or$2,992,000.00.

Because NBFL argued that neither it nor Clarke did anything wrong, it cannot be argued that the market value for KHIshares was not the price on the TSX of $6.80 per share. 123 Absent any evidence that Wadden should not have been allowed to trade freely in these 440,000 shares, but was, in fact,prevented from doing so, and absent evidence that the TSX stock price for KHI shares was not their real market value, the Court shouldnot speculate that the market would not have absorbed the 440,000 KHI shares for less than $6.80 per share. 124 Counsel cites Hodgkinson v Simms (SCC), [1994], 3 SCR 377 for the proposed remedy for Wadden’s capitallosses. 125 Between Clarke’s wrongful taking of instructions from Colpitts to prevent the sale of the 220,000 KHI shares in Wadden’smargin account and the wrongful taking of the 220,000 KHI shares in the 540 account, counsel argues that Wadden is entitled to anaward for damages equal to the value of the TSX public stock price for those shares in March 2000.

B.2.2 The Dunham Claim 126 Craig Dunham’s claim against NBFL is for negligence and breach of contract as well as breach of a fiduciary duty. The claim isbased both on NBFL’s own breaches of duty, and vicariously for Clarke’s wrongdoing. 127 Dunham claims that Clarke, and therefore NBFL, breached a fiduciary duty to Dunham.

On the totality of the evidence, it isclear that Dunham placed himself totally in Clarke’s hand in a manner described in Varcoe v Sterling, (ON SC), 1992Carswell Ont 1156 (ONSC) at paras 86 and 90. 128 Clarke knew that Dunham was a novice investor who relied totally on Clarke’s skill and knowledge to guide him and to diversifyhis account.

Instead, Clarke acted contrary to Dunham’s bests interests in an intentional manner such that Dunham not only lost thevalue of the 150,000 KHI shares placed in the care of Clarke but incurred significant consequential losses. 129 Counsel argues that nothing in Clarke’s conduct could reasonably have warned Dunham that Clarke was in a conflict of interestposition and acting deceitfully toward him. 130 Counsel cites Kerr v Baranow, 2011 SCC 10, at paras 70 and 71, respecting the flexibility given to courts to grant equitableremedies.

Dunham submits that Clarke ruined his life. 131 Dunham claims that the market value of his KHI shares, as they came in Clarke’s “orbit of influence” was $800,000.00. But forClarke’s deceit and failure to disclose his interest in the 540 account as well as his relationship and activities on behalf of KHI’s insiders,Dunham would not have placed his remaining KHI shares with Clarke and would have been able to liquidate them. 132 Counsel argues that, in a 2005 decision removing NBFL’s then counsel in this litigation, Justice Scanlan had admonished NBFLto settle with the truly innocent investors.

Counsel characterized Dunham as, without doubt, one of the clearly innocent investors withwhom NBFL should have settled. Dunham’s submission was made before counsel was aware of NBFL’s post-trial acknowledgment thatit had failed to properly supervise Clarke and his 540 account.

Counsel argues that NBFL should be liable for substantial punitivedamages as described in Whiten v Pilot Insurance, 2002 SCC 18, for the manner in which it strenuously contested Dunham’s claim forseveral years, during which time Dunham lost his home, his credit, his business and his business reputation. 133 NBFL knew it had no defence to Dunham’s claim, even while it advanced conflicting pleadings and claims, including claims first

that Clarke and others had conspired to cause the loss to NBFL and its client and, on the other hand, that neither NBFL nor Clarke had done anything wrong. 134 Counsel stresses that NBFL’s tactics and stratagems protracted the litigation, not unlike the treatment of the Blackburns in Blackburn v Midland Walwyn , 2003 Carswell Ont 684 . In that case, the Court tripled the costs award.

Counsel notes that unlike the Blackburn case, the NBFL managers in this case have not been otherwise punished. 135 NBFL’s reduction in its margin rates for KHI shares were affected suddenly and without regard to the consequences on its clients, including those like Dunham. This irresponsible conduct merits denunciation. 136 Failure to honour its contractual duty of good faith is distinct from breach of contract, ( Whiten , para 79 ), and forms an additional basis for punitive damages.

Counsel refers to para 112 to 125 in Whiten for the measure of punitive damages. 137 Applying these principles, counsel submits a substantial award of punitive damages is warranted because NBFL was so oppressive and affected so many over so extensive a period. B.2.3 The Barthe Claim 138 The late Michael “Ben” Barthe, made two investments in KHI after Clarke commenced his machinations with the KHI stock in March of 2000. 139 First, Clarke contracted to purchase KHI shares for Barthe, who was referred to Clarke by a KHI insider Colpitts.

Counsel submits that Clarke had a concomitant duty when he contracted to act for Barthe in the purchase of shares to disclose his involvement in the 540 account as well as his work for KHI’s insiders in maintaining the KHI share price. He did not disclose these to Barthe. 140 NBFL’s defence that Barthe was not induced by Clarke to buy KHI stock and that the purchase of KHI shares was not an unsuitable investment for Barthe, is not an answer to the “but for” test. Counsel submits that if Clarke had told Barthe what he knew, Barthe would not have purchased the KHI shares.

Compounding Clarke’s non-disclosure was Clarke’s continued manipulation of the market price of the KHI shares, while Barthe purchased shares. 141 Barthe invested $3,315,000.00 in KHI shares. He lost the value of his shares, except a minimal recovery, and the interest on those shares. B.2.4 The Weir/Blackwood Claims 142 Lowell Weir gave explicit instructions to Clarke to sell all KHI shares held by him, his company and his family in January 2001 in the event that the KHI share price dipped below $5.00.

It did and Clarke did not sell his shares. 143 When Weir received a share certificate for 28,125 KHI shares on the redemption of his KHI limited partnership unit, these instructions required Clarke to liquidate those shares. 144 The loss to Blackwood by Clarke’s failure to sell at $5.00 its KHI shares was $42,000.00. The loss to Weir himself was $26,250.00 for the shares he held as of January 2001 and $157,500.00 for the 28,125 shares received into his NBFL account shortly afterwards.

Weir claimed these sums plus interest. 145 The claim by Weir and Blackwood is based upon Weir’s clear instruction to sell, which instruction was not carried out. Weir says it was not complied with because of Clarke’s illegal trading both through the 540 account and otherwise. NBFL was negligent and in breach of its contract with Weir to failing to properly supervise Clarke. 146 Weir claims that when KHI collapsed and NBFL knew, or should have become aware, of Clarke’s illegal activities, Weir and Blackwood should have had their claims for losses quickly resolved.

Instead, it has taken over 10 years. 147 Weir’s credible evidence with respect to his communications with the head office of KHI was uncontradicted by any evidence at trial. It was to the effect that NBFL’s head office agreed to compensate him once NBFL had recovered from those others that it had sued for their

part in the wrongdoing, that the $100,000.00 was an advance on an eventual settlement of Weir’s claims against NBFL, (which advance was documented as a loan for audit purposes only), and NBFL employees made subsequent threats to teach him a lesson, and generally acted in bad faith. All these things merit punitive damages against NBFL.

The effect upon Weir and his family from the liquidation of his margin account with NBFL, and that of Blackwood, which included the forced sale of his shares in Helical (formerly Enervision), created collateral damages in the form of the loss to him of his interest in Helical and his business reputation. These merit punitive damages. B.3 Supplementary Submissions - December 2012 148 At trial, the Dunlop Clients sought to have the Court receive undisclosed evidence that he considered relevant and important to the proceeding.

NBFL objected vehemently to any disclosure of the subject matter of the evidence Dunlop proposed to tender. Counsel advised that NBFL would seek a mistrial if the subject matter was disclosed. The request by Dunlop was made both before the Dunlop Clients had closed their case and at the end of the hearing of all parties’ evidence. 149 Specifically Dunlop requested that his clients be entitled to reopen the case if the evidence he was prevented from introducing at

the trial could, at a later date, be introduced.

The Court advised that it would entertain a motion to receive new evidence within a reasonable time after the close of the evidence, if that occurred before the court had rendered a decision. 150 On December 4, 2012, a Settlement Agreement entered into in June 2005 between NBFL and its Halifax manager Eric Hicks on the one part and the Nova Scotia Security Commission, the Investment Dealers Association of Canada, and Market Regulation Services Inc., respecting the conduct of NBFL and Hicks in relation to its dealings with the subject matter of this litigation, and which, by order of the Commission, had been kept secret until approved by the Commission, was approved by the Nova Scotia Securities Commission and made public. 151 On December 5, 2012, Dunlop wrote to the Court requesting that I grant his request to reopen the case if the evidence that was referred to as the “big secret” became public before I rendered my decision.

He asked that the court reconvene so the NBFL / Hicks settlement agreement could be tendered as evidence and submissions be advanced as to the consequences of the agreement. 152 On December 6, Hodgson, counsel for NBFL, replied in part: For purposes of the Record, NBFL objects to the admissibility into evidence of the Agreement. However, this is an issue which has already been fully argued and upon which your Lordship has already ruled. Accordingly, (unless your Lordship has reconsidered his Decision) NBFL accepts that the Agreement will be entered into evidence as an Exhibit.

All counsel are in your Lordship ’ s hands. However, given the time of the year, I am wondering if it might be more expeditious for Mr. Dunlop to simply provide written argument for “ the consequences ” of the Settlement Agreement ... and for NBFL to provide its written Submissions ... 153 Hodgson’s reference to my decision, was my decision respecting the admissibility of a Settlement Agreement between NBFL and IDAC, arising from failure by NBFL to supervise other branch operations during the time frame of the alleged wrongdoing by Clarke, which decision is reported as 2012 NSSC 76 .

On December 6, Dunlop replied to Hodgson’s letter thanking him “. . . for agreeing that the Settlement Agreements be entered as exhibits for your consideration . . . [and] I am in agreement with Mr. Hodgson’s suggestion that we deal with the matter by way of written argument rather than try to

schedule a court appearance.” 154 On the same day, the Court wrote to counsel, in part as follows: “. . . based on counsel’s agreement on procedure, I am prepared to accept written submissions as to the “consequences” (your words) or use that may be made of the settlement agreement.” I set time lines for written submissions. Dunlop’s submissions were received on December 14, and NBFL’s on December 21, 2012.

B.3.1 Dunlop Clients Supplementary Submissions 155 In June 2005, NBFL and its Halifax manager Eric Hicks, entered into a Settlement Agreement with the Nova Scotia Securities Commission Staff, the Investment Dealers Association of Canada (“IDAC”) and Market Regulations Services Inc. (“MRS”), with an attached Statement of Allegations. The Agreement dealt with the subject matter of this litigation and the prior publicly-available settlement agreement between the Commission and Clarke.

The Agreement provided that it was to remain confidential until approved by the Commission. 156 The NBFL/Hicks/NSSC/IDAC/MRS Settlement Agreement was approved by the Commission and became public on December 4, 2012.

The Dunlop Clients tendered the Settlement Agreement, the decision of the Nova Scotia Securities Commission (“Commission”) dated December 4, 2012, approving the Settlement Agreement signed June 2005, together with the Nova Scotia Securities Commission decision dated April 17, 2012, amended September 30, 2012, and two decisions of the Nova Scotia Court of Appeal respecting the Settlement Agreement - the Court’s decisions of January 31, 2012 ( 2012 NSCA 12 ) and September 21, 2012, ( 2012 NSCA 99 ). 157 These decisions discuss the process by which the Settlement Agreement was kept secret for seven years.

They explain why the Dunlop Clients were unaware of the Settlement Agreement and agreed facts in the Statement of Allegations until shortly before the joint trial of these proceedings was commenced.

The decisions also explain why the Dunlop Clients were prevented from introducing evidence in this litigation of the Settlement Agreement and the agreed Statement of Allegations until after the trial was completed and initial post-trial submissions in this proceeding were made. 158 They explain why it is appropriate that this Court, not having yet rendered a decision, entertains the request to admit into evidence, and consider, if admitted, the purpose, and how the Settlement Agreement approved by the Commission on December 4, 2012, should impact this proceeding. 159 In substance, the Agreement provides that NBFL and Hicks agree that the Settlement Agreement was entered into on the basis of the facts contained in the Statement of Allegations of NSSC Staff attached to the Settlement Agreement.

The parties to the Agreement agree that the facts and conclusions are for the purpose of the Settlement Agreement only. The agreement on the facts and conclusions in the Statement of Allegations is “without prejudice to [NBFL] in any other proceedings of any kind, including . . . any civil or other proceedings”.

The Agreement sets out, as mitigating factors, NBFL’s full co-operation with the investigation, and the fact that “NBFL has conducted a thorough and rigorous examination of its internal procedures and policies resulting in significant changes to its compliance regime in order to enhance its ability to supervise and to detect compliance violations by its employees in their trading activities.” Finally, “this Settlement Agreement and its terms are to be treated as confidential until approved by the Commission and only thereafter if, for any reason whatsoever, [it] is not approved by the Commission.” 160 The agreed Statement of Allegations attached to the Settlement Agreement contains 34 paragraphs that mimic in substance evidence heard orally in this litigation.

The December 4, 2012, decision of the Commission summarizes the factual basis admitted to by NBFL as its violations of the Securities Act . The Commission summarized the facts as follows:

3. ... relates to the Respondents’ actions, or lack thereof, in connection with certain activities of Bruce Elliot Clarke, a former employeeof NBFL. Mr. Hicks was Mr. Clarke’s immediate supervisor at NBFL. Mr. Clarke entered into a settlement agreement with theCommission in 2004 relating to his actions involving Knowledge House Inc. which were a violation of Nova Scotia securities laws andcontrary to the public interest. ... 11. The violations of the Act admitted to by NBFL and Mr. Hicks occurred between 1999 and 2001. ... 17.

It is clear that the violations specified in the Statement of Allegations attached to the Settlement Agreement were seriousviolations. The violations demonstrated, among other, a lack of attention to internal policies, a failure to detect a pattern of manipulativetrading, a failure to establish and implement proper internal control procedures, a failure to ensure that the NBFL branch officeconfirmed with prudent business practices and failure to properly supervise certain staff members.

The Respondents have admitted thefacts set out in the Statement of Allegations, and acknowledge that during the relevant period they violated Nova Scotia securities laws,and engaged in conduct contrary to the public interest as set out in the Statement of Allegations. 161 The Statement of Allegations relates to the activities of Clarke, commencing in 1999, as an investor advisor for a number of KHIinsiders and entering into an arrangement to act jointly to maintain the market price of KHI shares.

Clarke carried this out throughseveral means, including, in particular, trading in the 540 account, with cash and share transfers from KHI insiders and margin debt fromNBFL.

Deposits of money and shares from KHI insiders into the 540 account, enabled Clarke to buy significant quantities of KHI shareson margin in a manner described in para 33 of the agreed Statement of Allegations, resulting in a pattern of manipulative trading thatNBFL failed to detect and prevent. 162 In their December Supplementary Submissions, the Dunlop Clients appear to accept as given that the Settlement Agreementconstitutes acknowledgment of facts in the Statement of Allegations for this litigation, despite para 4 of the Agreement. 163 Counsel focuses on the non-disclosure by NBFL of the existence of the Settlement Agreement, and the effect on this litigation. 164 Counsel argues that the Settlement Agreement made in June 2005 was improperly concealed for seven years, contrary to theSecurities Act, as determined by the Commission in 2012.

The Civil Procedure Rules, both the old (1972) and the new (2009), requireparties to fully disclose the existence of all relevant documents, and to disclose the contents of all relevant documents for which privilegeis not expressly and specifically claimed. NBFL never disclosed the existence of the Settlement Agreement, nor claimed non-disclosureof their contents on the basis of privilege. 165 Demand for disclosure was made by the Dunlop Clients on NBFL.

NBFL should have acknowledged its existence and claimedprivilege. 166 The Escrow Agreement that NBFL relied upon to not disclose the existence of the Settlement Agreement had no legal validity, asdetermined by the Commission, a Supreme Court Justice, and the Nova Scotia Court of Appeal. Any bona fide but mistaken belief thatNBFL could legally not disclose the existence of the Agreement ended with those decisions. 167 NBFL’s refusal to disclose the existence of the Agreement, and the admissions contained in the Agreement, including the

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