R. v. Potter; R. v. Colpitts, 2020 NSCA 9

Nova Scotia Court of Appeal Citation: R. v. Potter; R. v. Colpitts , 2020 NSCA 9 Date: 20200205 Docket: CAC 478375 and CAC 478392 Registry: Halifax Between: Daniel Frederick Potter Appellant/Respondent on Cross-Appeal and Sentence Appeal v. Her Majesty the Queen Respondent/Appellant on Cross-Appeal and Sentence Appeal and Between: Robert Blois Colpitts Appellant/Respondent on Cross-Appeal and Sentence Appeal v.

Her Majesty the Queen Respondent/Appellant on Cross-Appeal and Sentence Appeal Judge: The Court (Bourgeois, Van den Eynden, and Derrick JJ.A.) Appeal Heard: September 11–13; 16–19, in Halifax, Nova Scotia Subject: Abuse of process; s. 7 of the Charter ; pre-charge delay; investigative delay; s. 11(

b) of the Charter ; post-charge delay; “frivolous” defence applications; “illegitimate” defence applications; defence unavailability; delay caused by co-accused; markedly inefficient defence conduct; a judge’s case and trial management powers; Jordan ’s complexity exceptional circumstance; factual investigative witnesses; lay opinion evidence; expert opinion evidence; co-conspirators’ exception to the hearsay rule; conspiracy; fraud on the public market; market manipulation; misapprehension of evidence; judicial bias; sentencing range for large-scale, complex fraud; principle of proportionality; delay as mitigating; lawyer fraud.

Summary: After Knowledge House Incorporated (“KHI”) collapsed in September 2001, regulatory and criminal investigations into the conduct of Daniel Potter, KHI’s Chief Executive Officer, and Blois Colpitts, KHI’s lawyer and Lead Director, followed. On March 17, 2011, after an eight-year investigation, the Crown charged Mr. Potter and Mr. Colpitts, along with KHI’s stockbroker. The Crown alleged that they, along with other KHI principal shareholders who were not charged, had spent over a year and a half engaging in a variety of manipulative techniques to artificially prop up the price of KHI shares.

The company’s stockbroker pleaded guilty. Mr. Potter and Mr. Colpitts did not deny the activity forming the subject matter of the charge occurred nor what was said in e-mails sent between them and relied on by the trial judge. Instead, they asserted their activities were lawful and the Crown’s evidence deficient and unreliable. They also unsuccessfully challenged the admissibility of evidence from an RCMP investigator, evidence from the Crown’s market expert, and e-mails written by co- conspirators. On March 9, 2018, Mr. Potter and Mr.

Colpitts were convicted of conspiracy to affect the public market price of KHI shares with intent to defraud ( s. 465(1) (

c) of the Criminal Code ) and of affecting the public market price of KHI shares with intent to defraud ( s. 380(2) of the Criminal Code ) during the period of January 2000 to August 2001. Justice Kevin Coady sentenced Mr. Potter and Mr. Colpitts to terms of imprisonment of five and four and a half years, respectively. They appeal against their convictions. The Crown appeals against the sentences and cross-appeals against the convictions stayed under the Kienapple principle in the event that the conviction appeals are allowed.

Issues:

(1) Did the trial judge err in failing to find that Mr. Potter’s and Mr. Colpitts’ rights under s. 7 of the Charter were infringed due to an abuse of process stemming from pre-charge delay, and thus erred in failing to enter a stay of proceedings under s. 24(1)?

(2) Did the trial judge err in dismissing Mr. Potter’s and Mr. Colpitts’ applications for a stay of proceedings because their rights to be tried within a reasonable time under s. 11(

b) of the Charter were infringed?

(3) Did the trial judge err in law by admitting the evidence of Ian Black and then by relying on that evidence?

(4) Did the trial judge err in law by qualifying Langley Evans to give expert opinion evidence and then by relying on that evidence?

(5) Did the trial judge err in law by admitting into evidence the out-of-court statements of co- conspirators?

(6) Were the guilty verdicts for conspiracy unreasonable?

(7) Were the guilty verdicts for fraud on the public market unreasonable?

(8) Did the trial judge misapprehend the evidence, and, in particular, did he misapprehend the defences advanced?

(9) Did the trial judge’s conduct give rise to a reasonable apprehension of bias, or establish actual bias against Mr. Potter and Mr. Colpitts?

(10) Did the trial judge err in law and in principle in imposing sentences that are demonstrably unfit in all the circumstances? Result: The conviction appeals are dismissed. Leave to appeal the sentences is granted, but the sentence appeals are dismissed, as are the cross-appeals.

(1) The judge did not err in finding there was no abuse of process and therefore Mr. Potter’s and Mr. Colpitts’ s. 7 Charter rights were not infringed. First, their argument that the pre-charge delay resulted in lost evidence in the form of faded witness memories is rejected. They fell far short of identifying, as is required, what specific evidence was lost, and they had other feasible options to advance their defences. Second, their argument that the delay caused by the funding dispute between the provincial and federal prosecution services was an abuse of process is rejected.

While the investigation was lengthy, it is not the court’s role to scrutinize the efficiency of investigations. The judge’s conclusion that the investigative delay was “unacceptable” did not equate to finding egregious or oppressive Crown conduct. Absent a Charter breach, the judge did not err in refusing to grant a stay under s. 24(1) of the Charter .

(2) The trial judge did not err in dismissing Mr. Potter’s and Mr. Colpitts’ applications under s. 11(

b) of the Charter . Even if some of their allegations regarding the trial judge’s calculation of post- charge delay had some merit, the result would still be far less than the delay they allege. The trial judge did not err in finding they were responsible for the vast majority of the post-charge delay. His finding of 41 months of net delay was supportable on the record. While the net delay was above the 30-month ceiling set out in Jordan and was therefore presumptively unreasonable, the Crown had justified the excess delay.

The matter was sufficiently complex, and the Crown took reasonable steps to minimize delay. Mr. Potter’s and Mr. Colpitts’ rights to a trial within a reasonable time were not infringed.

(3) The trial judge did not err with respect to the evidence of Ian Black. The trial judge’s mid-trial ruling did not improperly admit Mr. Black’s evidence as lay opinion evidence; as he had not yet heard that evidence, he did not make a conclusive determination. Mr. Potter’s and Mr. Colpitts’ objections to Mr. Black’s evidence during the trial were addressed; they have not pointed to any particular objection where their concerns were not resolved. The record also demonstrates Mr. Black’s work product (spreadsheets) was admitted into evidence with Mr. Potter’s and Mr. Colpitts’ tacit consent. Mr.

Black did not give lay opinion evidence at trial. His evidence constituted a factual overview of the investigation. Finally, the trial judge did not err in his use of Mr. Black’s evidence. He independently assessed the evidence, including the emails introduced through Mr. Black’s testimony, and drew his own inferences and conclusions.

(4) The trial judge did not err with respect to Langley Evans’ evidence. He correctly applied the test from Mohan / White Burgess for qualifying an expert and admitting expert evidence. His determination Mr. Evans was an objective and unbiased witness who conducted an independent, reliable analysis was firmly supported by the record. Mr. Potter and Mr. Colpitts failed to point to any evidence suggesting otherwise. The trial judge also did not err in his use of Mr. Evans’ evidence. He was entitled to determine that Mr.

Evans’ mistakes in his report, including incorrect margin calculations, were insignificant and that, in this case, Mr. Evans did not need to assess order information to provide a reliable opinion on market manipulation. The trial judge also did not surrender his fact-finding role; he considered Mr. Evans’ evidence in the context of all the evidence and determined the issues for himself.

(5) The trial judge did not err with respect to the out-of-court statements (the contemporaneous emails) of co-conspirators. Mr. Potter’s and Mr. Colpitts’ argument that the judge neglected to meaningfully assess the necessity and reliability of the hearsay email communications is rejected. Necessity may be found by focusing on the availability of the testimony. The Crown was not required to call the declarants as witnesses. Like intercepts and other written communications, the emails were inherently reliable. The trial judge’s threshold determinations on necessity and reliability are entitled to deference. Mr.

Potter’s and Mr. Colpitts’ attacks on the trial judge’s assessment of the ultimate reliability of the emails also do not withstand scrutiny. There was no evidence before the trial judge that the declarants in the email communications may have been untruthful. The emails resonate with candour and spontaneity. They only support one

interpretation. The trial judge also properly applied the three step test from Carter to admit the emails under the co-conspirators’ exception.

(6) The guilty verdicts for conspiracy were reasonable. The trial judge determined Mr. Potter and Mr. Colpitts were guilty of conspiracy to affect the market price of KHI shares with intent to defraud after an exhaustive review of the leading case authorities, an application of the correct legal principles, and a comprehensive and logical examination of the vast amount of evidence before him.

He looked at the emails which disclosed an agreement to unlawfully influence the KHI stock price, the trading activity in KHI shares as disclosed by the Match Trade Report, and the relationship between the emails and the Match Trade Report. He considered the testimony of the Crown’s market expert, Langley Evans, explaining how the market operates and the manipulative techniques that can be used to distort it, and the testimony of others. The evidence established beyond a reasonable doubt Mr. Potter, Mr.

Colpitts, and their co-conspirators acted in concert to pursue a common objective, affecting the market price of KHI shares through fraudulent means. In the face of the evidence accepted by the trial judge, it is not enough for Mr. Potter and Mr. Colpitts to assert on appeal that their market activities were lawful. There was no credible or reliable evidence before the judge that supported those claims. The trial judge’s determination that Mr. Potter and Mr. Colpitts were participants in an agreement to commit an unlawful act was firmly anchored in the law and facts.

(7) The guilty verdicts for fraud on the public market were reasonable. This case turns on the facts the trial judge diligently reviewed. What the trial judge heard from witnesses and saw in the documentary record was evidence of the unlawful nature of Mr. Potter’s, Mr. Colpitts’, and their co- conspirators’ market activities during the indictment period—market domination, sales suppression, high closing, parking stock, use of nominee accounts and incentives, non-disclosure of material information—all in the service of propping up the KHI share price with the intent to defraud.

The evidence the trial judge accepted as credible and reliable supported his conclusion the actus reus and mens rea for fraud on the market had been proven beyond a reasonable doubt. The email communications taken together with the trading in KHI stock provide incontrovertible proof of the deceitful nature of Mr. Potter’s and Mr. Colpitts’ conduct, their intention to defraud, and the effect their conduct had on the market price of KHI shares. There was a direct causal relationship between their dishonest acts rigging the market and the risk of financial deprivation to the investing public.

(8) The trial judge did not misapprehend the evidence. The evidence showed normal market forces of supply and demand were displaced by manipulative techniques resulting in the artificial inflation of the KHI share price throughout the indictment period. Mr. Potter and Mr. Colpitts accomplished this by not disclosing material information that would have been important for investors to know (deceit), directly lying to investors (falsehood), and utilizing manipulative strategies in a highly regulated industry (other fraudulent means). Nor did the trial judge misapprehend the defences advanced.

It is irrelevant whether Mr. Potter and Mr. Colpitts complied with certain disclosure requirements of the securities industry. KHI stock was purchased by investors who had no idea the share price was being rigged. Financial institutions loaned money on margin against the apparent value of the stock in complete ignorance of the co-conspirators’ exhaustive efforts to buoy up the share price. There is no such thing as a “fiduciary duty” defence to fraud. Corporate obligations cannot be used to shield criminality. The criminal law does not recognize a defence of contributory negligence.

The facts that National Bank Financial failed to properly supervise their co-accused, Bruce Clarke, KHI’s stockbroker, and had egregiously misconducted itself in the civil litigation have no relevance to the criminal prosecution against Mr. Potter and Mr. Colpitts. The trial judge reached the entirely supportable conclusion that the KHI stockbroker was not providing, nor did Mr. Potter and Mr. Colpitts believe he was providing, market making services. The testimony supporting the lawfulness of the trading activity came from defence witnesses the trial judge rejected as lacking credibility. Mr.

Colpitts’ submission that the trial judge gave his defence short shrift is equally lacking in merit. The trial judge reacted to the evidence Mr. Colpitts sought to elicit from witnesses by explaining it was not responsive to the charges. The record confirms the trial judge tried hard to focus Mr. Colpitts and assist him in putting forward his defence. The record is replete with examples of the trial judge’s patience, fairness, and restraint.

(9) The conduct of the trial judge did not establish bias nor give rise to a reasonable apprehension of bias. The trial judge was correct in the recusal motions that Mr. Potter’s and Mr. Colpitts’ complaints, when properly put in context, did not give rise to a reasonable apprehension of bias or establish actual bias. Mr. Potter’s and Mr. Colpitts’ submissions that the stay decisions were a product of bias or pre- determinations of the outcome of trial are also rejected. They were a product of the trial judge attributing delay, as he was required to do.

The trial judge’s finding they had adopted a strategy of delay was a conclusion well-founded in the record. The assertion the trial judge’s trial management rulings demonstrate bias is also unequivocally rejected. The trial judge, in exercising his discretion, applied the appropriate legal principles. Nor was the trial unfair. The record is clear Mr. Colpitts was not restricted in calling evidence. He simply was required to seek leave to call additional witnesses. He never sought leave. Given the difficulties Mr.

Colpitts demonstrated in arranging witnesses, the expectations the trial judge placed on him were entirely warranted. Nor did requiring leave to bring a mistrial application give rise to a reasonable apprehension of bias. A reasonably informed observer would be aware of a trial judge’s case and trial management powers in light of recent Supreme Court of Canada direction regarding the court’s role in preventing delay. The reasonable person could also not conclude that the trial judge had pre-judged Mr. Colpitts’ defence and lacked impartiality. The interjections by the trial judge when Mr.

Colpitts was presenting his defence demonstrate the care he took to ensure Mr. Colpitts was well equipped to advance a coherent, responsive defence. Further, the record does not support Mr. Potter’s allegation that the trial judge’s alleged lack of impartiality impacted his decision not to testify. Finally, these latter bias allegations were never made to the trial judge. The entire record shows a trial judge who diligently applied his best efforts to ensure a very complex prosecution was heard in a manner that respected Mr. Potter’s and Mr. Colpitts’ Charter rights.

Their allegations relating to bias are entirely without merit.

(10) Leave to appeal sentences is granted but the appeals are dismissed. While some bases exist for disagreeing with the trial judge in relation to how he dealt with aspects of the issues, intervention to increase the sentences he imposed has not been justified. An appellate court owes significant deference to sentencing judges. While the trial judge erred in equating the specific intent element of s. 380(2) and the s. 380.1(1)(

b) aggravating factor, this error is of no consequence. There is agreement with the Crown that the sentencing range the trial judge identified for s. 380(2) offences—three to six years— is too compressed with an upper end that is too low. However, the trial judge’s identification of the range does not amount to reversible error. The Crown has failed to show the sentences were unfit. The sentences imposed took proper account of the gravity of the offences committed by Mr. Potter and Mr. Colpitts and the degree of their moral culpability.

The trial judge considered all the significant aggravating factors the Crown emphasized. He did not overemphasize the mitigating factor of delay. He did not err in factoring into the sentencing calculus the professional jeopardy faced by Mr. Colpitts as a consequence of his criminal convictions. He did not err in refusing to find that lawyers convicted of large-scale complex frauds should face a higher sentencing range than non-lawyers. The trial judge undertook a careful balancing of all the factors he was required to consider in crafting proportionate sentences for these offenders.

His highly discretionary determination deserves deference. This information sheet does not form part of the court’s judgment. Quotes must be from the judgment, not this cover sheet. The full court judgment consists of 303 pages.

Nova Scotia Court of Appeal Citation: R. v. Potter; R. v. Colpitts , 2020 NSCA 9 Date: 20200205 Docket: CAC 478375 and CAC 478392 Registry: Halifax Between: Daniel Frederick Potter Appellant/Respondent on Cross-Appeal and Sentence Appeal v. Her Majesty the Queen Respondent/Appellant on Cross-Appeal and Sentence Appeal and Between: Robert Blois Colpitts Appellant/Respondent on Cross-Appeal and Sentence Appeal v. Her Majesty the Queen Respondent/Appellant on Cross-Appeal and Sentence Appeal Judges: Bourgeois, Van den Eynden, and Derrick JJ.A.

Appeals Heard: September 11–13; 16–19, 2019, in Halifax, Nova Scotia Held: Conviction appeals dismissed; Leave to appeal sentences granted; Cross-appeals and sentence appeals dismissed, per reasons for judgment of the Court Counsel: Brian H. Greenspan, Jane O’Neill QC, and Michelle Biddulph, for the appellant Mr.

Potter (respondent on cross-appeal and sentence appeal) Robert Blois Colpitts, appellant in person (respondent on cross-appeal and sentence appeal) Mark Covan, James Martin, and Scott Millar, for the respondent (appellant on cross-appeals and sentence appeals) Table of Contents Overview .. 1 The Origins of KHI 2 A

Summary of the Evidence Relied on by the Trial Judge . 3 Ian Black . 4 Langley Evans . 5 The Match Trade Report 6 The Contemporaneous Communications . 6 In a Nutshell, What the Trial Judge Concluded from the Evidence . 7

The Key Participants in the Conspiracy . 8 The Email Communications, the Objective Trading Evidence, and the Opinions of Langley Evans . 11 Procedural Background . 57 The Investigatory Period . 58 The Pre-trial Period . 58 The Trial Period . 61 Issues . 63 Analysis . 65 Issue #1: Did the Trial Judge Err in Failing to Find that Mr. Potter’s and Mr.

Colpitts’ Rights Under s. 7 of the Charter were Infringed due to an Abuse of Process Stemming from Pre-charge Delay, and thus Erred in Failing to Enter a Stay of Proceedings Under s. 24(1)? 65 Background . 65 Position of the Parties on Appeal 69 Legal Principles . 71 Analysis . 73 Standard of review .. 73 Fair trial rights . 73 Residual category . 75 Conclusion . 79 Issue #2: Did the Trial Judge Err in Dismissing Mr. Potter’s and Mr. Colpitts’ Applications for a Stay of Proceedings Because their Rights to be Tried Within a Reasonable Time Under s. 11(

b) of the Charter were Infringed? . 79 Background . 80 Position of the Parties on Appeal 83 Legal Principles . 85 Analysis . 89 Standard of review .. 89 Overview .. 90 Attribution of 21 months arising from Stay Decision #1 . 92 Attributions in Stay Decision #2 . 105 Exceptional circumstances . 120 Observations on net delay . 121 The trial judge’s complexity finding . 121 Conclusion . 127 Issue #3: Did the Trial Judge Err in Law by Admitting the Evidence of Ian Black and then by Relying on that Evidence? . 127 Background . 128 Position of the Parties on Appeal 132 Analysis . 134 Nature of the mid-trial ruling . 134 Lack of meaningful objection at trial 135 The nature of Mr.

Black’s evidence . 137

The trial judge’s use of Mr.

Black’s evidence . 142 Conclusion . 143 Issue #4: Did the Trial Judge Err in Law by Qualifying Langley Evans to give Expert Opinion Evidence and then by Relying on that Evidence? . 143 Background . 143 Position of Appellants . 144 Standard of Review .. 146 The trial judge’s application of the relevant legal principles . 147 The trial judge’s use of the evidence adduced at trial 156 Conclusion . 161 Issue #5: Did the Trial Judge Err in Law by Admitting into Evidence the Out-of-Court Statements of Co-conspirators? . 161 Background . 161 Hearsay Evidence and the Co-conspirators’ Exception . 162 The Defence Application . 163 Threshold Admissibility and the Defence Burden . 163 The Position of the Appellants . 165 Standard of Review .. 166 Analysis . 166 Necessity . 168 Reliability . 170 Conclusion . 179 Issue #6: Were the Guilty Verdicts for Conspiracy Unreasonable? . 179 The Essential Elements of Conspiracy . 179 Standard of Review .. 180 An Unlawful Agreement 181 Carter Step #1—Proof of a Conspiracy Beyond a Reasonable Doubt 185 Carter Step #2—Probable Membership in the Conspiracy . 193 Carter Step #3—Declarations in Furtherance of the Conspiracy . 195 Conclusion . 196 Issue #7: Were the Guilty Verdicts for Fraud on the Public Market Unreasonable? 197 Issue #8: Did the Trial Judge Misapprehend the Defence Evidence and, in Particular, did he Misapprehend the Defences Advanced? . 197 Fraud . 197 How the Trial Judge Arrived at Guilty Verdicts for Fraud . 198 The Errors Alleged by the Appellants (Fraud) 201 The Errors Alleged by the Appellants (Misapprehension of Evidence) 202 Standard of Review .. 203 Fraud . 203 Misapprehension of Evidence . 203

Analysis . 203 The lack of evidence to establish criminality claim .. 204 The misapprehension of defence evidence claim .. 206 Cases relied on by the appellants . 208 Rejection of the defences—no error 217 Conclusion . 225 Issue #9: Did the Trial Judge’s Conduct Give Rise to a Reasonable Apprehension of Bias, or Establish Actual Bias Against Mr. Potter and Mr.

Colpitts? ... 225 Background/Position of the Parties . 226 Legal Principles . 228 Bias . 228 Case and trial management 231 Analysis . 235 Standard of review .. 235 The trial judge’s comments, pre-trial and stay decisions that allegedly demonstrated his actual bias . 235 The trial judge’s trial management rulings . 246 The trial judge’s treatment of the mistrial motion . 251 The trial judge’s treatment of the defences . 253 Conclusion . 257 The Sentence Appeals . 258 Introduction . 258 Overview of the Parties’ Positions on Appeal 259 Standard of Review .. 259 The Parties’ Positions at Sentencing . 261 Background Facts . 261 The Trial Judge’s Reasons for Sentence . 262 Analysis 269 The Sentencing Range for s. 380(2) Offences . 269 A Sentencing Range that is Too Compressed but No Reversible Error 274 The Sentences are not Demonstrably Unfit 283 Conclusion 288 Disposition . 289 By the Court: Overview [ 1 ] When Knowledge House Incorporated (“KHI”), a small publicly traded e-learning company, collapsed in 2001 few could have predicted the breadth of the consequences to follow.

The financial losses that flowed from its demise may have been contemplated, at least in part, but even those intimately involved in the company likely did not anticipate the waves of regulatory, civil, and criminal proceedings that have rolled through the past 19 years.

[ 2 ] For Daniel Potter, KHI’s Chief Executive Officer, and Blois Colpitts, legal counsel and Lead Director, their actions led to serious criminal consequences. They were convicted of conspiracy to affect the public market price of shares with intent to defraud ( s. 465(1) (

c) of the Criminal Code [1] ) and of affecting the public market price of shares with intent to defraud ( s. 380(2) of the Criminal Code ). The trial judge, Justice Kevin Coady, sentenced Mr. Potter and Mr. Colpitts to terms of imprisonment of five and four and a half years respectively. They appeal against their convictions. The Crown appeals the sentences. [ 3 ] The trial was long and demanding. It spanned more than 160 days, spread over two years. The record before the trial judge was massive. Fifty-seven Crown witnesses testified followed by Mr. Colpitts’ 17 witnesses and Mr. Colpitts himself. Mr.

Potter called no evidence. Tens of thousands of documents were contained in 184 exhibits. Exhibit 1 alone contained 5,672 electronic documents consisting of financial documents, reports, market analysis, and over 800 communications between the parties. As we will outline later, there were numerous pre-trial and mid-trial applications that produced a multitude of decisions on a broad range of issues. The trial judge’s reasons giving rise to the convictions are contained in 715 paragraphs. [ 4 ] Mr. Potter and Mr.

Colpitts contended their activities were legitimate and consistent with their corporate responsibilities. However, the trial judge did not see it that way. He found the defendants engaged in manipulative strategies to artificially maintain the KHI share price. He was satisfied the conduct purported to be lawful was unlawful and that the Crown had established guilt beyond a reasonable doubt. [ 5 ] On appeal, Mr. Potter and Mr. Colpitts launched a wide sweeping attack. In an appeal hearing lasting seven days, Mr. Potter and Mr.

Colpitts advanced a litany of missteps and misdeeds that they say ultimately led to improper convictions. They fault the police for the delay in investigating and laying the charges. They fault the Crown for the delay incurred due to the approach they took to advancing the prosecution. They fault the trial judge for allowing improper evidence to be introduced at trial, and then improperly relying on it. They say the trial judge did not understand the defences they were attempting to put forward, and further fault him for allegedly demonstrating “sustained animosity” and bias towards them.

In short, they assert their defences were valid and their trial was unfair. [ 6 ] This is an appeal. Not a retrial. Mr. Potter and Mr. Colpitts must establish the trial judge erred. However, despite stridently proclaiming they were at the mercy of a biased judge and denied a fair trial, Mr. Potter and Mr. Colpitts have not substantiated their claims. [ 7 ] Our review of the record reveals a diligent trial judge focused on ensuring the prosecution was heard in a manner that respected Mr. Potter’s and Mr. Colpitts’ rights, the rules of evidence, and the applicable substantive law.

In the following reasons, we explain why Mr. Potter’s and Mr. Colpitts’ complaints lack merit, and why their appeals against conviction are dismissed. [ 8 ] As for the sentences imposed, the Crown says they are demonstrably unfit, and the circumstances of the offences warrant longer periods of incarceration. Sentencing is a highly individualized exercise. As an appellate court, we owe deference to the trial judge’s weighing of the relevant sentencing factors.

We should intervene only if he exercised his discretion unreasonably and are also satisfied the sentences are demonstrably unfit. [ 9 ] We grant leave to appeal but dismiss the sentence appeals. In our reasons, we explain why there is no basis to justify appellate intervention. The Origins of KHI [ 10 ] KHI was founded in 1984 by Dr. Bernard Schelew for the development of medical education software. Known then as Knowledge House Publishing Limited, in 1988 it obtained a listing on the Montreal Stock Exchange. Mr. Potter was a member of the Board of Directors. [ 11 ] In 1998, Mr.

Potter took a controlling interest in KHI and resigned from the Board. Mr. Colpitts, legal counsel to KHI, took Mr. Potter’s seat. Mr. Potter had a transformative vision for KHI.

As the trial judge noted, it was to transition the company to “a learning, performance support and information technology company” that would be instrumental in the “complete overhaul of the K-12 and post- secondary education system through the introduction of collaborative, problem-based learning programs”. [2] [ 12 ] Although a pure e-learning company was the ultimate objective, the initial business model was as a provider of school technology infrastructure.

KHI had an impressive start, acquiring Nova Scotia companies with lucrative government contracts to supply computer hardware, software, warranty support, and installation services to a K-12 public education system. A business incubation centre and a distance learning centre were also absorbed into the KHI fold. [ 13 ] The initial contracts extended to early 2001 and provided KHI with a revenue stream. KHI also raised significant capital in 1998 and 1999 through a limited partnership offering (“KHLP”).

Various profitable contracts were signed in late 1999 and early 2000 for partnerships in the private and public sector for technology and services. A

Summary of the Evidence Relied on by the Trial Judge [ 14 ] Despite the legitimate business activity being undertaken by KHI, according to the trial judge, there was rot at its core. He accepted the Crown’s allegations that, during the period of January 2000 to August 2001, Mr. Potter, KHI’s CEO, and Mr. Colpitts, KHI’s lawyer, conspired with Bruce Clarke, [3] the company’s stockbroker, and others, including a number of KHI principal shareholders, to fraudulently maintain the share price of KHI stock at artificially high levels.

The unindicted conspirators were a group that included Calvin Wadden, Raymond Courtney, Ken MacLeod, Bernard Schelew, Eric Richards, and Stephen Wilsack, amongst others. The Crown’s witnesses included Steven Clarke, Bruce Clarke’s son, who worked in his father’s brokerage business, and Gerard McInnis, KHI’s Senior Vice-President Finance and Accounting, who each were found to have played instrumental roles in the conspiracy.

[ 15 ] The Crown alleged the conspirators used a variety of manipulative techniques that included: buy-side domination of the market; sales suppression of stock; high closing the stock; the use of incentives to induce the purchase or suppress the sale of stock; parking stock; the use of an account owned by Mr. Clarke—the 540 account—to buy stock; and the non-disclosure of material information.

The trial judge noted the Crown’s allegation that the techniques were employed “to maintain access to credit sources, to entice new investments and to protect the defendants’ personal net worth”. [4] [ 16 ] During the indictment period a core group of conspirators did the heavy lifting, including purchasing significant amounts of KHI stock using various techniques and suspect accounts. According to the trial judge, Mr.

Potter, Raymond Courtney, Calvin Wadden, Ken MacLeod, and Bernard Schelew schemed and maneuvered to keep up the appearance of a company performing strongly in the market. (The trial judge’s references to “suspect accounts” related to accounts “connected to the alleged conspiracy”. [5] ) Mr. Colpitts was instrumental in assisting these efforts and Bruce Clarke ensured the conspirators’ instructions were carried out. [ 17 ] Mr. Potter and Mr. Colpitts challenged the case against them by asserting their activities had been lawful and the Crown’s evidence deficient and unreliable.

They argued unsuccessfully against the admissibility of the evidence the trial judge ultimately relied on to convict them – the evidence of an RCMP investigator, Ian Black; the Crown’s market expert, Langley Evans; and the contemporaneous communications amongst the conspirators. These emails were admitted into evidence as admissions by Mr. Potter and Mr. Colpitts and otherwise under the co-conspirators’ exception to the hearsay rule. Ian Black [ 18 ] Ian Black was a significant witness for the Crown.

The trial judge described his evidence as follows: [317] Ian Black is an RCMP investigator who, at the time of the investigation, had 23 years of investigative experience, nine of those exclusively in commercial crime investigations. He was also a licensed investment advisor and worked in the industry for three years. Mr. Black was tasked by the RCMP with preparing a buy and sell analysis for KHI shares for the relevant period. Mr. Black relied on the Match Trade Report, trading information from the TSX, monthly portfolio statements, e-mails from KHI servers, and witness interviews.

The end result of his efforts is Exhibit 62 – a binder with 31 tabs containing spreadsheets and charts analyzing the trading in KHI from January 2000 to August 2001. [6] Langley Evans [ 19 ] Langley Evans was the Crown’s market expert. At the time of trial, he was … the manager of the Special Investigations Unit at the British Columbia Securities Commission. He is a chartered accountant who has been employed as a regulator in the investment industry since 1984, primarily with the Vancouver Stock Exchange and then with the British Columbia Securities Commission.

He has held positions in investigations, enforcement and regulation, both in the field and in management. … [7] [ 20 ] The report prepared by Mr. Evans for trial stated that its purpose was … to review the market for the securities of Knowledge House Inc. (KHI) between December 1999 and September 2001 and assess whether or not trading or the other related activity created or resulted in artificial prices for the securities of KHI. [ 21 ] Mr. Evans’ report indicates the conclusions he reached. The “Group” he referenced included Mr. Potter and Mr. Colpitts, amongst others: In

summary, general market trends and disclosed operating results for KHI are not sufficient to explain or support the trading price of KHI during the entire period reviewed. It is my view that the Group, through their trading and other actions, maintained the trading price KHI securities on the TSE [Toronto Stock Exchange] at artificially high levels for most of the period reviewed. I believe that the trading patterns and other actions by the Group were too consistent over time to be explained by coincidence, incompetence or bad luck.

The Group’s trading and other actions had a cumulative effect on the price of KHI shares over the period, and that effect became material starting in approximately May 2000. From that point forward through to August 16, 2001, the Group’s actions had an increasing impact on the trading price of KHI and maintained the price at artificially high levels. The Group’s actions resulted in a misleading appearance of strength of the KHI market from approximately April 2000, and from that point forward, resulted in numerous trades on the TSE at prices that were artificially high by a material amount.

The Match Trade Report [ 22 ] Although Mr. Potter and Mr. Colpitts are not arguing the Match Trade Report was inadmissible, Mr. Potter has tried to diminish its significance by calling it “a limited snapshot of market activity”. He says that, “[i]n a case alleging market manipulation and artificial pricing, it is imperative to review all market activity, not just executed trades”. The defence led no evidence at trial to support this assertion.

[ 23 ] Mr. Black and Mr. Evans referred in their testimony to the Match Trade Report, which was described by the trial judge: [335] A match trade report is a tool used by regulators and criminal investigators to track the trading in a given security over time. The Match Trade Report for the KHI investigation was prepared by Mehran Shahviri, a senior investigator for the Ontario Securities Commission who has worked in the securities field for over 25 years. [336] Both Mr. Shahviri and Langley Evans testified and were cross-examined on the creation of the report, its uses, its strengths, and its limitations. Mr.

Shahviri explained that the MTR is the product of a match trading software program that combined stock exchange data with broker data to generate a historical record of the trading in KHI. Once the software generated its initial report, Mr. Shahviri did an independent analysis of the broker data to verify the results, making amendments where the software failed to make associations that it ought to have made. Several years after completing the report, Mr.

Shahviri did a “final check” that involved reviewing the monthly statements of suspect account holders – where available – to confirm the trading volumes reported in the MTR and on the TSX. [337] The finished product admitted at trial is a 417-page trade-by-trade listing of every transaction of KHI stock that took place on the TSX between December 6, 1999 and August 21, 2001. For each trading day, columns on the left side – the “Buy Side” – identify the brokerage firm, the client who bought the stock and the quantity of the stock.

The centre columns identify the total number of shares traded according to the TSX data, the time of the trade and the share price. [8] The Contemporaneous Communications [ 24 ] Evidence about the activities of the conspirators emerged from the testimony of a handful of witnesses but was primarily presented by the Crown through a considerable volume of contemporaneous communications. As the trial judge said: [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. [9] [Footnote omitted] [ 25 ] Only some of the communications required the application of the co-conspirators’ exception to the hearsay rule. The Crown explains in its factum: … [T]he words of Mr. Potter and Mr. Colpitts were sufficient to ground a conviction. Their words are clear admissions.

There is no need to “interpret” what they said. Their words were contemporaneous and inherently reliable. Reliability was established through a detailed examination of the internal and external consistency of those communications over 21 months; consistency with witness testimony (such as Gerard McInnis); consistency with trading activity reflected in the MTR and their own account statements; and consistency with the body of all the evidence establishing the core theme of controlling the market.

It is an evidentiary juggernaut, laid out in detail in Justice Coady’s decision. [Footnotes omitted] In a Nutshell, What the Trial Judge Concluded from the Evidence [ 26 ] The evidence of Mr. Black and Mr. Evans, and their use of the Match Trade Report and the email communications mined by investigators from various sources, including the KHI servers (the Searchlight emails), were the interlocking pieces of the foundation for the trial judge’s findings of guilt. Early in his reasons, he laid out the case against Mr. Potter and Mr.

Colpitts and their positions in relation to it: [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. [10]

[ 27 ] The trial judge rejected Mr. Potter’s and Mr. Colpitts’ arguments about the reliability of Ian Black, Langley Evans, and the MTR. He did not accept what they said about the emails, and Bruce Clarke as a rogue broker. He found the Crown had established beyond a reasonable doubt Mr. Potter and Mr. Colpitts were involved in a conspiracy to manipulate the market price of KHI shares using a variety of techniques, including market domination, [11] sales suppression, [12] and high closing. [13] He was satisfied they also failed to disclose material information about the true nature of the trading activity.

He held: [712] All of these activities constitute “fraudulent means” in a regulated securities market like the TSX. I find that each of the defendants knowingly undertook these activities and subjectively appreciated that their conduct could have as a consequence the deprivation of another. Their goal was to artificially maintain the KHI stock price while they secured new investors, who, as a result of the defendants’ conduct, would be making investment decisions based on a misleading impression of the level of demand for the stock.

In other words, the defendants acted with an intent to defraud. [14] The Key Participants in the Conspiracy [ 28 ] Certain individuals who were found by the trial judge to have become enmeshed in the conspiracy started their relationship with KHI as a result of business transactions: • Calvin Wadden and Raymond Courtney sold Micronet to KHI. They each received 1.1 million shares (which came in installments over a period of several years), a KHI executive position, and a seat on the Board of Directors. No cash was paid for the acquisition. [15] • The evidence indicates Mr.

Wadden was aware of what the trial judge found to be the conspiracy and, at various times, fully participated in it. There were occasions when Mr. Wadden wanted to sell his KHI shares to fund other projects. This created significant conflict between him and the other co-conspirators. [16] • Mr. Courtney’s “primary role in the conspiracy was to buy [KHI] shares off the market”. [17] • Ken MacLeod sold his share in two companies, Silicon Island Art & Innovation Centre (“Silicon Island”) and the Centre for Distance Education (“CD-Ed”), to KHI in exchange for shares, an executive position, and a seat on the Board.

The trial judge described the Crown’s allegations about Mr. MacLeod as a “core member” of the conspiracy: Mr. Potter, Mr. Colpitts, Mr. Clarke, and Mr. Wadden used him “as a primary source” for alleviating sell-side pressure on KHI stock by using his account, FutureEd.com, for share purchases. [18] • Stephen Wilsack sold his share in Innovative Solutions to KHI in exchange for shares. At the request of other co- conspirators, he bought KHI shares on the market at escalating prices.

He looked for permission before trying to sell any of his KHI shares. [19] (Craig Dunham, a co-owner of Innovative Solutions also sold to KHI but was not part of the conspiracy.) [ 29 ] In time, Dr. Schelew also joined what the trial judge found to be the conspiracy. He held over a million shares when he left KHI. The evidence indicated that when he wanted to start selling his holdings, the conspiracy was revealed to him. This led to him joining forces with the other conspirators to maintain the KHI share price. [20] [ 30 ] In addition to being KHI’s broker, Bruce Clarke was also the investment advisor for Mr.

Potter, Mr. Colpitts and most of the co-conspirators. In 2000–2001, he worked in the Halifax office of National Bank Financial Limited (“NBFL”). The trial judge described Mr. Clarke’s role in the conspiracy as alleged by the Crown: [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 account. [21] [ 31 ] Mr. Clarke owned a private investment numbered company—2317540 Nova Scotia Limited. It had a margin account at NBFL referred to at trial as “the 540 account”.

Although historically it had been relatively inactive, the evidence indicated it was infused with cash and securities as part of the conspiracy “to enable it to buy and sell KHI shares”. [22] The account, often referred to by the conspirators as “the orderly market account”, was used “to manipulate the price of KHI stock on the Toronto Stock Exchange”. [23] The trial judge noted the Crown alleged that Mr.

Potter controlled the 540 account that was used to purchase KHI shares coming onto the market “while avoiding insider reporting requirements”. [24] [ 32 ] The Crown alleged there was another investment advisor involved in the conspiracy. The evidence disclosed that Bank of Montreal Nesbitt Burns’ (“BMO NB”) Eric Richards was responsible for the investment portfolios of Calvin Wadden, Raymond Courtney, and Steve Tsimiklis, who also had significant KHI investments. Mr. Richards worked with a good friend of Mr. Colpitts, Shirley Locke, who was another investment advisor and branch manager of BMO NB’s Halifax office.

The trial judge noted the Crown’s case included evidence that Mr. Richards “knew there was no market for KHI shares and accepted that any sales must be conducted with the buy side arranged”. [25] [ 33 ] The evidence also indicated Shirley Locke “encouraged her clients to buy KHI stock when Mr. Potter and Mr. Colpitts needed someone to ‘soak up selling pressure’”. [26]

[ 34 ] Mr. Colpitts called Dr. Schelew and Shirley Locke as witnesses. They denied being part of a conspiracy to artificially maintain the KHI share price. The trial judge found neither of them to be credible. Their testimony did not square with the evidentiary record, notably the contemporaneous email communications and the trading evidence.

The Email Communications, the Objective Trading Evidence, and the Opinions of Langley Evans [ 35 ] The trial judge’s review of the Crown’s evidence extends over 200 paragraphs. [27] Our description of the Indictment period relies heavily on the trial judge’s narrative, which has not been challenged by Mr. Potter and Mr. Colpitts. They have never denied the trading that occurred or what was said in email communications. [ 36 ] We have not found it necessary in these reasons to review all of the evidence of market manipulation.

We describe many, but not all, of the contemporaneous email communications exchanged amongst the conspirators. We have chosen to concentrate on certain emails, the evidence of market trades, and Langley Evans’ opinions because this evidence amply proved the charges beyond a reasonable doubt. Additional evidence is mentioned in the discussions of the grounds of appeal. [ 37 ] KHI stock was moved to the TSX on December 6, 1999. On December 1 st , Mr. Potter sent an email to Calvin Wadden and Harold (“Hal”) Greenwood, then KHI’s Director of Finance.

Entitled “Share the Future Program”, it referred to ensuring that options for employees to buy KHI shares were arranged, as had been promised. Mr. Potter indicated: 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. [ 38 ] Shortly afterwards, on the same day, Mr. Potter forwarded the “Share the Future Program” email to Bernard Schelew with the following message: 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 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 P wanted to sell 200,000 KHI shares – I assume that this may be connected to his investment [ sic ] 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 fine [ sic ] 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. [ 39 ] The “Share the Future Program” email was also forwarded on December 1, 1999 to others including, Bruce Clarke, Ken MacLeod, Blois Colpitts, and again to Calvin Wadden. [ 40 ] The trial judge noted the Crown said this was the start of the conspiracy with these emails showing: … 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. [28] [ 41 ] In an email exchange on December 16 th , Mr. Potter and Dr. Schelew spoke about Anthony Phelips’ (Tony) 50,000 KHI shares, with Dr. Schelew telling Mr. Potter: Nice write-up in Nova Scotia magazine. Lookin’ good! I also love the way the stock is moving. What a great thing! re: Anthony He has decided to wait until January (for tax reasons) to sell 50,000 shares. Actually, he may not sell KHI at all but may hang in. [ 42 ] Mr.

Potter replied: Missed you at the KHI party last night – it was great! I hear you did a fantastic job at Silicon Island last Friday. Thanks a million! 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 notice. [ 43 ] The trial judge indicated the following about the KHI stock in December 1999: [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 accounts purchased 23,300 of those shares. [29] [Footnote omitted] [ 44 ] In January 2000, trades in KHI shares involving KHI insiders and Bruce Clarke led to 10,000 shares trading on 13 of 20 trading

days that month. The trial judge noted Mr. Potter’s December 1 st plan was working. [30] [ 45 ] A February 25, 2000 email from Mr. Potter was an indication of his role in managing how KHI shares hit the market. Gerard McInnis was tasked with advising Stephen Wilsack and Craig Dunham how to arrange paying off their shareholder loans with KHI, loans that had arisen as a result of purchase adjustments from the acquisition by KHI of their companies. The email Mr. McInnis sent was copied to Mr. Potter and Mr.

Wadden and said: Spoke with Andrew Burke 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. (Andrews [ sic ] number is [*]). 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. [ 46 ] Mr. Potter reacted strongly to Mr. McInnis’ suggestion that Mr. Wilsack and Mr. Dunham could choose to use their own broker to sell the shares: Sorry for the back seat driving but we should insist on Bruce doing the selling! [ 47 ] This led to Mr.

McInnis hastily amending his instructions: 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 Clark [ sic ] and have Bruce manage the selling transactions. I would be pleased if you would honor this request. [ 48 ] The trial judge described how the Crown saw this as fitting into Mr.

Potter’s hands-on role in the conspiracy: [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. [31] [ 49 ] The trading in KHI shares in February 2000 closed the stock at $6.60.

Bruce Clarke’s personal expenditures on KHI stock was described by the trial judge as “staggering”: [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. [32] [ 50 ] As the trial judge noted, March 2000 was significant for two reasons: the 540 account was loaded with shares (from Calvin Wadden) and cash (from Mr. Potter) so it could start buying shares, and the “tech bubble” burst. The significance of each development was considered by the trial judge. [ 51 ] The “loading” of the 540 account increased its purchasing muscle from just over $13,000 to more than $1.6 million.

This equipped the account with robust purchasing power: … 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. [33] [ 52 ] It was Langley Evans’ opinion that the 540 account was a nominee account [34] utilized for stock manipulation purposes by the group to which Mr. Potter and Mr. Colpitts belonged: [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. [35] [ 53 ] The trial judge noted the 540 account was just getting out of the gate when the “exuberant” tech market crashed. Technology stocks suddenly lost their lustre, which threatened to impact the KHI share price. This put “tremendous pressure on KHI insiders to keep the stock price from plummeting like so many others had”. [36] [ 54 ] Despite the adverse developments in the tech market, KHI shares did very well in March 2000. At the end of the month the stock closed at $8.40.

Suspect accounts (including an account controlled by Mr. Potter, and Bruce Clarke’s joint account) spent nearly $740,000 buying KHI shares. $500,000 was spent by the 540 account alone. [37] Langley Evans viewed the March trading by the 540 account as “suspicious”: 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). [ 55 ] Not everyone had a positive impression of KHI’s stock.

Eric Richards joined BMO NB in April 2000 and wanted to bring with him several heavily margined client accounts (Calvin Wadden, Raymond Courtney, and Steve Tsimiklis) with concentrated holdings in KHI. As a result, Bruno Falvo, a member of BMO NB Risk Management Group, took a look at the company’s trading. Mr. Falvo was a Crown witness at trial. He described the KHI stock as very illiquid, trading at only 3,000–10,000 shares per day. (It was Mr. Falvo’s evidence that stock would not qualify as liquid unless it was trading at least 100,000 shares per day.) [38] [ 56 ] Mr.

Richards’ client accounts could not be transferred without review and approval by the Risk Management Committee. Mr. Falvo reported to the Chair of the Committee who indicated to the BMO NB Halifax office that “due to the limited liquidity, BMO NB should contemplate granting no loan value on KHI”. [39] [ 57 ] The trial judge described the trading in 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, these accounts purchased just under half of the KHI shares that crossed the Exchange. [40] [ 58 ] In early May, there were signs of disharmony in the KHI group.

Calvin Wadden emailed Dan Potter on May 4 th , copying Raymond Courtney and sounding peeved: I had an opportunity [ sic ] talk with Ray about our stock and the issue of supporting the market. Ray is not prepared to place more than $100,000 in an account to support KHI until he at least has an opportunity to sell some of his existing stock. I have to agree with his position since we have both used our KHI stock as security to purchase more stock in the market. I am comfortable with the same arrangement if you are in agreement.

In the meantime I would like to make arrangements to free up the 220,000 shares Bruce holds at National Bank. To be honest Dan I wish someone told me before $1.1 million of KHI stock was purchased using this as security. I am quite willing to do my part but I would like to have a [ sic ] been kept in the loop. 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. [ 59 ] Mr. Potter responded on May 5 th : In relation to being “kept in the loop”, as far as I’m concerned, you’ve been able to be just as much in the loop as I have, and, if you are in any way implying that Bruce or I have done something that you do not or did not agree with, I say it comes as a total surprise to me! As far as I know, you talk to Bruce as much as I do, or at least I assumed that you were doing so as part of your investor relations role.

In any event, let’s focus, as always, on working together to problem solve, both the freeing up of your 220,000 shares and the sale of some of your shares (how many?) by the end of June! I’ll give some thought to some alternatives and get back to you. [ 60 ] As promised in his email, Mr. Potter got back to Mr. Wadden (with a copy to Mr. Courtney) later on May 5 th with a proposal to be effected through Bruce Clarke’s “orderly market” account, that is, the 540 account. Mr. Potter also laid out an idea that would control the one million shares Mr.

Wadden received from the sale of Micronet and eliminate “market pressure over the coming months”: I greatly appreciate your attitude and desire to keep things smooth as you transition – it’s certainly critically important for all KHI shareholders! My suggestion for you to think about re Bruce’s “orderly market” account is that you, Ray and I should each support it equally, with 100,000 KHI shares and no cash. I’ve spoken to Ray about this and he agrees. Over to you to think about it. I [ sic ] would be good to get it done next week – you could free up 120,000 shares in the process!

Another thing to think about is the potential for further share sales by you. The “win-win” I’d be looking for here is that you get liquidity while at the same time the shares get put in long term hands so there will be no market pressure over the coming months. In this regard, it would be good if you’d consider giving us the right to try to place, say 1 million plus of your holdings over the next, say, three months.

To make this feasible, you’d have to be willing to agree to a sale at current levels (like a three month option concept) to give us the leveage [ sic ] to shop them around without chasing the market fluctuations on news, etc. The understanding here would be that the shares would be attractively enough priced compared to market to get potential buyers (like our German friends who continue to express strong interest) to take a substantial position.

Similarly, we’d need price stability in order to effect a secondary offering type of placement of a substantial number of shares through the services of Bay Street investment bankers, such as RBC DS (by the way, Gerard and I have a conference call with RBC tomorrow – they seem very interested still!)

[ 61 ] Mr. Wadden accepted the proposal, telling Mr. Potter he was committed to helping “support the stock and continue to promote KHI”. As for placing his one million shares “in long term hands so there will be no market pressure over the coming months”, Mr. Wadden indicated he wanted “to keep this amount and be considered a strong supporter of KHI going forward”. [ 62 ] Mr. Potter was content with the resolution.

He expressed hope about new investment—the “German folks”—on the horizon: Re your investment intent, I think it’s great that you’re a believer and that the three of us agree to sell in “lock-step” in the future! Now, we’ll have to turn our attention to the near term sales! I’m hoping the German folks may be part of the answer here. We’ll keep our fingers crossed. Also, we’ll continue working on the other components as well – the brokers, institutional buyers, Intel Capital, etc.

In relation to the orderly market account, by a copy of this to Ray, I’m asking him to forward a certificate for 100,000 KHI shares to Bruce – I’ll do the same. Once they are in place, we’ll get Bruce to get 120,000 out to you. I really like doing business like this – keeping this kind of spirit of co-operation and partnership going will contribute greatly to our mutual success over the years!! [ 63 ] The German investment was materializing by late May. Mr. Potter emailed Gerard McInnis, with a copy to Mr. Colpitts, to say: A German investor group led by Mr.

Michael (Ben) Barthe is interested in investing 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. … [ 64 ] The trial judge noted the trading volumes for May: [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. [41] [ 65 ] The 120,000 shares referred to by Mr. Potter in the May email exchange with Mr. Wadden were forwarded to Mr. Wadden in June from the 540 account. The transaction was orchestrated by Mr. Potter, as described by the trial judge: [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 doing. [42] [ 66 ] In early June, Stephen Wilsack wanted his share certificates that were at the law office where Mr.

Colpitts was a partner, Stewart McKelvey. He emailed Gerard McInnis with this request. Mr. McInnis referred to Mr. Wilsack’s shareholder loan and endeavoured to dissuade him from selling, saying: … 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 ]… . [ 67 ] As the trial judge noted, Mr. Wilsack was “clearly unhappy with this response” [43] and emailed Mr.

McInnis on June 8 th to say so: 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 period. 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. [ 68 ] The matter did not end there. Mr. McInnis emailed Mr. Wilsack on June 14 th : Can you advise status from your end. I understand Eric has sold your shares into market already so you have raised the cash for repaying the loan. Is the only o/s matter from your end the timing of release of balance of shares from escrow? Is this chicken and egg in your mind or can I still expect payment this week.

I know Dan has concerns about the timing of sale of the balance of your shares and he asked to speak to you directly if you have a problem waiting until the fall. … [ 69 ] An email from Mr. Wilsack to Mr. Potter on June 18 th indicates Mr. Potter had sorted the problem out: 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 have the option of transferring my stock to another broker or continue on with Bruce. … [ 70 ] In an email to Mr. Wilsack later on June 18 th , Mr. Potter confirmed their agreement:

… I’m confirming our agreement that KHI will release your shares from escrow immediately on the understanding that you will put the shares in a new account you will open with Bruce at National Bank Financial and dispose of them only in consultation and agreement with him at least until the end of this Sept. … We also agreed that the balance of your account with KHI will be paid with the appropriate number of the released escrowed shares at $7.00 per share. What a great win-win way to work together! [ 71 ] The trial judge described the significance of Mr.

Potter’s intervention: [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 control. [44] [ 72 ] Other trading maneuvers were undertaken in June. As explained by the trial judge in a

section of his reasons entitled “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 shares. [45] [ 73 ] The trial judge summarized the trading in June: [115] During the month of June, 157,200 shares crossed the Exchange. Suspect accounts 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. [46] [Footnote omitted] [ 74 ] Suspect accounts being referred to above included the 540 account, Mr. Colpitts’ account, Bruce Clarke’s joint account, and Mr. Potter’s wife’s account, which he controlled. [47] [ 75 ] By July 2000, Calvin Wadden had decided he wanted to sever his relationship with KHI and sell his shares. He needed Bruce Clarke to return his 100,000 KHI shares but was not getting any traction with him. The trial judge described how Mr.

Wadden sought to navigate the impasse: [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 evidence. [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 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. [48] [ 76 ] While Mr. Wadden’s interest in selling his KHI shares was being stymied, Bruce Clarke found a new source of funds for

buying stock on the market. As the investment advisor to the “Union account” of Locals 83 and 1392, affiliates of the United Brotherhood of Carpenters and Joiners of America, Mr. Clarke had discretionary control over the account. Contrary to standing instructions based on investment policies that would have prohibited the purchase of speculative education technology stocks, Mr.

Clarke used the account to buy $30,335 worth of KHI stock between July 24 th and 26 th . [49] [ 77 ] The trial judge noted what Langley Evans said in his report about the Union account trading: [125] The Union Local 73 [ sic ] 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. [50] [ 78 ] The trial judge described the trading in KHI shares for July: [131] In July 2000, 98,075 KHI shares crossed the Exchange. Suspect accounts 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. [51] [Footnote omitted] [ 79 ] Suspect accounts being referred to above included the 540 account, the Union account, Ken MacLeod’s FutureEd.com account, Bruce Clarke’s joint account, and Mr. Potter’s wife’s account, which he controlled. [52] [ 80 ] As the trial judge explained, a purchase of $1 million worth of KHI shares by Derek Banks was finessed in early August 2000 with the help of Shirley Locke and Blois Colpitts and the involvement of Mr. Potter. Mr.

Banks testified he understood he would be

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