COMPLAINTS made on October 24, 2006 to Nova Scotia Barristers’ Society by Dan Potter and Knowledge House Inc. against Stewart McKelvey Stirling Scales, R. Blois Colpitts, Andrew V. Burke, James K. Cruickshank, Robert J. Aske, T. Arthur Barry, Q.C, Daniela F. Bassan, Marc J. Belliveau, Lydia S. Bugden, Mark S. Bursey, George A. Caines, Q.C., Maurice P. Chiasson, James L. Chipman, Warren B. Chornoby, Sheree L. Conlon, James S. Cowan, Q.C., James M. Dickson, David P. S. Farrar, Q.C., Paul W. Festeryga, Lisa M. Gallivan, Robert G. Grant, Q.C., Elizabeth M. Haldane, Christa M. Hellstrom, Richard A. Hirsch, Brian G. Johnston, Q.C., Elizabeth Jollimore, Q.C., Richard K. Jones, Q.C., John E. MacDonell, D. Fraser MacFadyen, G. Grant Machum, D. Geoffrey Machum, Q.C., Deanne MacLeod, J. Thomas MacQuarrie, Q.C., Douglas J. Mathews, Q.C., Timothy C. Matthews, Q.C., Carman G. McCormick, Q.C., Donald H. McDougall, Q.C., John S. McFarlane, Q.C., David A. Miller, Q.C., C. Patricia Mitchell, A. William Moreira, Q.C., Nancy I. Murray, Q.C., Scott C. Norton, Q.C., Colin D. Piercey, John D. Plowman, Charles S. Reagh, Roderick H. (Rory) Rogers, John Rogers, Q.C., Nancy G. Rubin, William L. (Mick) Ryan, Q.C., Rebecca K. Saturley, John T. Shanks, Richard F. Southcott, David A. Stewart, Q.C., Lawrence J. Stordy and Candace L. Thomas STATEMENT OF ALLEGATIONS 1. This Statement of Allegations is intended to be attached to and form part letters of complaint to the Nova Scotia Barristers’ Society (the “Society”) dated October 5, 2006 against each of Stewart McKelvey Stirling Scales (“SMSS”), R. Blois Colpitts (“COLPITTS”), Andrew V. Burke (“BURKE”), James K. Cruickshank (“CRUICKSHANK”) and the additional 52 named lawyers who are partners in the Halifax office of SMSS (“HALIFAX PARTNERS”). -2I. Background 2. SMSS was legal counsel for each of Dan Potter (“Potter”) and Knowledge House Inc. (“KHI”) during the relevant period between 1997 and 2001 and, in particular, provided specialized professional advice and services in corporate, commercial, securities, taxation and related areas of law, in all of which specialities SMSS held and holds itself out as the pre-eminent law firm in Atlantic Canada. 3. COLPITTS is a lawyer and a former partner in SMSS and was one of the SMSS lawyers who provided legal advice and services to KHI and Potter during the relevant period. In addition, COLPITTS was a director of KHI at the time the Potter became chair of the KHI board in 1997. During a portion of the relevant period COLPITTS served as KHI’s Lead Director and as Chair of its Audit Committee. 4. BURKE and CRUICKSHANK are lawyers and partners in the Halifax office of SMSS and each provided legal advice and services to the KHI and Potter during the relevant period. 5. The HALIFAX PARTNERS of SMSS are current partners in the Halifax office of SMSS and each has an ethical duty to report to the Society particulars of improper professional conduct by another lawyer (including their own law partner or associate) if it is reasonably perceived that such conduct may result in serious damage to a client or other member of the public. 6. Since the early 1990s Potter and companies with which he was then associated had retained the services of SMSS on a number of occasions because of its reputation and specialization in areas of law which corresponded to Potter’s personal and business needs. SMSS also provided legal services to KHI during the 1990s when KHI was operated by its then President and principal shareholder, Bernard Schelew. -37. BURKE, COLPITTS and CRUICKSHANK were introduced to Potter as a result of retainers of SMSS and in their capacity as SMSS lawyers. Potter had no prior personal or business relationship with any of them. The first material involvement of any of these SMSS lawyers in providing legal services to Potter began in or about 1995 when COLPITTS was assigned by then SMSS partner, Glen Dexter (Potter’s then primary contact at SMSS), as the lead lawyer in assisting Potter in a corporate reorganization and going public transaction that resulted in the formation ITI Education Corporation. As a result of the transaction, Potter and his family’s holding company, Gramm and Company Incorporated, became substantial shareholders and Potter became President and CEO of that company. 8. After Potter and his family sold their interests in ITI Education Corporation in 1998 and Potter became actively involved in the management and operation of KHI in early 1999, SMSS, through BURKE, COLPITTS, CRUICKSHANK and other SMSS lawyers, continued to provide professional advice and services to KHI and to Potter his family in the areas inter alia of corporate and securities law and were responsible to ensure the KHI’s and Potter’s compliance with all legal and regulatory requirements under applicable laws and rules. 9. SMSS, BUKRE, COLPITTS and CRUICKSHANK knew that KHI and Potter were reliant upon and vulnerable to the legal advice and services provided by them pursuant to trust-based professional solicitor-client relationships. II. General Allegations A. COLPITTS’s propensity for conflicts of interest 10. In December 1997 COLPITTS was charged with and found guilty by the Society of professional misconduct or conduct unbecoming a barrister on the bases inter alia that he acted for a client when the interests of the client and -4COLPITTS were in conflict and that COLPITTS failed to take adequate steps to ensure that the client had independent legal advice, contrary to the Legal Ethics and Professional Conduct Handbook of the Society. Potter was not aware of the professional misconduct decision against COLPITTS at the time and when he did become generally aware of it months later he was assured by COLPITTS that it was an insignificant matter and simply the collateral result of the breakdown of a business relationship with his client. 11. The Society’s legal ethics Handbook at Chapter 18 specifically admonishes member law firms and individual lawyers that: Lawyers who have a tendency to disregard the rules for ethical conduct contained in this Handbook, unless checked at an early stage, may cause loss or damage to clients or others. Evidence of minor breaches may, on investigation, disclose a more serious situation or may indicate the beginning of a course of action which would lead to serious breaches in the future. 12. Notwithstanding the demonstrated tendency of COLPITTS to breach conflict of interest rules, neither SMSS nor COLPITTS took any adequate steps or any steps at all after the 1997 disciplinary decision against COLPITTS to prevent further occurrences and, in particular, they failed investigate whether there were issues or factors underlying COLPITTS’s professional misconduct that could, if left unchecked, lead to serious further breaches and damage to clients or others in the future. 13. Had SMSS and COLPITTS investigated the source of COLPITTS’s tendency to conflict of interest with clients in the wake of the 1997 finding of professional misconduct against him, they would have learned that COLPITTS has a hyperthymic temperament and he is subject to hypomania and that these factors detrimentally affected his ability to meet the high standards of independence, loyalty and care expected of a competent corporate and securities law specialist and compromised his adherence to ethical and legal duties to provide loyal, independent and disinterested professional advice in that capacity. -514. The attributes of COLPITTS’s hyperthymic temperament which are not episode-bound and that constitute part of his habitual long-term functioning include: 15. • Cheerful and exuberant • Articulate and carefree • Overoptimistic and carefree • Overconfident, boastful and grandiose • Extroverted and people seeking • High energy level, full of plans and improvident activities • Versatile and meddlesome • Uninhibited and stimulus seeking • Habitual short sleep (less than 6 hours per night) Hypomania is an episodic mood state to which some persons with hyperthymic temperaments are susceptible that, like mania, is characterized by persistent elated or irritable mood and behaviours and thoughts that are consistent with such a mood state. It is distinguished from mania by the absence of psychotic symptoms and less impact of functioning. When an individual experiences a hypomanic episode 3 or more of the following symptoms have persisted and have been present to a significant degree for a least 4 days: • Inflated self-esteem or grandiosity • Decreased need for sleep (e.g., feels rested after only 3 hours of sleep) • More talkative than usual or pressure to keep talking • Flight of ideas or subjective experience that thoughts are racing • Distractibility (i.e., attention too easily drawn to unimportant or irrelevant external stimuli) • Increase in goal-directed activity (either socially, at work or school, or sexually) or psychomotor agitation • Excessive involvement in pleasurable activities that have a high potential for painful consequences (e.g., the person engages in -6unrestrained buying sprees, sexual indiscretions, or foolish business investments) 16. After he was arrested and charged in June 2003 for trying to buy sex from an undercover Halifax police officer posing as a prostitute, COLPITTS was diagnosed by a psychiatrist as having the attributes and/or conditions referred to above. 17. In a June 12, 2003 news release concerning his arrest in which COLPITTS inter alia apologized generally to his clients, he stated: "My priority is to understand and address with counselling the underlying issues which cause this type of unacceptable behaviour…. It will not be repeated." 18. While not mentioned in his press release, it came to light later in June 2003 that COLPITTS had also been previously arrested but not charged in 2001 for trying to buy sex from an undercover police officer posing as a prostitute. 19. The same personality traits and/or mood states that caused or materially contributed to COLPITTS’s sexual misconduct also made him prone to the kinds of conflicted and improvident professional conduct as a specialist corporate and securities lawyer complained of herein. 20. After the 1997 conflict of interest related professional misconduct decision against COLPITTS, neither he nor SMSS did anything to correct his known propensity for professional conflicts of interest or to otherwise prevent reoccurrences of such misconduct. 21. On the contrary, after 1997 COLPITTS acted in an increasingly exuberant, over-involved and meddlesome manner and engaged in an ever-increasing number of outside personal business interests which he undertook concurrently with practising law. In fact, COLPITTS’s business interests virtually always arose directly from SMSS client contacts and/or client information. -722. COLPITTS’s business interests related to his law practise materially increased both the number and seriousness of actual and potential conflicting interests situations and thereby increased the risk of further and more serious breaches of ethical and legal duties owed to SMSS clients, including Potter and KHI. 23. SMSS and its individual HALIFAX PARTNERS (including BURKE and CRUICKSHANK) -- who benefited financially from COLPITTS’s significant business development activities on behalf of the firm -- actively encouraged and knowingly gave assistance to COLPITTS in his increasingly risky professional conduct or were wilfully blind to it despite warning signs that should have alerted them to guard against conflicting interests. 24. Neither Potter nor KHI were advised or warned of COLPITTS’s propensities to conflicts of interest and related reckless or careless conduct by SMSS or COLPITTS and they had no knowledge of such propensities until June 2003 when he learned of COLPITTS’s diagnosis. B. Conduct to September 2001 25. After 1997, despite their duties to avoid conflicting interests, SMSS, COLPITTS, BURKE and CRUICKSHANK acted on behalf of KHI and Potter in many situations that were rife with actual and potential conflicts of interest. Except in the context of the litigation retainer by Potter of another SMSS partner, David Farrar, referred to in paragraph 49, at no time did SMSS or any of its individual lawyers advise KHI or Potter of any conflicts or potential conflicts, withdraw from providing services in relation to any matter, advise KHI or Potter to seek independent advice or seek their consent to act or continue to act despite a conflict or potential conflict. -826. COLPITTS, while continuing to act as legal counsel to the KHI and Potter, substantially increased his personal shareholdings in KHI after 1997, from 2,000 shares in May 1997 to at least 309,000 shares by April 2000. 27. In the fall of 1997, after he became chair of the board of directors of KHI, Potter had arranged with National Bank Financial Ltd., through two of its brokers, David Mack and Bruce Clarke, for the brokerage firm to provide market making services in relation to the trading of KHI’s common shares on the stock exchange. (The need for market making is recognized in the securities industry to be greater in relation to less active issues such as KHI and the practice of having a market maker was common, accepted and encouraged in the industry, especially for small capitalization, thinly-traded issues like KHI.) 28. Unbeknownst to KHI and Potter, sometime after the market making arrangement was made, COLPITTS entered into a private arrangement with Mr. Clarke, the full particulars of which are known to COLPITTS, but which provided that COLPITTS would obtain an ownership and/or financial interest in 2317540 Nova Scotia Limited, the private investment company Mr. Clarke used inter alia to provide market making services on behalf of KHI. KHI and Potter were not advised of COLPITTS’s interest in Mr. Clarke’s company and did not become aware of it until 2002. 29. In or about June 1998, SMSS, primarily through COLPITTS and BURKE, provided legal services to Potter in relation to a $3,ooo,ooo sale of a portion of Gramm and Company Incorporated’s interest in ITI Education Corporation to Torstar Corporation, a publicly traded media company headquartered in Toronto, Ontario. 30. After that transaction COLPITTS, BURKE and CRUICKSHANK advised Potter and his family on tax planning and related matters in preparation for any further sale of ITI Education Corporation shares. As a result of the advice, a family trust and two (2) additional holding companies, 2532230 Nova Scotia -9Limited and 3020828 Nova Scotia Limited, were established to hold most of the remaining ITI Education Corporation shares. COLPITTS became a trustee of the family trust that he had helped to establish on behalf of Potter’s family. 31. In or about December 1998, SMSS, through COLPITTS, acted for Potter and his family in the sale of their remaining interests in ITI Education Corporation to Torstar Corporation for approximately $6,000,000. 32. As a result of these transactions, COLPITTS, BURKE and CRUICKSHANK had a detailed knowledge of the personal financial affairs of Potter and his family and were specifically aware that as of January 1999 they had in excess of $6,000,000 in cash and cash equivalents on deposit at the Halifax branch of National Bank Financial Ltd.. 33. Potter became actively involved in the operation and management of KHI in or about January 1999. Thereafter and throughout the relevant period up to September 2001, COLPITTS, BURKE and CRUICKSHANK COLPITTS advised Potter and other KHI principals that it was lawful and proper to make purchases of KHI shares to directly provide market support to help achieve an orderly public market for the shares. COLPITTS, BURKE and CRUICKSHANK also advised that the loans of funds and securities and the optioning of securities that were made by KHI principals during the relevant period were lawful and proper. 34. COLPITTS not only advised that the transactions referred to in the preceding paragraph were lawful and proper, he also repeatedly counselled and urged Potter and others to undertake such transactions on the basis that it was their duty to ensure that KHI’s shares did not go unsupported in the market. In this regard, COLPITTS frequently stated that “you have to protect the egg”. 35. Potter had not engaged in such market support transactions during his tenure as CEO of ITI Education Corporation. But for the advice of COLPITTS, BURKE and CRUICKSHANK as to the propriety of such transactions and for - 10 COLPITTS’s and for COLPITTS’s repeated reminders of the duty to provide support and his urgings to do so, Potter, Gramm and Company Incorporated, and the numbered holding companies owned by the Potter family trust, would not have loaned the funds and securities and made the market support purchases of KHI shares referred to above. The transactions were openly and transparently conducted in full reliance on such advice using Potter’s family’s financial wealth realized from the sale of ITI Education Corporation. 36. In or about January 2000 COLPITTS initiated and acted on behalf of KHI in relation to the purchase of 1,000,000 KHI common shares by the late Charles Keating from Donnie Snow, then a KHI director, for $5,900,000.00 (through a holding company controlled by Mr. Keating called 1384156 Ontario Inc. that has since been continued as 3058703 Nova Scotia Limited). The option of having Mr. Keating purchase common shares from the treasury of KHI -- which would have provided KHI with $5,900,000.00 in new capital -- was not brought forward or recommended by COLPITTS either to KHI’s management or its board. 37. Shortly after the purchase of his KHI shares by Mr. Keating, Mr. Snow, using the proceeds from the sale, invested in and became the president of another public company, Keltic Incorporated, which then changed its name to CrossOff Incorporated. 38. COLPITTS then became a director of CrossOff and SMSS replaced the Cox Hanson O’Reilly Matheson law firm as solicitors for CrossOff. Thereafter SMSS and COLPITTS earned substantial fees from providing legal services to their new client. As of December 2000 COLPITTS owned at least 112,000 shares of CROSSOFF. 39. COLPITTS then encouraged and arranged for Mr. Keating to join him on the board of directors of another public company, Anitech Enterprises Inc.. COLPITTS had become a director of that company in May 1998. COLPITTS owned at least 203,300 shares of Anitech Enterprises Inc. - 11 40. SMSS, through COLPITTS, also provided legal services to another public company, SolutionInc Technologies Limited. In or about June 2000 COLPITTS approached Potter (who had no prior association with SolutionInc Technologies Limited) and requested that he invest in the company. Potter invested $150,000 in a private placement of treasury shares of SolutionInc Technologies Limited. COLPITTS acted for Potter in completing the transaction. As advised by COLPITTS, Potter paid for his investment by way of KHI shares. 41. Unbeknownst to Potter at the time of his investment COLPITTS had received options on at least 25,000 SolutionInc Technologies Limited shares related to his fundraising efforts. 42. In July 2000 SMSS, through COLPITTS and BURKE, acted for Potter in relation to the purchase from him of 156,250 KHI shares by Derek Banks. In connection with the Banks transaction COLPITTS requested that Potter purchase 15,000 KHI shares for $100,500 from COLPITTS and his spouse, Jennifer Callbeck. Potter completed the purchase as requested. 43. In or about August 2000 SMSS, through COLPITTS and BURKE, acted for Potter in relation to the purchase from him of 259,000 KHI shares by Michael (Ben) Barthe. In connection with the Barthe transaction COLPITTS requested that Potter purchase 30,000 KHI shares for $196,500 from COLPITTS and his spouse, Jennifer Callbeck. Potter completed the purchase as requested. 44. In the spring of 2001 Potter was appointed Chair of the Board of Nova Scotia Business Inc., a Government of Nova Scotia business development and lending agency. Potter knew that ITI Education Corporation was another of COLPITTS’s clients, that it was seeking a loan or loan guarantee from the Government of Nova Scotia and that COLPITTS was assisting it in that effort. - 12 45. Due to Potter’s past connection to ITI Education Corporation he had specifically told COLPITTS that he would take no part whatsoever in any discussions about possible Government of Nova Scotia assistance to ITI Education Corporation. 46. Despite Potter’s unequivocal statement to COLPITTS, in or about August 2001, COLPITTS suddenly and unexpectedly “patched” Potter into a telephone conversation already in progress between COLPITTS and the then Minister of Economic Development in the Nova Scotia Government, Gordon Balser. 47. In the circumstances, Potter tried to “say nothing” during the telephone conversation. Nevertheless, Mr. Balser, presumably as a make-weight comment in support of his government’s ultimate decision not to provide a loan guarantee, subsequently told David Galloway (the then President of Torstar Corporation, ITI Education Corporation’s largest shareholder) that Potter, as chair of Nova Scotia Business Inc., had not seemed to support giving such assistance to ITI Education Corporation. 48. On August 17, 2001, ITI Education Corporation was put into receivership and ceased operations and, as a result, Torstar Corporation lost millions of dollars. Mr. Galloway inter alia was angry at Potter as a result of what he had been told by Mr. Balser. As a form of pay-back, Mr. Galloway caused or initiated the short-selling of 50,000 KHI shares through a brokerage firm called Canaccord. The short-selling caused or materially contributed to the rapid decline in the trading price of KHI shares after August 17, 2001 which, in turn, materially contributed to KHI having to cease operations on September 13, 2001. 49. Potter had initially believed and had claimed in pleadings against National Bank Financial Ltd. filed on his behalf in October 2001 by a SMSS lawyer, David Farrar, that the short-selling of the 50,000 KHI shares had been carried out by another person, George Armoyan, who later credibly denied that he had done any short-selling through Canaccord. - 13 50. During the relevant period, COLPITTS had increasingly interspersed his provision of legal services to KHI, CrossOff Incorporated, Anitech Enterprises Inc., SolutionInc Technologies Limited and ITI Education Corporation with an avid interest and participation in the public trading in the shares of each company, including trading in the shares of KHI on behalf of himself, his wife Jennifer Callbeck and his mother, Eloise Glendenning. 51. COLPITTS spoke virtually daily with stock brokers, particularly, Bruce Clarke of National Bank Financial Ltd. and Shirley Locke, the then manager of the Halifax office of BMO Nesbitt Burns Inc.. COLPITTS’s interest and involvement in the trading of the shares in these companies was so extensive that on one occasion in the fall of 2000, Ms. Locke, as a joke, but tellingly, had three live “budgie birds” named “ANI” “ITI” and “KHI” after the trading symbols of three of the companies (and pronounced as ANNIE, ITTY and KEY) delivered in a birdcage to COLPITTS’s office at SMSS. 52. Mr. Clarke later stated (in a June 28, 2004 settlement agreement with the Nova Scotia Securities Commission) he had “violated the [Toronto Stock] Exchange’s rules during the relevant period by entering purchases and bids … that caused the price and bid of KHI to close on an uptick ….” 53. Neither KHI nor Potter authorized, permitted or acquiesced in any closing of KHI shares on an uptick by Mr. Clarke and did not even become aware that such conduct had occurred until the settlement agreement was made public in 2004. 54. If there were any factors that caused or contributed to Mr. Clarke’s conduct other than his own errors or intentions, such factors related to COLPITTS’s improvident and meddlesome behaviour in relation to the trading of KHI’s shares and the consequential influence of such conduct upon Mr. Clarke and did not relate to any actions or conduct by Potter or others. - 14 55. Wholly or substantially as a result of SMSS and its lawyers continuing to act on behalf of KHI and Potter while in conflict of interest situations, and particularly due to the improvident conduct of COLPITTS, after KHI was forced to cease operations in September 2001, Potter and his family holding companies were vulnerable to the debt claims brought by National Bank Financial Ltd. against Potter and the companies in October 2001 and to the various subsequent conspiracy allegations made against Potter, SMSS and COLPITTS by National Bank Financial Ltd. and by others. 56. In mounting its conspiracy claim (in Action S.H. 206439) National Bank Financial Ltd. was able to plausibly assert that “COLPITTS was one of the creators” of the alleged conspiracy scheme and to a lesser extent to impugn the conduct of each of BURKE and CRUICKSHANK by focusing in its allegations on matters and transactions in relation to which the SMSS lawyers had provided legal services while in conflict of interest situations. 57. In fact, virtually every element of the conspiracy claim alleged throughout the National Bank Financial Ltd. statement of claim in S.H. 206439 was based on matters and transactions in relation to which COLPITTS, BURKE and/or CRUICKSHANK had provided legal advice and services to one or both of KHI and Potter while in conflict of interest situations. 58. The conduct of SMSS, BURKE, COLPITTS, CRUICKSHANK and each of SMSS’s HALIFAX PARTNERS between 1997 and 2001 referred to above constitutes professional misconduct and conduct unbecoming a lawyer. C. Conduct after September 2001 59. In September 2003 Potter advised the then legal counsel for SMSS, Bruce Outhouse, that the firm would have to take responsibility for the flawed legal services provided to KHI and Potter by its lawyers and Potter began drafting a civil claim document on December 5, 2003. - 15 60. When National Bank Financial Ltd. brought an application on December 16, 2003 to strike parts of KHI’s and Potter’s counterclaim (and that of Potter’s holding company, Starr’s Point Capital Incorporated) in S.H. 206439, Potter put the drafting of the civil claim against SMSS and the individual lawyers aside so that he could focus on the National Bank Financial Ltd. application. 61. It soon became clear that National Bank Financial Ltd.’s then legal counsel had acted improperly in the litigation by unlawfully obtaining and using Potter’s email documents. In the result, Potter, SMSS and others who had common interests in relation to that issue, brought similar applications to address the situation. Lengthy interlocutory proceedings ensued and the final court order aimed at resolving the issues arising from the misconduct was not issued until April 27, 2006. 62. In the meantime, on June 3, 2004, Potter wrote to SMSS and COLPITTS (who had by that time resigned or been removed from the firm) setting out the basis of an intended civil claim. SMSS and COLPITTS refused to enter into any negotiation to settle the claim or to take any of the other actions specifically requested by Potter, including reporting the truth about COLPITTS’s behaviour to regulatory and investigative bodies, including the Society, to prevent further serious injury and damage to Potter and his family as well as to KHI and others as a result of the ongoing KHI related civil, regulatory and criminal proceedings and/or investigations. 63. On May 2, 2005 Potter again wrote to SMSS and COLPITTS, this time focusing on SMSS’s and its individual lawyers’ ethical duties to report the conflicts of interest related professional misconduct of COLPITTS and other SMSS lawyers to the Society and to undertake the other reporting to regulators and investigators referred to initially in the June 3, 2004 letter. Once again, SMSS and COLPITTS steadfastly refused to comply with these requests and chose not to take any action. - 16 64. As a result of the failure of SMSS and its individual lawyers to live up to their ethical duties to report the professional misconduct of COLPITTS, he was able to enter into a settlement agreement with the Nova Scotia Securities Commission on March 21, 2006 by lying about and/or misrepresenting the facts concerning his own legal advice to Potter, KHI and others and/or by lying about or misrepresenting confidential information arising from SMSS’s and his solicitor-client relationships with KHI and Potter. 65. In particular, in the absence of the truth about COLPITTS’s conduct having been earlier acknowledged by him and/or reported by SMSS or one or more or of its HALIFAX PARTNERS, as had been repeatedly requested by Potter, COLPITTS was able to and did – through lies and/or misrepresentations audaciously put forward a “cut-throat defence” in support of his settlement negotiations that was based on the premise that illegal acts were committed by Potter and others but that COLPITTS was not involved and his only fault was one of omission in that he “failed … to uncover conduct by certain of the insiders group … which contravened the provisions of the [Securities] Act….” 66. COLPITTS’s duplicitous lies and/or misrepresentations in the context of his settlement with the Nova Scotia Securities Commission about his supposed failure to “uncover” conduct of others focused on the period beginning in the summer of 2000, after the resolution of KHI related disputes with Calvin Wadden in which COLPITTS had been involved. During this period COLPITTS not only knew about the conduct of Potter and others in relation to transactions in KHI shares, he also repeatedly urged Potter and others to engage in such transactions, engaged in them himself engaged in them himself, as did his spouse and mother and other SMSS lawyers. Further, COLPITTS, along with other SMSS lawyers, notably BURKE and CRUICKSHANK, advised Potter and others that such transactions were lawful and provided legal services that facilitated such transactions. In particular, and by way of a partial list of examples only: - 17 a. In June 2000 COLPITTS requested another (then) SMSS partner, Karin McCaskill, to purchase KHI shares on the market and she complied with his request. b. COLPITTS requested and advised Potter to purchase KHI shares on the market on two occasions in June 2000 and August 2000 from COLPITTS and his wife and at the same time from Calvin Wadden and others in the context of transactions in relation to which COLPITTS and BURKE were provided legal services; c. COLPITTS, in September 2000, requested and advised Donnie Snow to loan marketable securities worth approximately $400,000 to Mr. Clarke’s company, 2317540 Nova Scotia Limited, for the purpose of enabling Mr. Clarke to carry out his market making activities, including the making of market support purchases of KHI shares (COLPITTS arranged this loan of shares unbeknownst to Potter who did not even become aware of its existence until many weeks later); d. COLPITTS, on January 4, 2001, personally hand-delivered a certificate from his SMSS office representing 20,000 shares owned by Calvin Wadden (and derived from the transfer of Knowledge House Limited Partnership units in a shares-for-units conversion transaction in which SMSS provided legal services and arranged to have the share certificates issued) to Mr. Clarke for deposit into Mr. Wadden’s account at National Bank Financial Ltd. for the purpose of enabling Mr. Wadden to make market support purchases of KHI shares; e. COLPITTS, in or about March 2001, conceived of, recommended, and drafted a “Managed Selling Agreement” that he intended be entered into among a number of KHI shareholders, including COLPITTS, for the purpose of restraining such shareholders from selling KHI shares - 18 in the market and thereby putting undue selling pressure on the market for KHI shares; f. COLPITTS, in or about April 2001, advised Potter to use KHI shares to be loaned by Bernard Schelew in an intended transaction that was designed to facilitate market support purchases of KHI shares purchase and undertook to provide legal services in relation to such intended transaction including the preparation of loan of securities agreements and option agreements; g. COLPITTS, throughout 2000 and into 2001, made market support purchases of KHI shares on behalf of himself, his wife Jennifer Callbeck and his mother Eloise Glendenning; and h. COLPITTS, throughout 2000 and into 2001, repeatedly urged Mr. Clarke to purchase the shares of companies COLPITTS was interested in on behalf of Mr. Clarke’s clients; this was not limited to KHI but also included ITI Education Corporation and Anitech Enterprises Inc. and in response to COLPITTS’s urgings Mr. Clarke made such purchases, notably purchasing in excess of $4,000,000 in such shares during that period on behalf one client alone, IBEW Local 82 & 1392. 67. The premise of COLPITTS’s settlement with the Nova Scotia Securities Commission and that fact that it occurred on the basis of that premise was not only an outrageous betrayal of the truth and of the fiduciary duties of loyalty and candour by COLPITTS and SMSS, it was also an extremely damaging consequence of SMSS’s and its HALIFAX PARTNERS’ earlier and still ongoing breaches of their respective ethical duties to report COLPITTS’s conflicts related professional misconduct and the underlying reasons for such conduct. - 19 68. The Nova Scotia Securities Commission settlement was manifestly to COLPITTS’s and SMSS’s benefit and to KHI’s and Potter’s detriment by publicly exculpating COLPITTS (and thereby lessening the prospect of civil liability being fixed upon him and upon SMSS) while falsely but very publicly implicating Potter in alleged illegal conduct. 69. The loss and damage to KHI and Potter have been substantially aggravated by the SMSS’s, its HALIFAX PARTNERS’ and COLPITTS’s failure since September 2001 to act with candour, honesty and integrity to fulfill their ethical and legal obligations to report. 70. In the absence of SMSS or any of its HALIFAX PARTNERS stepping forward and telling the truth about COLPITTS’s conduct, KHI and Potter have been subjected to more than 5 years of an almost constant barrage of legal processes, including a multiplicity of unrelenting civil proceedings by their extremely well-funded adversary, National Bank Financial Ltd., as well as to highly publicized and damaging investigations by the Nova Scotia Securities Commission and the RCMP. 71. Beyond the losses and damages suffered by KHI and Potter through the need to expend enormous amounts of time and financial resources to defend against these proceedings and investigations, their reputations have been virtually destroyed. 72. As of the date of this Statement of Allegations, SMSS and its HALIFAX PARTNERS (including BURKE and CRUICKSHANK) know or have a reasonable basis to believe that COLPITTS is attempting or will attempt to arrange a similar settlement to his benefit and to KHI’s and Potter’s detriment with the Society, again through lies and/or misrepresentations and other improper means. - 20 73. The conduct of SMSS, COLPITTS and of each of SMSS’s HALIFAX PARTNERS since September 2001 as referred to above constitutes professional misconduct and conduct unbecoming a lawyer. III. 74. Particulars of Breaches As a result of the above SMSS and the individual lawyers breached their respective ethical duties to KHI and Potter, including by the following: a. SMSS failed to develop and implement any or any adequate policies, standards and procedures of general application to avoid conflicting interests by its lawyers; b. SMSS failed to develop and implement any or any adequate special policies, standards and procedures to avoid conflicting of interests in circumstances where one of its lawyers, such as COLPITTS, functioned concurrently and as legal counsel and as a director for a client, such as KHI; c. SMSS and COLPITTS failed after the 1997 professional misconduct decision against COLPITTS to investigate adequately or at all the underlying issues related to and causes of COLPITTS’s propensity for conflicts of interest; d. SMSS and COLPITTS failed after the 1997 professional misconduct decision against COLPITTS to develop and implement any or any adequate policies, standards and procedures to ensure that COLPITTS would not engage in further conflicts of interest; e. SMSS, BURKE and CRUICKSHANK failed to make any or any adequate inquiries to determine whether there were any conflicting interests involving COLPITTS before acting or continuing to act on - 21 behalf of KHI and Potter in relation to any specific matter or generally; f. SMSS and COLPITTS chose not to warn KHI and Potter of the risk of loss or damage that could and/or did result from potential and/or actual conflicts of interest, particularly involving COLPITTS; g. SMSS, BURKE, COLPITTS and CRUICKSHANK generally failed to provide legal services to KHI and Potter with the care, knowledge, skills, attributes, values and professional competence to be expected of reasonably competent and prudent corporate and securities law specialists; h. COLPITTS acquired an undisclosed ownership and/or financial interest in Bruce Clarke’s company, 2317540 Nova Scotia Limited, after Mr. Clarke, among others, had been retained to provide market making services for the benefit of KHI; i. SMSS and COLPITTS usurped or compromised KHI’s opportunity to sell $5,900,000 in treasury shares to Charles Keating for their own benefit and/or for the benefit of prospective clients, Donnie Snow and CrossOff Incorporated; j. SMSS and COLPITTS acted or continued to act for Potter in the purchase of treasury shares of SolutionInc Technologies Limited in circumstances where COLPITTS received undisclosed compensation related to the purchase and sale of such shares; k. SMSS, BURKE and COLPITTS acted or continued to act for Potter in a KHI share purchase and sale transaction with Derek Banks in relation to which COLPITTS and his spouse also sold $100,500 in KHI shares to Potter; - 22 l. SMSS, BURKE and COLPITTS acted or continued to act for Potter in a KHI share purchase and sale transaction with Michael (Ben) Barthe in relation to which COLPITTS and his spouse also sold $196,500 in KHI shares to Potter; m. COLPITTS improperly engaged Potter in a telephone conversation with a minister of the Government of Nova Scotia for the benefit of another client which resulted in a third party short-selling 50,000 shares of KHI to the severe detriment of KHI, Potter and other KHI shareholders; n. COLPITTS simultaneously provided legal advice and services to KHI and Potter and engaged in activities related to the public trading of KHI shares in a manner and to an extent that made KHI and Potter vulnerable to civil, regulatory and criminal allegations related to such trading; o. SMSS, BURKE, CRUICKSHANK and the other HALIFAX PARTNERS of SMSS actively encouraged and knowingly gave assistance to COLPITTS in his increasingly risky professional conduct or were wilfully blind to it despite an abundance of warning signs; p. after many conflicts of interest had arisen, each of SMSS, BURKE, COLPITTS, and CRUICKSHANK acted or continued to act as legal counsel for KHI and Potter in relation to some or all of the matters that were subsequently pleaded in National Bank Financial Ltd.’s statement of claim in S.H. 206439 as evidence of a fraudulent conspiracy; q. SMSS and COLPITTS failed to be candid with KHI and Potter after September 2001 when they discovered and/or were advised of the full - 23 extent and underlying causes of the conflicts of interest and related matters that were material to the retainers; r. SMSS, BURKE, COLPITTS, CRUICKSHANK and the HALIFAX PARTNERS of SMSS generally failed -- and continue to fail -- to act with complete and undivided loyalty, dedication, candour and independence of judgment to safeguard KHI’s and Potter’s best interests; s. SMSS and each of its HALIFAX PARTNERS failed and chose not to report the professional misconduct of COLPITTS, BURKE and CRUICKSHANK to the Society in relation to conflicts of interest notwithstanding that it was or should have reasonably perceived that such misconduct had caused and was continuing to cause serious loss and damage to KHI and Potter; and t. such other breaches of duties as may appear. III. Ethical Rules Breached 75. KHI and Potter repeat the foregoing and state that: a. SMSS breached the provisions of Chapters 1, 2, 4.11-4.15, 5, 6, 7, 8, 18 and 23 of the Society’s Handbook; b. COLPITTS breached the provisions of Chapters 1, 2, 4.11-4.15, 5, 6, 7, 8 and 23 of the Society’s Handbook; c. BURKE breached the provisions of Chapters 1, 2, 4.13-4.15, 6, 7, 18 and 23 of the Society’s Handbook; - 24 d. CRUICKSHANK breached the provisions of Chapters 1, 2, 4.13-4.15, 6, 7, 18 and 23 of the Society’s Handbook; and e. the 52 named HALIFAX PARTNERS of SMSS breached the provisions of Chapters 1, 18 and 23 of the Society’s Handbook. DATED at Halifax, Nova Scotia, October 24, 2006. _____________________ DAN POTTER 830 Young Avenue Halifax, NS B3H 2V7 Tel: 902-452-1533 Fax: 902-425-0747 Email: dan.potter@ns.sympatico.ca On behalf of himself and Knowledge House Inc. TO: Ms. Victoria Rees Director of Professional Responsibility Nova Scotia Barristers’ Society Suite 1101-1645 Granville Street Halifax, NS B3J 1X3 AND TO: John Rogers, Q.C. Managing Partner - Nova Scotia Stewart McKelvey Stirling Scales Suite 900, Purdy's Wharf Tower One 1959 Upper Water Street P.O. Box 997 Halifax, NS B3J 2X2 AND TO: R. Blois Colpitts RBC Law Inc. Suite L105, Sarah Howard Building PO Box 25 CRO, 1701 Hollis Street Halifax, NS B3J 2L4 - 25 AND TO: the following lawyers (c/o SMSS): Andrew V. Burke James K. Cruickshank Robert J. Aske T. Arthur Barry, Q.C Daniela F. Bassan Marc J. Belliveau Lydia S. Bugden Mark S. Bursey George A. Caines, Q.C. Maurice P. Chiasson James L. Chipman Warren B. Chornoby Sheree L. Conlon James S. Cowan, Q.C. James M. Dickson David P. S. Farrar, Q.C. Paul W. Festeryga Lisa M. Gallivan Robert G. Grant, Q.C. Elizabeth M. Haldane Christa M. Hellstrom Richard A. Hirsch Brian G. Johnston, Q.C. Elizabeth Jollimore, Q.C. Richard K. Jones, Q.C. John E. MacDonell D. Fraser MacFadyen G. Grant Machum D. Geoffrey Machum, Q.C. Deanne MacLeod J. Thomas MacQuarrie, Q.C. Douglas J. Mathews, Q.C. Timothy C. Matthews, Q.C. Carman G. McCormick, Q.C. Donald H. McDougall, Q.C. John S. McFarlane, Q.C. David A. Miller, Q.C. C. Patricia Mitchell A. William Moreira, Q.C. Nancy I. Murray, Q.C. Scott C. Norton, Q.C. Colin D. Piercey John D. Plowman Charles S. Reagh Roderick H. (Rory) Rogers - 26 John Rogers, Q.C. Nancy G. Rubin William L. (Mick) Ryan, Q.C. Rebecca K. Saturley John T. Shanks Richard F. Southcott David A. Stewart, Q.C. Lawrence J. Stordy Candace L. Thomas