A Vancouver real estate developer has been sentenced to a year in jail for violating real estate and securities laws in a landmark case involving a condo-development scheme that left investors high and dry.
Michael Jerome Knight is appealing both his sentence and his conviction.
But in sending the 52-year-old to prison last month, provincial court judge Maria Giardini made it clear she thought time behind bars was necessary to send a message to the public.
"A non-custodial sentence would be tantamount to tacit approval of the egregious violations of the Securities Act and the Real Estate Services Act," Giardini concludes in her decision.
"I am satisfied a period of incarceration is needed to denounce Mr. Knight's conduct, to deter him and others from committing similar regulatory offences and to protect the public."
Even red hot-market carries risks
They provide a stark reminder that even investments in Vancouver's red hot real estate market carry certain risks.
In 2004, the B.C. Securities Commission issued Knight a three-year prohibition on trading in securities or engaging in investor relations. And in 2006, he was banned indefinitely from providing real estate services.
And yet starting in 2006, he and co-accused Jeffrey Wiegel led a scheme which saw them raise millions from dozens of investors for the development of three Lower Mainland real estate projects.
As Giardini explains it, the complainants in the criminal case claimed they were told that for every $100,000 they invested, a bank would advance $300,000. The money was supposed to go towards the construction of cutting-edge, green-technology condominium buildings.
In exchange for their money, investors were allotted a unit they could either buy at a discounted "wholesale" price or sell on the open market upon completion. The investor would reap the difference between the wholesale price and the retail price.
Only one of the buildings was ultimately built. But not before running into devastating money problems.
"The complainants did not make a profit," she writes. "They did not buy the condominium units they thought had been earmarked for them. The complainants lost part or all of the money they paid."
Testimony like 'a sales pitch'
Knight testified about the "dark shadow" the criminal charges have cast over his life. He claims to have "struggled with health and anxiety issues" and said he "felt a tremendous loss of freedom" as a result of his bail conditions.
But the victims also suffered.
One lost $89,675 — his life savings at the time — and then endured years of fear and threats in relation to lawsuits. Another lost thousands as well as a close friend he brought into the deal.
A single mother said "her confidence is gone and her positive and motivated outlook has changed to one of stress and financial worry." And yet another investor said with the collapse of the investment, the initial thrill of a deal turned to "confusion, doubt, shock and disbelief, anger, fear, humiliation, embarrassment and despair."
In his defence, Knight claimed he wasn't engaging in real estate services, because the investors were developers — not home purchasers. For essentially the same reason, he claimed he wasn't promoting shares under the Securities Act.
The arguments may be legally complex, but Giardini's logic for finding him guilty is fairly simple.
Despite Knight's insistence that the investors were developers, the judge said they thought they had "shared interest in the land"; that made the project "real estate" as defined by the Real Estate Services Act.
And Knight was not licensed to provide real estate services.
As for the financial allegations, the judge looked at the basic definition of a security: an investment offered with the promise of a financial return to an investor who has no say over the management of a project.
As such, the judge found Knight was basically advising people to buy shares in his projects. But without a prospectus and without being registered to do so.
On top of all that, Giardini found Knight wasn't a credible witness; she said she "didn't believe his evidence".
Her assessment is particularly telling against the backdrop of the often endlessly upbeat public relations connected to real estate development projects like the ones Knight was promoting.
"At certain points during his testimony in direct examination, but more so in cross‑examination, it appeared Mr. Knight had a message he wanted to deliver, almost like a 'sales pitch'," the judge wrote.
"His focus, in answering questions, seemed to be on the 'sales pitch' and not on the actual content of the question asked."
'When bad people get started'
Tess Lawson is one of dozens of investors who lost money to Knight. She credits the regulatory agencies and police with bringing some measure of justice to the victims.
But they're still out millions, and the case will be tied up in civil court for years to come. Lawsuits involve not just Wiegel and Knight, but the lawyers and banks accused of standing behind them.
Wiegel pleaded guilty and got a suspended sentence, which keeps him out of jail. Knight was convicted after a trial, but argued that he shouldn't be more harshly punished than his co-accused.
But Giardini concluded the circumstances of their offences warranted different sentences.
The website for the now defunct company he ran with Wiegel still boasts baby pictures of the two men in a boastful 'Our Story' section. The phone number has been disconnected.
The site also links to numerous uncritical, glowing media stories about the projects.
Lawson told the court that "each time she tried to approach writing a victim statement, she fell apart."
She refuses to see herself or the other investors as victims. She believes "justice will prevail" and hopes the case will ultimately improve the consumer protection system.
But she urges people to do their due diligence with real estate investments. Particularly in the current market. She notes that Knight and Wiegel's scam didn't come to light until the 2008 recession squeezed their finances.
"Perhaps this is when bad people get started, and when there's the next squeeze is when they will be revealed," she says.
Knight declined comment through his lawyer.