How did the justice system deal with this case of major commercial fraud?
Between 1993 and 2001, VisuaLABS Inc. – the company built in Calgary, Alberta by Sheldon Zelitt – attracted thousands of investors, raised hundreds of millions of dollars in capital and grabbed the attention of the global technology press. The promise of two technologies Zelitt developed generated excitement.
In 1998, Zelitt patented a method to modify cathode ray tubes, liquid crystal display (LCD) monitors and plasma display panels to produce three dimensional images. This 3D technology represented a highly awaited potential next-step in the display and broadcast industry. The ability to add depth to televisions and computer monitors without the need for special glasses or headgear, and without the vertigo often experienced with stereoscopic displays, was very attractive to the display and broadcast industries.
The second “GroutFree” technology was a method for joining smaller LCD panels into a single large display without visible seams. When GroutFree was unveiled by press release in 2000 at the height of the technology bubble, it was enthusiastically received. In 2000, display manufacturers were unable to make large LCD screens in a cost effective manner. These large LCD displays would offer better image quality, lighter weight and lower power consumption than the then-popular plasma display panel model. In 1999, the large flat panel display market was expected to grow from $250 million to $5 billion by the year 2005.
Zelitt grew his new company, VisuaLABS Inc., around these two technologies. At its height in early 2000, the company enjoyed a market capitalization of $300 million and thousands of investors.
However, none of this technology existed. It was all hype and deception.
Zelitt kept investors and the press informed of every development by issuing press releases, filing annual reports and maintaining a conspicuous presence at trade shows. However, Zelitt was also obsessed with security. Virtually no one saw detailed demonstrations. He claimed components came from a secret military lab in the United States. The technology was stored in a vault more secure than most banks. Security guards patrolled Zelitt’s house.
Zelitt made other false claims of personal heroism. Yet he was a charismatic and fanciful storyteller, which elevated his promotions and product demonstrations.
The story started to unravel at VisuaLABS’ Annual General Meeting on July 3, 2001. Sharp-eyed directors noticed that the Zelitt prototype was a store-bought 42” Sony plasma display panel with a thin line inscribed down the centre of the screen and a VisuaLABS label on it. The Board promptly fired Zelitt and share prices immediately dropped by 98% – from $4.00 to 10 cents per share.
The next year, the Board of Directors settled with the Zelitts, allowing the Zelitts to keep one million VisuaLABS shares that were subject to harsh restrictions. If they sold these shares, the first proceeds would repay the $1.5 million borrowed by the Zelitts from the company in 2000 to purchase a mansion in Brázdim, Czech Republic. Soon VisuaLABS Inc. dissolved.
Six months after Zelitt was busted, the Alberta Securities Commission (ASC) charged him with 11 Alberta Securities Act violations related to unlawful misrepresentations in press releases, annual reports and ASC filings. He pleaded ‘not guilty’ through his lawyer and fled with his family to his Czech mansion. A warrant was issued for his arrest.
At the trial in absentia on November 14, 2002, the Crown presented damning testimony through 23 witnesses, including VisuaLABS employees and technical experts, over seven days. Zelitt was convicted on all charges.
The judge said general deterrence, denunciation and the protection of the public were the overriding objectives in Zelitt’s sentence. He said Zelitt fell into the category of maximum punishment for “the worst sort of offence by the worst sort of offender” because:
- Zelitt’s actions were planned, deliberate and spanned more than six years,
- he breached his fiduciary duty to VisuaLABS, and
- his offences significantly impacted shareholders.
Zelitt had pocketed $5.7 million from his deception. He flouted the law by missing his own trial. Zelitt was sentenced to four years in jail and $1.85 million in fines, or a total of 8 years if the fines were not paid.
Zelitt continued during this time to live well and incognito with millions of dollars swindled from VisuaLABS investors in his mansion in the low cost Czech Republic – beyond the reach of Canadian law and its enforcement. There, he set up another company with advanced television displays and 3D technology that seemed familiar to VisuaLABS shareholders.
Since Zelitt had ignored its prosecution, the ASC pushed for criminal charges. More than a year after conviction on the provincial regulatory offences, Zelitt was charged with one count of fraud over $5,000 under the Criminal Code of Canada.
On March 22, 2004, Canadian officials requested the extradition of Zelitt from the Czech Republic, based on the serious criminal charge of fraud over $5,000. Fourteen months later, the Czech Republic confirmed the extradition. Zelitt was returned to Canada to begin serving his eight-year sentence at the Grand Cache Correctional Facility in western Alberta.
On July 18, 2005, Zelitt pleaded ‘not guilty’ to the criminal fraud charge. Later he changed his plea to ‘guilty’ and was sentenced to “time served” since he was already convicted of, and serving prison time for, similar provincial offences.
On March 27, 2006, Zelitt applied to court to have his detention declared unlawful under the Charter rights to “life, liberty and security of the person” (section 7). He claimed he had been unlawfully extradited from the Czech Republic. The Court of Queen’s Bench judge, with extensive reasons, concluded the extradition lawful.
Zelitt also returned to court in September 2006 to appeal his sentence, almost four years after the sentence was imposed and well after the deadline to challenge that sentence. On October 26, 2006, a different judge in the Court of Queen’s Bench of Alberta reduced the total imprisonment to 4 years and the fine to $1 million (less than the public cost of dealing with Zelitt).
In Canada, convicts are often released after they have served only one third of their sentence, and often less for non-violent crimes. Zelitt was released after 18 months in jail. It is thought he never paid his fine.
Upon release, Zelitt settled in British Columbia. This was around the arrival time of the unregulated online financing method known as “crowd-funding” to support new ventures. Zelitt wanted back in. According to a news report, in 2010 he registered a new company on Vancouver Island. Outside the reach of the British Columbia securities regulator, he solicited money to develop a “3-D optical inspection tool”. In 2012, he refused to discuss his capital raising for his newest venture, promising: “you’ll see them when they emerge.”
After the initial conviction on all charges, the ASC had crowed, “we believe this is a major accomplishment.” Most Canadians will not see any accomplishment. They will only see the massive failure of oversight and justice on the part of the corporate managers, the regulator, law enforcement and the judiciary. No one was held to account. From all apparent reckoning, with the exception of VisuaLABS employees and investors, everyone seems content with the legal process in this case.
As for Zelitt, and serving 18 months for his estimated $5.7 million loot, crime pays. If there was any “major accomplishment”, that would be it.
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The information in this article was correct at time of publishing. The law may have changed since then.
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