Canada’s first criminal conviction for illegal insider trading occurred on November 6, 2009 when Justice Robert Bigelow of the Ontario Court of Justice accepted a guilty plea from Stan Grmovsek. Sentencing was delayed until January 7, 2010 to facilitate the conclusion of regulatory proceedings brought by the Ontario Securities Commission (OSC) and a civil action brought by the United States Securities and Exchange Commission (SEC) against Grmovsek and his co-accused, Gil Cornblum. Tragically, Cornblum committed suicide on October 27, 2009, a day before he was scheduled to plead guilty. Cornblum and Grmovsek collaborated in a deliberate and prolonged illegal insider trading scheme.
Cornblum and Grmovsek, who were classmates at law school, started the illegal insider trading scheme after their graduation in 1994. Cornblum sought and obtained material, non-public information about pending corporate transactions that he passed on to Grmovsek who then executed trades in the securities of the corporations involved in the corporate transactions for a profit that they split between them.
Cornblum’s conduct reads a bit like a spy novel. During the time of the illegal insider trading, he worked at a number of law firms including, Sullivan and Cromwell, LLP, New York; Schulte Roth and Zabel, LLP, New York; and Dorsey, Whitney, LLP, Toronto. Cornblum received some of the material non-public information in his role as counsel to certain issuers on pending corporate transactions. In addition, he gained material non-public information through conversations with colleagues or other counsel. However, Cornblum also resorted to more clandestine-like activity to obtain material non-public information. For example, he used the night secretarial staff’s temporary passwords to search for confidential information in the computer databases at the law firms that he worked for. He also conducted early morning searches through the hallways, photocopy rooms, fax machines and files of his colleagues at the firms for documents that contained confidential information about pending transactions that he was not involved in.
The illegal insider trading scheme spanned a 14 year period from 1994 to 2008, but the trading was generally conducted in two time periods: September 1996 to August 2000 and May 2004 to April 2008.
In total, Cornblum tipped Grmovsek and Grmovsek traded while in possession of material, non-public information about 46 corporate transactions involving securities that were publicly listed in Canada and the United States.
In Canada, Grmovsek was charged with three offences: (i) fraud (for trades executed before the new Criminal Code insider trading provisions), (ii) illegal insider trading contrary to the Criminal Code and, (iii) money laundering contrary to the Criminal Code.
Section 382.1 of the Criminal Code which creates the offences of insider trading and tipping was introduced in 2004. Insider trading and tipping are indictable offences punishable by a maximum prison term of 10 years. The distinction between the Criminal Code offence of prohibited insider trading and the Ontario Securities Act offence of illegal insider trading is that the criminal offence imports a mens rea requirement that the individual “knowingly used inside information,” whereas in the regulatory context the Crown is only required to prove that the individual was in possession of knowledge that was not generally disclosed.
On January 7, 2010, Bigelow J. sentenced Grmovsek to 39 months imprisonment on the joint recommendation of the prosecution and the defence.
In the United States, the SEC alleged that Grmovsek violated the anti-fraud provisions, including prohibitions against insider trading. On January 13, 2010, Grmovsek pleaded guilty and was convicted of one count of conspiracy to defraud the United States in the United States District Court for the Southern District of New York. He was sentenced to a term of imprisonment of time served and fined one hundred dollars.
In addition to the jail terms, Grmovsek agreed to disgorgement orders to the United States Securities and Exchange Commission (SEC) at a total of $8.5 million dollars with a waiver of all but nearly $1.5 million and to the Ontario Securities Commission (OSC) at a total of $1.03 million dollars, including $283,000.00 to the Attorney General for Ontario. Grmovsek also agreed to pay $250,000.00 in costs relating to the OSC investigation. Grmovsek traded in the US and the Canadian capital markets and the disgorgement orders reflect the proportion of profits made in each of the United States and Canada.
Justice Bigelow described the sentence against Grmovsek as “entirely appropriate and justified.” Bigelow J. also noted that “it has a strong denunciatory and general deterrent effect.”
The Grmovsek jail sentence exceeds the longest sentence to date in an illegal insider trading prosecution brought by the OSC under section 122 of the Ontario Securities Act. In 2000, Glen Harvey received a sentence of six months jail on conviction of two counts of insider trading. At that time, the maximum sentence under the Securities Act was two years imprisonment and/or a basic fine of $1 million dollars or in insider trading offences up to three times the profit. Harper profited $4 million dollars as a result of his illegal insider trading and the fine of $2 million dollars represented half of his profits. The current penalties available under section 122 of the Securities Act are five years imprisonment and/or a $5 million fine.
The OSC’s settlement agreement with Grmovsek stated that Cornblum and Grmovsek provided extensive cooperation in assisting all regulatory authorities and law enforcement agencies involved in identifying the depth and breadth of the conduct at issue. In particular, it stated that many of the corporate transactions that occurred in the 1994 to 2000 period were identified by the two respondents from memory. It also noted that staff’s investigation and analysis of those transactions was aided by Cornblum and Grmovsek’s testimony as the records of some of the transactions particularly those with offshore components were incomplete. Although the Commission has not yet released its reasons, Grmovsek’s cooperation was undoubtedly taken into consideration in meting out the sentence