Canada’s First Criminal Conviction for Illegal Insider Trading

March 21, 2010

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 and a civil action brought 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 started the illegal insider trading scheme after their graduation from law school 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.

During the time of the illegal insider trading, Cornblum worked at a number of law firms in New York and Toronto. He 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.

The illegal insider trading scheme spanned a 14 year period from 1994 – 2008.   Grmovsek traded while in possession of material, non-public information in about 46 corporate transactions involving securities that were publicly listed in Canada and the US, after being tipped by Cornblum.

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 creates the offences of insider trading and tipping, punishable by a maximum prison term of 10 years. The distinction between the Criminal Code 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.

The US Securities and Exchange Commission (SEC) alleged that Grmovsek violated the anti-fraud provisions. On January 13, 2010, Grmovsek pleaded guilty and was convicted of one count of conspiracy to defraud the US. He was sentenced to a term of imprisonment of time served and fined one hundred dollars.

Grmovsek agreed to disgorgement orders to the SEC 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 total of $1.03 million dollars.  Grmovsek also agreed to pay $250,000.00 costs of the OSC investigation.  The disgorgement orders reflect the proportion of profits made by Grmovsek in the US and Canadian capital markets.

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.

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.  Although the Commission has not yet released its reasons, Grmovsek’s cooperation was undoubtedly taken into consideration in meting out the sentence.


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