Law Times

Law TiMes • May 10, 2010 FOCUS PAGE 11 Guilty plea key to first conviction under new law But co-operation between Canada, U.S. played big role in insider-trading case BY DARYL-LYNN CARLSON For Law Times arlier this year, Toronto lawyer Stan Grmovsek became the fi rst person sentenced for insider trading under amendments to Cana- da's Criminal Code passed in 2004. Grmovsek is currently serv- ing 39 months after pleading guilty and co-operating with au- thorities as a result of a scheme he and a friend from law school executed over 14 years. Th e plot began during their articling placements at two notable Bay Street law fi rms. Grmovsek's conviction marks E several milestones in terms of asserting Canada's seriousness about prosecuting insider-trad- ing violations with stringent jail sentences, lawyers say. "What's important about this case is it's the fi rst case I'm aware of in the securities marketplace where the U.S. and Canadian regulators co-operated at a very high level," says Joseph Groia, principal at Groia & Company in Toronto, who represented Grmovsek in court. "Ultimate- ly, the American regulators al- lowed this matter to have a made-in-Canada solution." Th e pair's scheme started in 1994, when Grmovsek's friend, Gil Cornblum, began sharing confi dential information about pending client deals while he was articling in Toronto. Gr- movsek then started contrib- uting by searching out similar insider details also while arti- cling, according to an agreed statement of facts. Cornblum later landed a job as a corporate lawyer at Wall Street law fi rm Sullivan & Cromwell LLP and then moved to Schulte Roth & Zabel LLP, also in New York, before end- ing up at Dorsey & Whitney LLP in Toronto, all the while continuing the insider-trading scheme. Over 14 years, the pair earned upwards of $10 mil- lion by leveraging confi dential information to purchase shares in companies that had deals pending. Th e scheme came to light after someone gave a tip to the U.S. Financial Industry Regulatory Authority, an inde- pendent brokerage watchdog. Th e tip confi rmed an unusual and lucrative trading pattern in two takeovers involving U.S.- listed companies. Two days before his court appearance, Cornblum committed suicide in Toronto. Groia, former director of enforcement for the Ontario Securities Commission, ac- knowledges the case was the fi rst to bring together investi- gative authorities from both countries to agree on prosecu- tion and sentence. "We had the participation and co-operation of the OSC, the RCMP, and the attorney general's offi ce in Toronto, as well as the FBI, the SEC, and the U.S. Justice Department in New York," says Groia. "So it's the fi rst time that there could have been a competition be- tween the regulators to take a bigger piece of the pie, so to speak, but they agreed." Th e outcome could have been diff erent, Groia adds. "Had [Grmovsek] not been able to reach a global settle- ment, he was looking at charg- es in Toronto and proceedings in New York and he could have been looking at potentially spending time in jail in Can- ada and then having to go to the U.S. and spend more time in a U.S. jail. So the level of co-operation is a positive and encouraging sign with the U.S. regulators prepared to allow the Canadians to take the lead and come up with a made-in- Canada solution." Nigel Campbell, a partner at Blake Cassels & Graydon LLP in Toronto who practises securities and corporate/com- mercial law, agrees the Gr- movsek case exemplifi es a spirit of co-operation between the authorities. Still, he notes the off ender's guilty plea was key to resolving the matter. "As a lawyer, I fi nd the co- operative element very interest- ing. Th e sentence of 39 months is a lot longer than any other sentence for insider trading." Campbell also points out the successful last insider-trading Wendy Moore Johns Been in Law Times? Want a record of it? Promote your law firm by ordering reprints of articles from the voice of the profession — Law Times! Reprints are great for: • Firm promotional material • Use on your web site • Training and education • Suitable for framing $175 - $225/reprint We provide a color PDF and unlimited reproduction rights. LAW TIMES For more information or to order reprints, please e-mail Gail Cohen at: gcohen@clbmedia.ca Untitled-4 1www.lawtimesnews.com Untitled-1 1 8/20/09 1:11:45 PM 5/4/10 2:56:13 PM | David Payne | David Tenszen For over 70 years Thomson, Rogers has built a strong, trusting, and collegial relationship with hundreds of lawyers across the province. As a law firm specializing in civil litigation, we have a record of accomplishment second to none. With a group of 30 litigators and a support staff of over 100 people, we have the resources to achieve the best possible result for your client. Moreover, we are exceptionally fair when it comes to referral fees. We welcome the chance to speak or meet with you about any potential referral. We look forward to creating a solid relationship with you that will benefit the clients we serve. THOMSON, ROGERS Barristers and Solicitors 416-868-3100 Toll free 1-888-223-0448 www.thomsonrogers.com YOUR ADVANTAGE, in and out of the courtroom prosecution dates back 10 years. In that instance, the off ender received a sentence of just six months in jail. Yet other prosecutions under the new Criminal Code amendments may not go as smoothly as the Gr- movsek case, particularly if there isn't a guilty plea. "It's a diffi cult provision for a number of reasons," he says. "If you proceed un- der the Criminal Code, you have to prove a guilty mind under mens rea, and that is doubly complicated in the context of insider trading because, in many instances, you don't have a smoking gun or somebody who has observed the off ence. Th ese cases are usually prosecuted mostly by inference or based on circumstantial evidence." Emily Cole, an associate counsel in Miller Th omson LLP's litigation and business law groups, authored a paper about the case in February. She says it sends a message to other markets that Canada is indeed willing to prosecute insider- trading off ences under the American regulators were particularly helpful in allowing for a made-in- Canada solution, says Joseph Groia. Criminal Code provision. "Canada has certainly been criticized in the past for failing to address insider trading," says Cole. "Th e substantial jail sen- tence and the speedy resolution of this case will send a strong message that Canada is serious about securities violations." She adds that "exemplary Trust [ co-operation amongst the Canadian and U.S. regula- tors and criminal authorities will also convey to interna- tional markets that Canada has both the capacity and the will to address fi nancial crimes." Also importantly, Cole noted in her newsletter article that Grmovsek had agreed to pay back $8.5 million in prof- its to the SEC, more than $1 million to the OSC, $250,000 to cover investigative costs, and $283,000 to the Ontar- io attorney general through disgorgement orders. Disgorgement orders set out to remove any "ill-gotten gains" from an accused in fi - nancial crimes, Cole explains. But in the long term, whether the matter will count as a precedent for disgorge- ment orders or in sentencing re- mains to be seen. "In this case, it was a plea, the evidence was overwhelming, and the accused co-operated extensively with authorities," Cole says. "So the precedential value will be con- sidered in light of the unique circumstances in this case." LT Every time you refer a client to our firm, you're putting your reputation on the line. It's all about trust well placed. REPRINTS

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