TORONTO - Toronto lawyer Stan Grmovsek has been sentenced to 39 months in prison for his role in a massive insider trading scheme that netted him and a friend about US$9 million.
The sentence Thursday at the Ontario Court of Justic is the first insider trading conviction under new federal laws that came into place in 2004 and the largest prison sentence ever in Canada for such an offence.
Grmovsek and a friend from law school, Gil Cornblum, used the insider information they had access to as corporate lawyers to profit from insider trades on 46 potential corporate transactions over 14 years.
In some cases, Cornblum would get nighttime secretarial staff at his law firm to access information on upcoming transactions he was not personally involved in. He would also conduct "early morning searches through the hallways, photocopy rooms, fax machines and files of colleagues at the law firms for documents revealing material non-public information," according to court documents.
Insider trading occurs when someone uses confidential information to trade in shares and profit from a jump in the stock price before that information is made public to ordinary investors. In most cases, the shares of companies that are taken over jump on the news, usually because the takeover price is higher than the market value at the time.
In this particular case, Cornblum committed suicide days before the two men were set to plead guilty to the insider trading charges in October.
Once he had received the information gathered by Cornblum, Grmovsek would make insider trades using "numerous brokerage accounts," including accounts that belonged to family and friends who were unaware that he was making illegal trades.
Once the information Grmovsek and Cornblum had obtained was made public, the shares Grmovsek had bought "often increased dramatically in value," court documents say. Grmovsek and Cornblum would then take their profits and deposit them in offshore accounts.
Mergers that Grmovsek and Cornblum illegally profited from included the acquisition of Office Depot by Staples in 1996, the merger of Glamis Gold Ltd. and Vancouver gold miner Goldcorp Inc. (TSX:G) in 2006 and the merger of Toronto-based uranium company Denison Mines Corp. (TSX:DML) and International Uranium Corp. in 2006.
Grmovsek turned himself over to the police on Oct. 26 and pleaded guilty to all charges against him the next day.
Grmovsek's sentence is the first test of the federal insider trading law, which provides for a maximum 10-year prison sentence for anyone convicted of insider trading. Provincial securities laws have more lenient provisions.
"A jail sentence in excess of three years will make a lot of people think twice," said Kelley McKinnon, a partner at the Gowlings law firm in Toronto.
"It's real time. It's a federal prison. Even if you get credit for good behaviour, even if you get off early, you are spending some real time in a jail," she told BNN, a cable TV business channel based in Toronto.
"Compared to the prior sentences we've had for insider trading this is an enormous leap up. Certainly this will be an attention-getting sentence for that reason."
The Harper government plans to toughen up Canada's white-collar crime laws by introducing mandatory jail terms, longer sentences and confiscation of assets.
Justice Minister Rob Nicholson has also said the government is planning to change the rule that allows white-collar criminals to get parole after serving just one-sixth of their sentence.
Canada has long been criticized for lack of rigour in prosecuting financial crime. Many high-profile cases were never brought to trial and others, including those of former newspaper baron Conrad Black and executives of Nortel Networks, were first charged in the United States, where sentences for white-collar crime are generally much stiffer than in Canada.
A notable Canadian exception was the seven-year sentence handed to theatre impresario Garth Drabinsky in August for swindling investors, although the case took 11 years to resolve.
Grmovsek now faces sentencing in the U.S. on Jan. 14. An initial agreement to sentence him to 39 months was reached on both sides of the border and the U.S. court now has to decide whether it will bless that agreement, said Kellie Seaman, a lawyer with Groia & Co., the Toronto-based law firm that defended Grmovsek.
