An illegal insider trading scheme unveiled by U.S. and Canadian police this week was hatched by two freshly minted lawyers at a pair of prominent Toronto law firms in the early 1990s and migrated to Wall Street, where covert "spelunking" raids were conducted on partners' offices and computers to uncover lucrative corporate secrets.
According to a statement of facts filed in an Ontario criminal court this week, law school friends Gil Cornblum and Stan Grmovsek first began pocketing stock profits in 1994 when Mr. Cornblum shared confidential information about pending client deals he gleaned as an articling student at Fraser Milner Casgrain LLP in Toronto.
Within a few years, Mr. Cornblum was hunting for confidential client news on Wall Street, where he worked as a corporate lawyer for deal giant Sullivan & Cromwell.
According to the court statement, Mr. Grmovsek would phone his friend every morning at about 4 a.m. to wake him so he could begin what they called "spelunking" hunts through the New York firm's dark and empty offices in search of clues about pending deals.
The extraordinary tactics the two lawyers employed to mine legal secrets over a prolonged period illustrates the complexities regulators face in their efforts to monitor and control the illicit spread of inside information.
Despite numerous crackdowns, most major takeovers continue to be proceeded by runups in stock prices ahead of deal announcements.
According to the court documents, Mr. Cornblum found press releases and contracts left on desks and photocopiers, used temporary passwords issued by night-time secretaries to mine electronic data, and talked to Sullivan & Cromwell attorneys about the files on which they were working.
Mr. Grmovsek pleaded guilty in criminal courts in Toronto and New York on Tuesday to a variety of criminal fraud, money laundering and insider trading charges. The RCMP and Ontario Securities Commission alleged that he and Mr. Cornblum illegally used inside information to generate $9-million (U.S.) in stock profits over a 14-year period.
The case marks the first time that Canadian lawyers were targeted in an insider trading case. It also represents the country's first criminal insider trading charges since the Criminal Code was amended in 2004 to impose sentences of as much as 10 years in prison for insider trading. (Quasi-criminal provincial securities laws call for shorter terms.)
Police dropped the case against Mr. Cornblum after the 39-year-old lawyer killed himself early Monday morning. He had battled depression for years, according to his wife. Sources familiar with the case said that the lawyer had agreed to plea guilty to the charges, but he disappeared from his family home Sunday night, less than two days before he was to appear in a Toronto court. His body was found by police shortly after 7 a.m. Monday in the Don Valley in central Toronto.
The statement of facts said Mr. Cornblum, a quiet and respected lawyer, "lived in fear every day" that the pair would be caught.
Kevin Harrison, an RCMP superintendent in charge of the case said that the two men were the only targets of the case and that none of their former law firms are under investigation.
"Most lawyers have access to non-public information. The message from this case is that those that have it need to ensure that they have adequate security systems," he said.
A statement of facts filed with the Ontario Court of Justice by the RCMP said that the two men, who met as students at Osgoode Hall Law School, first began contemplating trading on corporate secrets while Mr. Grmovsek was articling at Osler Hoskin & Harcourt LLP, a leading Bay Street law firm.
After a year at the firm, the statement of facts said, Mr. Grmovsek "concluded that other students were trading on inside information."
In an e-mailed statement Wednesday, Steve Sigurdson, a managing partner at Osler, said: "Although we cannot influence what Mr. Grmovsek claims to remember, we also cannot let his self-serving comments about the firm go unchallenged. The conclusions he says he made as a student about the treatment of confidential information were clearly wrong. Osler's reputation is built on integrity and the trust that clients place in us."
Soon after both men began articling, Mr. Cornblum was passing confidential information about two deals he gathered at Fraser Milner to Mr. Grmovsek, who organized a series of Canadian and offshore accounts to trade in stocks ahead of deal news. They earned small profits by buying stock in Fraser Milner clients ahead of deals that pushed their stock prices up. The deals involved Slocan Forest and Labatt Brewing Co., then a target of a failed bid by Onex Corp.
Chris Pinnington, Toronto managing partner with Fraser Milner said, "every aspect and dimension of this case is sad and tragic." He said the firm has not been contacted by any investigators or police and was unable to comment about any details of the case because it only just learned about the statement of facts Wednesday.
"We have very stringent policies in place to ensure that the confidentiality of information is maintained," Mr. Pinnington said.