TORONTO (Reuters) - The phone call on Christmas Eve 2007 was like all the others. Gil Cornblum, a respected Toronto lawyer, told his law school buddy, an unemployed consultant named Stanko Grmovsek, that a corporate merger was about to take place — and to start buying stock.
The old friends had turned a profit that way dozens of times already, using confidential information garnered on deals by Cornblum to invest in companies ahead of major market moving news like mergers and acquisitions.
The merger in question was hardly high-profile — a U.S. manufacturer of construction equipment, Terex Corp, was buying ASV Inc, which designed and made track machines — but it led the duo to their biggest take ever, a nearly US$1 million pay day.
It was also big enough to alert authorities to Grmovsek’s and Cornblum’s audacious 46-deal, 14-year insider trading scheme — Canada’s largest ever. Over that span, they netted more than $9 million, according to Canada’s securities regulator.
The scheme came to light less than two weeks after the biggest hedge fund insider trading case in history, involving the Galleon Group as well as executives at several blue chip U.S. firms.
The Canadian case may have brought in less lucre, but the details — laid out in court documents and legal filings from the Ontario Securities Commission, the U.S. Securities and Exchange Commission and the U.S. District Court — read like a paperback detective novel on white collar crime.
On Tuesday, Grmovsek, 40, pleaded guilty to criminal charges; one day earlier, Cornblum, his closest friend and best man at his wedding, jumped to his death from a Toronto highway bridge. Both men had been cooperating with authorities in the U.S. and Canada.
The suicide came at the end of a long battle with depression, Cornblum’s wife Marilyn told the Globe and Mail newspaper. According to local media, he had unsuccessfully attempted suicide twice before during a months-long investigation involving law firm secrets and corporate mergers across the United States and Canada.
The pair hatched the scheme during Cornblum’s ‘articling year’ at a Toronto law firm from 1994 to 1995, U.S. prosecutors said. During that year, Cornblum provided Grmovsek with information on at least two mergers involving Canadian companies.
By 1999 both men were able to bring in about C$600,000 each from a brokerage account in the Bahamas which they used to purchase homes in swank Toronto neighborhoods.
But after cashing in on more than 40 blockbuster deals involving companies with names like Staples, ING Groep, and Alcoa Inc, and lesser-known financings and resource restatements by small mining companies, authorities investigated.
The case is both stunning in its simplicity and comical in its complexity, with the men growing increasingly paranoid as the years went by.
Friends and associates describe the two, but especially Cornblum, as respected and highly intelligent.
“I mean, who would have expected this?” said one person who knew Cornblum as a teenager in the late 1980s, describing him as a nice fellow who tended to keep to himself and was aloof to a degree. “He was a really bright guy, into the arts more than the sciences.”
The first phase of the scheme took place from 1994 through 1998. Both men had graduated from Osgoode Hall School of Law at York University in Toronto. Cornblum was working in New York as a young associate at Sullivan & Cromwell, a prestigious U.S. law firm involved in mergers and acquisitions.
Grmovsek, who quit law in 1997 and also did a short stint in film school, was an energetic partner. He would make 4 a.m. wake-up calls to Cornblum to ensure the young lawyer was getting to his office in time to rifle through fax rooms and copy centers for details of impending mergers.
As one corporate lawyer among dozens, Cornblum gathered inside information not just from cases he was working on, but from other attorneys “at lunch or in the hallways,” by reading memos left outside offices and by accessing computer records “often using passwords intended by use by the word processing department,” U.S. prosecutors said.
He would then phone his friend Grmovsek with stock tips, and the two split profits down the middle.
“Typically, it is very simple for someone (to plot such a scheme),” said Darryl Levitt, a lawyer with Macleod Dixon LLP in Toronto.
“If you are involved in a transaction and you know that the target is going to be bought out for 30 percent more than what it is currently trading at, all you have to do is pick up the phone and call a friend and give them that information, so that they can buy shares, to the detriment of other shareholders.”
But half a decade into their partnership, the two were overcome by stress and took a five-year hiatus from their life of crime. During that period, Cornblum changed law firms several times.
When the partnership resumed in 2004, the two men became far more cautious in their approach, although their growing take — and greed — would eventually do them in.
Toward the end the scheme, when Cornblum was working in the Toronto office of Dorsey & Whitney, another U.S. law firm, investigators say he got nervous about using his office phone to call Grmovsek.
“Beginning in 2006, Cornblum began using pay phones to communicate with Grmovsek in an effort to conceal their contacts,” the U.S. District Court documents said.
The two also used weekly lunch dates to exchange information and plan stock-trading strategies, since they were both again living in Toronto.
Grmovsek got increasingly creative in using trading accounts in the names of friends and family — and even a neighbor — to buy stock just before an acquisition was announced and sell it after the shares had jumped.
According to a statement of allegation by the Ontario Securities Commission, Grmovsek traded through brokerage accounts belonging to his parents, a sister and brother-in-law, his ex-wife, a friend and her spouse, and a former neighbor.
Authorities said the friends and family were not aware of the insider trading scheme, though some did pay Grmovsek a percentage of profits generated by the illegal trading.
One of the curiosities of the case is that Cornblum appears to have been caught at least in part because he was found to have been using his law firm’s computers to look up information without billing clients for that time at work.
While it is not yet clear how authorities discovered the scheme, it appears that regulators became suspicious at the flow of trading just before some mergers were announced. That led them to the common thread between the mergers: the law firm involved in negotiating the deal.
The law firm, Dorsey & Whitney, searched its computer records, among other things, to see who had accessed records about the suspicious cases.
In one instance, late on a Sunday night in February 2008, Cornblum used his Dorsey computer to look at three different documents related to a merger transaction that he was not involved in as a lawyer.
“According to Dorsey’s internal records, Cornblum did not bill any time to clients on that date,” one court filing notes.
Grmovsek faces a maximum sentence of five years in prison for the U.S. charges, according to the U.S. Attorney. He is scheduled to be sentenced on November 23.
Some predict his arrest will be followed by others in the not so distant future.
“After the major Ponzi schemes, uncovering a lot more insider trading matters is certainly not surprising. There is certainly going to be a lot more coming out of the woodwork,” said Levitt.
Tom Tinkham, an attorney with Dorsey and Whitney, said the firm implemented one major change when it found out about Cornblum a year and a half ago: senior partners who maintain documents in the company’s electronic document database are now required to make all files restricted and decide on which employees will be given access in each case.
He also said all lawyers at the firm were required to take — and pass — annual tests on ethics. Asked if Cornblum passed those tests, Tinkham said: “Yes, he did.”
To see a timeline of the insider trading scandal, click here
Reporting by Andrea Hopkins and Pav Jordan; additional reporting by Euan Rocha in Toronto and Jui Chakravorty in New York; Editing by Jim Impoco and Claudia Parsons