Stan Grmovsek and Gil Cornblum have been close friends ever since they met at Osgoode Hall Law School 17 years ago. Although their careers took different directions, they have remained in close contact, attended each other's weddings and frequently socialized with their families.
Two years ago, the close bond veered into troubling territory when Mr. Grmovsek, known to friends as Joe, began making lucky stock bets on companies for himself and two relatives shortly before takeover bids and other favourable events were announced. The problem with Mr. Grmovsek's timely trades is that at least eight companies involved in the deals were clients of Mr. Cornblum or his law firm Whitney & Dorsey LLP.
The coincidence has had devastating consequences for both men. On Monday, Mr. Grmovsek, a 39-year-old self-employed business consultant in Woodbridge, Ont., consented to an Ontario Securities Commission demand to freeze most of the alleged $1.1-million in proceeds from the trades in his brokerage accounts. He has hired a lawyer and is co-operating with a joint OSC and U.S. Securities and Exchange Commission investigation, which court documents describe as a “potential illegal insider trading” case.
For Mr. Cornblum, the scandal has sent his personal and career life into a horrible downward spiral.
He is currently lying in a Toronto hospital after he was rushed to emergency earlier this week. Sources close to Whitney & Dorsey said his partnership was terminated this week and he no longer works in its Toronto office. It is understood that the Minneapolis-based firm conducted an internal probe after the SEC alerted it two weeks ago that is was investigating two of its lawyers in relation to the Grmovsek case. It is understood the firm has taken no action against the other lawyer, whose identity is unknown.
It is a hard fall for a respected corporate lawyer who had won a coveted partnership with a mid-sized U.S. firm, boasted a roster of growing resource company clients and is admired as a devoted husband and father of a young son.
Mr. Cornblum could not be reached for comment. A spokeswoman for the OSC said the insider trading investigation “is ongoing, but we can't comment beyond that.” Spokesmen for the SEC and Whitney & Dorsey have declined to comment. In a written statement yesterday about the scandal, Mr. Grmovsek said he is “heartbroken” and described Mr. Cornblum as “someone for whom I greatly cared, admired and respected.”
News of the insider trading investigation has stunned Mr. Cornblum's corporate clients and Bay Street lawyers and bankers who worked with him on a variety of transactions involving mostly mid-sized resource companies. They described Mr. Cornblum as an unassuming and pragmatic deal maker.
“He's a guy with a lot of integrity,” said Joseph Conway, chief executive officer of Iamgold Corp., which hired Mr. Cornblum to advise Iamgold on its $1.3-billion takeover of Cambior Inc. in 2006.
“I find it hard to believe that he would actually be willingly involved in something like that,” he said.
Peter Marrone, chairman and CEO of Yamana Gold Inc., which hired Mr. Cornblum to advise on two of the merger transactions named by the OSC, said the company has not been contacted by regulators, but it intends to co-operate with any investigation. “I will always hope that the people we deal with will maintain our confidences,” he said.
The investigation is believed to mark the first time that a Canadian lawyer has been ensnared in an case involving allegations of insider trading. U.S. prosecutors have successfully pursued cases against an estimated half dozen lawyers accused of buying stocks when they possessed confidential information about pending corporate deals or news. One of the lawyers was former Dorsey & Whitney partner James O'Hagan, who was sentenced to 18 months in prison in 1997 after he was convicted for making illegal trades ahead of a client's takeover offer.
The SEC recently signalled that it was troubled by the growing number of lawyers who have recently been targeted in insider trading cases. Linda Chatman Thomsen, the SEC's director of enforcement, said in a March speech that she found it “depressing” and “inexplicable” that nine U.S. lawyers have been sued by the regulator in the past year for allegedly trading in stocks ahead of significant news.
Iamgold's Mr. Conway said he regarded lawyers as his most “trusted advisers” because they give counsel over a long period of time on a variety of corporate decisions and transactions.
“There's that level of trust and confidence that you have with a lawyer that is much higher than you would have with say an investment adviser or an investment banker. That's the disturbing part about it,” he said.