Grails - java.lang.SecurityException: Prohibited package name: java.lang

I installed grails on my laptop today and was curious to try out my grails application. But I was presented with long scary error stack trace.

java.lang.SecurityException: Prohibited package name: java.lang
        at java.lang.ClassLoader.preDefineClass(ClassLoader.java:479)
        at java.lang.ClassLoader.defineClass(ClassLoader.java:614)
        at java.security.SecureClassLoader.defineClass(SecureClassLoader.java:124)
        at java.net.URLClassLoader.defineClass(URLClassLoader.java:260)
        at java.net.URLClassLoader.access$000(URLClassLoader.java:56)
        at java.net.URLClassLoader$1.run(URLClassLoader.java:195)
        at java.security.AccessController.doPrivileged(Native Method)
        at java.net.URLClassLoader.findClass(URLClassLoader.java:188)
        at org.codehaus.groovy.tools.RootLoader.oldFindClass(RootLoader.java:152)
        at org.codehaus.groovy.tools.RootLoader.loadClass(RootLoader.java:124)
        at org.codehaus.groovy.grails.cli.support.GrailsRootLoader.loadClass(GrailsRootLoader.java:43)
        at java.lang.ClassLoader.loadClass(ClassLoader.java:251)
        at java.lang.ClassLoader.loadClassInternal(ClassLoader.java:319)
        at java.lang.ClassLoader.defineClass1(Native Method)
        at java.lang.ClassLoader.defineClass(ClassLoader.java:620)
        at java.security.SecureClassLoader.defineClass(SecureClassLoader.java:124)
        at java.net.URLClassLoader.defineClass(URLClassLoader.java:260)
        at java.net.URLClassLoader.access$000(URLClassLoader.java:56)
        at java.net.URLClassLoader$1.run(URLClassLoader.java:195)
        at java.security.AccessController.doPrivileged(Native Method)
        at java.net.URLClassLoader.findClass(URLClassLoader.java:188)
        at org.codehaus.groovy.tools.RootLoader.oldFindClass(RootLoader.java:152)
        at org.codehaus.groovy.tools.RootLoader.loadClass(RootLoader.java:124)
        at org.codehaus.groovy.grails.cli.support.GrailsRootLoader.loadClass(GrailsRootLoader.java:43)
        at java.lang.ClassLoader.loadClass(ClassLoader.java:251)
        at org.codehaus.groovy.grails.cli.support.GrailsStarter.rootLoader(GrailsStarter.java:177)
        at org.codehaus.groovy.grails.cli.support.GrailsStarter.main(GrailsStarter.java:212)

I inspected classpath on my laptop and found that I'd %JAVA_HOME%\jre\lib\rt.jar in my classpath. When I removed rt.jar from classpath, grails was working fine.