As Justice Mary Lou Benotto delivered her verdict, an audible gasp could be heard from family members and supporters who filled the courtroom. As the verdict was being delivered Drabinsky slumped in his seat while members of his family wept and hugged each other for support.

In a brief verdict, Benotto commended Drabinsky for his “spectacular” achievements and creative success with theatre productions such as Phantom of the Opera, Ragtime and Showboat. Those shows helped attract thousands of tourists to the city and “reflected favorably on all of us in Canada,” she said. However, the trial was not about that creative success, but rather about the widespread accounting fraud that occurred under their watch at the company. “This was widespread and long-standing,” said Benotto. “The accounting system was fraudulent. Most importantly, I have been satisfied beyond a reasonable doubt that you knew what was happening with the financial statements.”

The verdict brings to a close one of the most sensational chapters in the ongoing Livent Saga. The transcript of the 10-month long trial exceeds 7,000 pages, as the court heard from more than a dozen witnesses and examined literally thousands of company documents that prosecutors said clearly laid out the fraud and Drabinsky and Gottlieb’s complicity.

Neither Drabinsky nor Gottlieb would comment on the case as they left the courtroom. “We will have to read the 80-page judgment before we make any comment,” said Edward Greenspan, the lawyer representing Garth Drabinsky.

Lawyers will be back in court on April 8 to set a date for sentencing. The pair will be sentenced under guidelines that were in place in 1998 – the date of the actual crime. Under those guidelines the former executives could face a maximum sentence of 10 years for each count of fraud and 14 years for forgery.

Over the course of the trial, prosecutors and defence lawyers painted a very different picture of the accounting fraud that destroyed what was once North America’s largest live theatre company. Prosecutors argued the case was simple: Drabinsky and Gottlieb arbitrarily manipulated the company’s books to hide mounting losses and ensure that investors continued to buy the company’s stock.

The fraud was ultimately uncovered after Micheal Ovitz – the former Hollywood superagent – bought a controlling stake in Livent in early 1998 and installed his own executives to manage the day-to-day financial affairs of the company. In August 1998, Maria Messina, the company’s former chief financial officer, blew the whistle on the fraud and Drabinsky and Gottlieb were suspended. The pair were fired soon after and an internal investigation found evidence of rampant accounting manipulations.

Defence lawyers painted a much more complicated picture of what brought Livent to ruin. The accounting manipulations were masterminded by Gordon Eckstein, the company’s senior accountant, who was aided by Messina, the defence argued. The judge rejected the defence argument that Messina, Eckstein as well as junior Livent accountants then conspired with executives representing Ovitz and lawyers from the prominent Toronto law firm of Stikeman Elliott to plant incriminating documents and frame Drabinsky and Gottlieb for crimes they did not commit.

“This was widespread and long-standing,” she said. “The accounting system was fraudulent. Most importantly, I have been satisfied beyond a reasonable doubt that you knew what was happening with the financial statements.”

One of the main reasons cited by the judge for her rejection of the defence’s notion that Eckstein carried out the accounting fraud on his own was the existence of the now-notorious “Executive Summaries” Eckstein produced at the end of every financial quarter. The one-page document provided a stark and simplified picture of Livent’s financial health – or lack thereof. Each summary contained a line-item stating Livent’s
“actual net income” – which was almost always a substantial loss, as well as its “reported net income” – which was almost always a healthy profit. The report then summarized the amount of expenses that had been “moved” to the company’s fixed assets or “rolled” into future periods where they would improperly boost the company’s bottom line. “Mr. Eckstein had these reports prepared in order to report to management. Were he on a frolic of his own, he would not have needed these reports in simplified format,” Justice Benotto wrote in her decision. “I believe that Mr. Eckstein gave the management summaries to Mr. Drabinsky and Mr. Gottlieb and discussed the documents with them at management meetings.”

Both Eckstein and Messina pled guilty to fraud charges in the United States. Neither has been sentenced in those cases. Eckstein also pled guilty to a single count of fraud in Canada but received a conditional sentence with no jail time.

Eckstein was perhaps the most vilified witness during the months long trial. Defence lawyers – and even many of the prosecution’s own witnesses – portrayed him as a rude, aggressive bully who was prone to verbal and even physical abuse. He admitted calling Drabinsky and Gottlieb “fucking idiots” but denied allegations that he once threw a clock at Maria Messina. Even the judge found his behaviour reprehensible. “Mr. Eckstein demonstrated a complete lack of understanding of basic human dignity,” the judge wrote.

Eckstein’s testimony was often “exaggerated, overstated and even changed when he was challenged by defence lawyers,” Benotto wrote. However, not everything he said was a lie, according to the judge. “Mr. Eckstein is an unsavoury witness. He is also the perfect fall guy,” Benotto wrote.

Benotto accepted Eckstein’s testimony that he was instructed by Gottlieb to bury millions of dollars in kickback payments on Livent’s balance sheet shortly after the company was formed in 1993. She also accepted that Drabinksy and Gottlieb rejected his advice that they write down those payments prior to the company’s initial public offering. At the time of the IPO Livent’s reported assets of about $97 million were overstated by about $6.8 million as a result of the improper accounting related to the kickback scheme, the court heard.

Another controversial figure in the trial was Messina who – prior to joining the company – also audited the company’s books. While Messina portrayed herself as a whistleblower who informed new Livent managers brought in by Michael Ovitz about the fraud, defence lawyers insisted that she was a master manipulator who concocted the complex scheme to frame Drabinsky and Gottlieb for fraud.  Neither portrait is accurate, wrote Benotto.  Once new Livent managers began rooting through the company’s books, it was only a matter of time before they uncovered the fraud, Benotto wrote. “[Messina] saw the curtain coming down. She knew she could not hide the fraud. The disclosure was self-preservation not whistle blowing.”

And while Messina is “an expert in self-preservation” the judge rejected the defence’s assertion that Messina lied when she testified about Drabinsky and Gottlieb’s role in the fraud. “Ms. Messina failed miserably in her role as officer of a public company. To participate in a fraud violated her duty. She could have stopped it and did not. Her conduct was inexcusable,” Benotto wrote. “That said, I believe her evidence as to Mr. Drabinsky and Mr. Gottlieb’s role in the fraud.”

The judge did agree with the defence’s assertion regarding one of the most dramatic incidents connected with the Livent fraud: the controversial management meeting on April 24, 1998. Both Gordon Eckstein and Chris Craib – a Livent controller – testified they attended a meeting with Drabinsky on that day where he openly discussed manipulating Livent’s first quarter financial results. In earlier interviews and testimony before the Ontario Securities Commission, Craib provided elaborate details about the meeting and emerging from the meeting sick to his stomach by what he had witnessed. There’s just one problem – it couldn’t have happened the way Craib described it.

At the time Craib said the meeting was taking place, Drabinsky was in Livent’s corporate jet flying back from a gala lunch in Washington, D.C., attended by then-president Bill Clinton. At the trial, Eddie Greenspan submitted a photo of Drabinsky, Clinton and Drabinsky’s girlfriend at the time at the lunch as proof of his attendance.

Prosecutors suggested that Craib merely got the time of the meeting wrong and Drabinsky could well have attended the meeting later that afternoon after he returned from Washington. Defence lawyers insisted that Craib was lying about the meeting and that perjury should cast doubt not only on Craib’s testimony, but the prosecution’s entire case.

There are so many inconsistencies in Craib’s evidence and evidence of collusion with Messina, regarding the events surrounding the meeting that it is impossible to rely on anything Craib says about that infamous meeting, Benotto wrote. As a result, Benotto ruled that the meeting never took place. However, that fact does not negate the evidence that other executive meetings did take place where accounting manipulations were discussed, she says. “It does not follow that because one meeting did not take place as described, the accused had no knowledge of the manipulations going on in the books of the company,” Benotto wrote.

Despite the problematic testimony of Eckstein, Messina and Craib, the mountain of documents that made up the heart of the prosecution’s case backed much of what they said, wrote the judge. Benotto also rejected the defence’s notion that the documents were so vague and ambiguous that they could not be used to ascribe knowledge of the fraud. During final arguments, defence lawyers even argued that the word “actual” does not actually mean “actual.” However, Benotto cites earlier testimony by Eckstein and Messina that Drabinsky knew full well what “actual” actually meant.

During a particularly heated management meeting in the fall of 1997 Eckstein had two sets of financials prepared: one that represented the financials Livent would report to shareholders and another that accurately reflected the company’s financial position. When those “actual” figures were presented to Drabinsky, he asked what they were. Eckstein replied they were “the fucking real numbers,” before Drabinsky pushed them aside and focused on the manipulated financials. “This is evidence [Drabinsky] knew what the word meant,” Benotto wrote.

The judge also rejected the defence’s contention that many of the accounting transactions the prosecution said were fraudulent could have been justified by accounting experts who were not called as part of the case. “Even if some of the entries are justifiable, the cumulative effect of the manipulations is not,” Benotto wrote.

During final arguments of the trial, the defence argued that the actions of Drabinsky and Gottlieb indicated that they were innocent. The men never personally directed any of Livent’s junior accountants to commit fraud, they never told anyone to hide the fraud from Livent’s auditors and they were not panicked by the thought of accountants working for Michael Ovitz poring over Livent’s books as part of a due diligence examination. And while the conduct of Drabinsky and Gottlieb is consistent with someone who doesn’t know about the fraud, it is also consistent with executives confident that their crimes will not be discovered, Benotto wrote. “The accounting practices at Livent had gone on for a long time. They were entrenched… The practices had become a way of life and no one had detected them. The confidence could have easily have been the result of having fooled the auditors for many years.”

The judge also rejected the notion that Drabinsky and Gottlieb’s firing of Robert Topol – the company’s former chief operating officer and a co-conspirator in the fraud – indicated their innocence. Topol was fired in early 1998 after it was discovered he had “mis-appropriated” several hundred thousand dollars in Livent securities, the court heard. Had Drabinsky and Gottlieb known about the fraud, it would have been too much of a risk to fire Topol, the defence argued. After all, an incensed Topol could have gone to the police and blown the whistle on the fraud. Given Topol’s alleged complicity in the fraud, it was highly unlikely he would have gone to the authorities, Benotto wrote.

Topol was originally charged with Drabinsky and Gottlieb. However, those charges were dropped in 2007 due to unreasonable delays in the case coming to trial. Topol made a brief appearance at the trial early in the proceedings, but was quickly ushered out of the courtroom and banned from returning since he may have been called as a witness.

Benotto also dismissed the defence’s contention that Drabinsky was too busy working on the creative aspects of Livent’s theatre productions to know about the fraud. “Mr. Drabinsky may not have known of every detail in the accounting department. He knew that the system of manipulations was taking place. He had long ago pushed the first domino.”

Other actions by Drabinsky and Gottlieb that the defence insisted pointed to their clients’ innocence are not consistent with the facts of the case, the judge ruled. If Drabinsky and Gottlieb knew about the fraud, why on earth would they hire Maria Messina as their chief financial officer? Messina was a respected auditor with Deloitte and Touche who gave no indication that she would go along with the fraud, the defence argued. But that alone is not an indication of innocence, Benotto ruled. “Perhaps they wrongly assumed she would not find out. Perhaps they knew she would and then be drawn into assisting in the fraud out of fear of shame. Perhaps they believed she would be ‘hooked’ by the excitement of the company,” Benotto wrote. “Whatever the reason…the fact of her hiring does not raise a reasonable doubt.”

Benotto acknowledged that some of the evidence against Gottlieb is contradictory and incomplete. Gordon Eckstein made sweeping allegations that Gottlieb always attended the raucous quarterly management meetings where the accounting fraud was discussed. Those charges, however, were contradicted by other evidence. But that’s not enough to exonerate him, Benotto writes. “There is no doubt that some of the evidence against Mr. Gottlieb is incorrect. However, the evidence that I believe places him at meetings where fraudulent manipulations were openly discussed and documents were reviewed in detail.”

Benotto also rejected the defence’s assertion that Livent investors did not care about any potential misallocation of expenses on the company’s balance sheet since that document was barely mentioned in the documents used to market Livent’s initial public offering. “The inclusion of a balance sheet that is false is an act of deceit, falsehood and dishonesty,” Benotto wrote. As a result of that inclusion, the judge found Drabinsky and Gottlieb guilty of the first count of fraud.

Drabinsky and Gottlieb’s criminal actions continued after the company went public as the executives worked to keep the company afloat, Benotto wrote. Their dedication to the company compelled them to direct staff members to falsify the company’s financial statements in order to keep the money flowing, she said. “The company experienced exponential growth in a very short time. The exponential growth was analogous to an athlete taking a performance enhancing drug. The result may be spectacular but the means involve cheating.” As a result of that – as well as the submission of Livent’s falsified financial statements to investors, regulators and the company’s board of directors, the judge found Drabinsky and Gottlieb guilty on the second count of fraud as well as guilty of forgery.

Nearly 10 months after their trial for criminal fraud began, Livent founders Garth Drabinsky and Myron Gottlieb will finally learn their fate this Wednesday. The pair will return to a Toronto courtroom to hear if Justice Mary Lou Benotto thinks prosecutors proved the two men oversaw a massive accounting scheme that defrauded investors and creditors of nearly $500 million.

Drabinsky and Gottlieb are alleged to have masterminded what may be the most meticulously documented accounting fraud in Canadian history. The pair allegedly kept two sets of books – one set for investors and regulators and another that was shown only to the most senior Livent executives. To investors, Livent reported that it was making million from its Broadway shows such as Phantom of the Opera, Ragtime and Showboat, while the second secret set of books showed the company was losing buckets of money and burying those losses in the company’s fixed assets and other financial accounts.

If past corporate fraud cases are any indication, the defence has a steep hill to climb. Executives at Enron, WorldCom, Adelphia, Tyco and Hollinger all failed to convince courts of their innocence. But Drabinsky and Gottlieb are arguing something different—not only are they claiming that they did not do it, but that a vast and shadowy conspiracy has spun a complex web of lies and created and planted damning documents as part of an elaborate plan to frame them for crimes they did not commit.

The old frame job. You don’t often hear that argument in high-profile cases of accounting fraud. It’s a claim most often used by from low-level street thugs who – when caught red-handed with drugs, guns, stolen goods or DNA on a bloody glove – complain that the incriminating evidence was planted by the cops. But there is a recent high profile case where the conspiracy theory worked and a high-profile defendant walked away free: the acquittal last year of American R&B singer Robert Kelly on child pornography charges.

As in the Kelly case, Drabinsky and Gottlieb insist that the evidence against them has been confabulated by a web of former employees and disgruntled business associates. The alleged Livent schemers include the company’s former senior accountant, chief financial officer, a group of junior accountants, new Livent managers working with former Hollywood mogul Michael Ovitz and lawyers at the prominent Toronto law firm of Stikeman Elliott LLP.

The defence conspiracy theory has three components. First, in an attempt to divert attention from their own complicity in the alleged accounting fraud, prosecution witnesses Gordon Eckstein, Livent’s former senior accountant, Maria Messina, its chief financial officer, and Chris Craib, a controller, lied to investigators, securities regulators, lawyers and in their sworn testimony when they said they attended meetings where Drabinsky or Gottlieb openly discussed manipulating the company’s financials, the defence argues. (Click here for a more comprehensive examination of the Livent defence.)

Secondly, to back up their perjured testimony, the witnesses met in secret to coordinate their stories and create fraudulent notes, memos and other documents that indicated Drabinsky and Gottlieb knew about the alleged fraud. Lawyers working for Stikeman Elliott then planted many of the most damaging documents in Drabinsky’s office.

Finally, the witnesses took ambiguous company documents and spun wild tales of fraud that made the innocent documents seem damning or suspicious. For instance, the prosecution’s most damaging documents were a series of “Executive Summaries” produced for senior Livent managers every financial quarter. Witnesses explained how the summaries laid out in excruciating detail how Livent managers were burying millions of dollars in expenses in the company’s fixed assets and other financial accounts in an attempt to improperly boost the company’s bottom line.  Each summary contained two line items: the company’s “actual net income” – which was almost always a substantial loss – and “reported net income,” which almost always showed a healthy profit.

Some of those summaries contain handwritten notes that witnesses identified as Drabinsky’s, allegedly instructing accountants to “roll” or “move” millions of dollars in expenses and amortization to future periods or to parts of Livent’s balance sheet where they would improperly boost the company’s bottom line. The accounting manipulations are clearly laid out and “would be obvious even to the most indolent CEO,” the prosecutors argued during the trial. “It is inconceivable that these major reallocations could have escaped the attention of the senior executives.”

Not so fast, argues the defence. Those summaries – and many other documents presented during the trial – are part of an elaborate plan by former Livent chief accountant Gordon Eckstein to hoodwink Drabinsky and Gottlieb, the defence argues. Eckstein is the real mastermind of the fraud and he kept a “Nuremburg file” of fake and ambiguous documents that he claimed proved that he was “only following orders,” the defence insists.

Many of the documents in the prosecution’s case are ambiguous and only seem suspicious after witnesses give them some nefarious meaning, the defence argues. “There are many reasons why there could be discrepancies between actual and reported. In my submission it does not necessarily connote fraud,” said Roebuck during final arguments.

The judge didn’t seem to be buying it. “So is it your submission that when the report says ‘net reported income’ and ‘net actual income,’ those phrases are ambiguous?” Justice Benotto asked Roebuck. “Yes,” he replied.

None of the prosecution witnesses emerged unscathed from the weeks of withering cross-examination by defence lawyers Edward and Brian Greenspan. Gordon Eckstein has already pled guilty to fraud in both Canada and the U.S. and was evasive on the stand. Maria Messina took more than a year to blow the whistle on the fraud and has worked for Stikeman Elliott as a consultant on the case for the past 10 years. And Chris Craib, well, he told investigators about attending a meeting where Drabinsky talked about manipulating the company’s finances. There’s just one problem, Drabinsky wasn’t in the country at the time Craib said the meeting took place. And while Drabinsky was back in the office later that day, defence lawyers insist that the contradiction is proof Craib is lying.

Prosecutors dismiss the conspiracy theory as “preposterous.” Rather than a complex web of shadowy players who have conspired to frame Drabinsky and Gottlieb for a variety of dubious and complicated reasons, there is a much simpler and logical explanation, argued crown lawyer Amanda Rubaszek. “The accused did it,” she told the court. “There is no conspiracy. The evidence is what it is.”

The case may look like a slam-dunk for the prosecution, right? After all, prosecutors have eyewitnesses who testified they saw Drabinksy and Gottlieb openly discussing how to manipulate the company’s financials, they have reams of documents that indicate the pair knew about the fraud, and many of those documents have Drabinsky’s handwriting on them. But prosecutors in the R. Kelly case had even more evidence and the singer walked free.

The child pornography case against R. Kelly hinged on a videotape of the award-winning R&B singer best known for inspirational songs like “I Believe I Can Fly,” and “Sex Me” having sex with a clearly underage girl. In the tape, a man who happens to look exactly like R. Kelly is having sex with a the girl in question in a log-cabin-themed rec room that happened to look exactly like the log cabin-themed rec room in Kelly’s Chicago mansion. Seems like an open and shut case right? Well, it wasn’t.

In a defence that can be best summed up as “Who you gonna believe? Me or your lyin’ eyes?” Kelly’s defence lawyers (which included Edward Gensen – the lawyer who unsuccessfully defended Conrad Black) argued that the tape was a fake. Despite numerous experts who assured the jury the tape was authentic, defence lawyers argued that a shadowy conspiracy of disgruntled former business associates (including the young girl’s aunt) and employees (most notably, a woman who Kelly hired to simulate sex with him on stage during his concerts) produced the tape using high-tech special effects in an attempt to blackmail the singer.

And just like in the Livent case, the witnesses in the R. Kelly case were not completely pure. For instance, Lisa Van Allen – the woman who did the bump-and-grind at Kelly’s concerts testified that she had stolen Kelly’s gold Rolex watch, as well as another Kelly sex tape that she ransomed for $40,000 and had dated two different men who had both been accused of fraud. That’s pretty tawdry, but were these people really capable of producing a high-tech blackmail sex-tape? Is that even possible?

Defence lawyers thought so and even cited the distinctly unfunny 2006 Wayans brothers’ comedy Little Man as an example. In the Razzie-nominated film, digital special effects are used to superimpose the head of Marlon Wayans onto the body of a little person to make the actor look like the freakish baby referred to in the movie’s title. “They put the head of Marlon Wayans on a midget and it looked real, didn’t it?” Adams asked one witness, the Chicago Sun Times reported. You can judge for yourself by clicking on the following video clip.

At the end of the R. Kelly trial, the Chicago Sun-Times reported that not one of the more than 20 reporters who covered the case thought Kelly would be acquitted. But after just a few hours of deliberation, the jury found the singer not guilty on all 14 pornography related charges.

It appears that elaborate efforts by the R. Kelly defence team to discredit the evidence and witnesses in the case were enough to make jurors look past the infamous sex tape. That’s good news for members of the Livent defence team who have spent the last 10 months highlighting every conceivable discrepancy in the testimony, as well as every shred of evidence that does not completely conform to the prosecution’s theory of the alleged crime. If R. Kelly’s defence lawyers could make the jurors forget that tape, then it’s certainly possible Drabinsky and Gottlieb’s lawyers could cast doubt on the prosecution’s sometimes tainted witnesses and the often arcane details of Livent’s accounting policies.

However, there is another explanation for the Kelly acquittal that may not be such good news for the Livent lawyers: the Kelly jury may well have been just plain nuts. I mean, Little Man, really?  And there are signs that this may not have been the most diligent jury. Despite deliberating for only a few hours, one juror was dragged before the judge after having a tantrum in the jury room when the hamburger he ordered for lunch was late in arriving. Hours later another member of the jury begged the judge to be excused. The request was denied.

There is no jury in the Livent trial. Justice Mary Lou Benotto is overseeing the case alone and will ultimately decide the verdict. If the Livent defence succeeds as well as Kelly’s, Drabinsky may be able to restart his career as a musical impresario. Could a musical based on the life of R. Kelly be coming to a theatre stage soon? We’ll find out soon enough.

Douglas Barrington, Deloitte’s former chairman, Claudio Russo and Anthony Power will be formally censured and must pay fines and administrative costs totaling more than $1.55 million—the largest penalty ever handed down by the ICAO. The institute could have revoked the accountants’ professional accreditation, but instead ordered the three men to each pay a financial penalty of $100,000 and investigation and administration costs of $417,000.

In an earlier ruling the ICAO said it opted for the financial penalties since only Claudio Russo continues to work as an accountant. Anthony Power retired in 2000 and Douglas Barrington retired in 2007 after more than 34 years at the firm. Barrington was chairman of Deloitte and Touche’s Canadian operations from 1992 to 1996, as well as managing partner of the firm’s national office from 1996 until 2001. Barrington is currently the national chairman of The United Way of Canada.

The decision wraps up the longest disciplinary hearing every conducted by the ICAO. Charges against the accountants were originally laid in 2004—nearly six years after Livent collapsed into bankruptcy amid charges that company founders Garth Drabinsky and Myron Gottlieb had manipulated the company’s financial statements. (A verdict in the criminal fraud trial of the founders is expected March 25th.) A decision of the disciplinary panel was handed down in 2007 after more than two years of hearings that included nearly 200 exhibits and 8,000 pages of oral testimony. Deloitte and Touche was “disappointed” with the decision and will be consulting with the accountants to determine what steps – if any – may be taken next, said Jacqui d’Eon, a Deloitte and Touche spokewoman. *

The length and complexity of the proceedings, as well as the lack of cooperation by the accountants in the investigation contributed to the size of the financial penalties, the ICAO ruled. “The length of the investigation was primarily the result of the complexity of the issues compounded by the less than transparent way the members (or their firm) dealt with the investigators and the Professional Conduct Committee,” the original disciplinary panel wrote. “The members were not forthcoming with respect to the relevant facts.”

The appeal committee rejected appeals from lawyers representing Douglas Barrington that he should not be penalized so harshly since he was not involved in the day-to-day details of the Livent audit. “The sharp criticism of Mr. Barrington’s work – much of it in a fairly short but critical period – is painful to read about such a senior member of the profession,” the appeal committee wrote.

The appeal panel upheld the ICAO disciplinary committee’s original findings that the three accountants failed to apply the proper amount of skepticism when dealing with Livent’s managers—even after those managers were caught lying to the auditors. At the heart of those charges is how Deloitte dealt with a controversial “put agreement” in a contract between Livent and Dundee Realty regarding redevelopment of the Pantages Theatre in Toronto.

The agreement would have allowed Dundee to pull its investment from the project ahead of other investors. Livent managers told Deloitte that the agreement had been cancelled since the agreement would have disqualified Livent from booking revenue associated with the deal until a later date. However, Deloitte accountants auditing Dundee’s books learned the agreement had not been cancelled and was, in fact, still in place.

The accountants demanded letters of explanation from Livent co-founder Myron Gottlieb (who was also a member of the audit committee of Dundee Realty’s parent company), and Dundee and Livent’s outside lawyers. All three provided letters that said the agreement had already been cancelled. However, explanations as to when and how the agreement was dropped differed significantly. The ICAO appeal committee upheld the findings of the original disciplinary panel that ruled those inconsistencies should have cast doubt on all of the assertions of Livent’s managers and caused Deloitte to increase its scrutiny of the company. “The auditors failed to consider the broader implications of the admitted deception, including the representations made by management throughout the audit,” the panel said in their original ruling.

Both the original disciplinary panel and the appeal committee criticized Deloitte’s handling of a last minute writedown of Livent’s production costs. During the audit, Myron Gottlieb sternly rebuffed Deloitte requests that Livent writedown any of its production costs. However, just days before the audit was to close, Gottlieb did an about face and suggested writing off $27.5 million in production costs—more than double the amount Deloitte had suggested. “All three members had been satisfied because the $27.5 million write-down indicated that a new management would have a more business-like approach, and strengthened procedures would follow,” the appeal committee wrote. “Instead, the Discipline Committee viewed this alteration as a warning signal that management’s representations by that point lacked credibility, and that the substantial figure’s basis required careful re-testing.”

Late last month the Ontario Superior Court ruled that Claudio Russo and four other Deloitte accountants must answer question under oath in connection with a $450-million lawsuit filed by Livent against Deloitte and Touche. However, the court turned down a request by Livent to use transcripts of the ICAO hearings in the lawsuit.

* This blog post has been updated to include comments from Deloitte and Touche.

The court did not release reasons for the decision, but awarded costs to lawyers representing investors who bought about US$125 million in Livent debt in the fall of 1997. The notes were made virtually worthless after the company collapsed into bankruptcy in 1998 amid allegations Drabinsky and Gottlieb had manipulated the company’s financials. Drabinsky and Gottlieb’s criminal fraud trial wrapped up in Toronto last month and a verdict in the case will be handed down on March 24th.

The fact the Supreme Court refused to hear the case will not have any impact the criminal case or any outstanding lawsuit relating to the collapse of Livent, said David Roebuck, a lawyer with Toronto-based Heenan Blaikie, who is representing Drabinsky in several civil lawsuits as well as the criminal case. “The Court declines to take cases for many reasons that are unrelated to the merits of the particular case,” he said. *

The Supreme Court decision represents the end of the road for a case that has been winding through courts in the U.S. and Canada for more than five years. Back in 2004, a New York judge sided with plaintiffs in the case and found that Drabinsky and Gottlieb had failed to perform the due diligence required. A U.S. appeal court upheld the ruling a year later and then things get tricky.

Exactly a year after the appeal, Drabinsky and Gottlieb filed a motion to vary the judgment citing evidence gathered during the lengthy preliminary into criminal fraud charges that the two men currently face in Canada. In that appeal, Drabinsky and Gottlieb blamed the alleged manipulation on other senior members of Livent’s accounting staff. The judge in the case remained unimpressed and dismissed the motion.

The case was unsuccessfully appealed again last year after U.S. lawyers successfully moved to have the judgment filed in Ontario so they could begin to collect their award. In that case, the court of appeal disagreed with Drabinsky and Gottlieb’s argument that their ability to mount a defence in the U.S. civil lawsuit was unduly hampered by the criminal charges they were also fighting in Canada.

Interest and costs continue to build on the original judgment—which now stands at more than $40 million, says Akbarali. Drabinsky and Gottlieb will soon be forced to undergo a “debtor examination” where lawyers will question the executives under oath about any income or assets they hold. Lawyers will then move to either garnish those wages or seize assets in Canada or abroad, says Akbarali.

The loss is just the latest in a series of legal setbacks for the former Livent executives. Last month, the Ontario Court of Appeal upheld the dismissal of a  lawsuit Gottlieb filed against Stikeman Elliot—a prominent Toronto law firm representing Livent in numerous other civil cases. In his lawsuit, Gottlieb had accused the firm of conspiring to frame him for accounting crimes he says he did not commit.

In the meantime, other civil actions related to the collapse of Livent are moving along. Late last month the Ontario Superior Court ordered several Deloitte and Touche accountants who worked on the books of the theatre company to order questions and produce documents relating to a $450-million civil case brought by the receiver handling the Livent bankruptcy. Livent alleges Deloitte and Touche was negligent in failing to detect the alleged manipulations on Livent’s books.

Deloitte and Touche is currently appealing a 2007 ruling by the Institute of Chartered Accountants of Ontario that found three senior Deloitte accountants who worked on the Livent account had violated the Institute’s professional standards. A decision on the appeal is expected by the end of this month.**

* This post was updated to include comments from Drabinsky’s lawyer David Roebuck.

** This post was updated to include comments from the ICAO.

Drabinsky and Gottlieb have both pled not guilty to two counts of fraud and one count of uttering forged documents relating to a massive accounting fraud at the theatre company that produced such massive Broadway hits as Phantom of the Opera and Kiss of the Spider Woman.

The judge has her work cut out for her. Her decision will have to address the complex conspiracy theory put forward by defence lawyers Eddie Greenpan, who is representing Drabinsky, and Brian Greenspan who represents Gottlieb. Both defence lawyers submitted hefty written final arguments that allege their clients were framed by a cabal of Livent accountants, new company managers, lawyers and outside accounting firms that represented Michael Ovitz, the former Hollywood superagent and Livent investor.

Prosecutors, on the other hand, argue the evidence against the two executives is “overwhelming.” Not only did Drabinsky and Gottlieb know about the fraud at the company, but they directed a pattern of accounting manipulations that routinely transformed millions of dollars in losses into profits, prosecutors allege.

Drabinsky and Gottlieb each face a prison sentence of up to 10 years if found guilty. A guilty verdict would also have a major impact on the hundreds of millions of dollars in outstanding civil lawsuits related to the alleged fraud. Livent has filed a lawsuit against Drabinsky and Gottlieb seeking as much as $100 million and a separate $450 million lawsuit against Deloitte and Touche, the company’s former auditing firm.

A panel of Ontario Court of Appeal judges upheld an earlier dismissal of Gottlieb’s lawsuit in a brief, but unanimous, oral decision delivered on Monday. “It is difficult to see how such a claim could be dealt with prior to the determination of the criminal proceedings,” Justice Robert Sharpe wrote on behalf of the three-member panel which also included Justices Robert Blair and Paul Rouleau. “It would be impossible to know what, if any, damages the appellant had suffered until he has been acquitted or convicted.” .

Gottlieb and Drabinsky have been charged with two counts of fraud and one count of uttering forged documents relating to a massive alleged accounting fraud that occurred at the theatre company. During the lengthy criminal trial that wrapped up earlier this month, Drabinsky and Gottlieb claimed a cabal of lawyers, accountants, former Livent accounting employees and investors framed them. A verdict is expected in the coming months.

In his lawsuit, Gottlieb sought more than $60 million from Stikeman Elliot, the law firm currently representing the now-bankrupt live theatre company; KPMG, the accounting firm that conducted the initial investigation into the alleged accounting fraud; Michael Ovitz, the former Hollywood mogul who bought a controlling stake in the company and eventually forced the two executives out, as well as a handful of former Livent employees who have now testified in the criminal trial. In the suit, Gottlieb claimed that Stikeman “carried out a concerted and planned scheme to manipulate documents and information” to wrongfully demonstrate Gottlieb attended a Livent management meeting in April 1998 where company executives openly discussed plans to manipulate the company’s financial results.

Stikeman Elliot called Gottlieb’s accusations “highly implausible,” and argued they can’t be sued for framing him for a crime before he is actually acquitted of that crime. An Ontario judge agreed and dismissed the suit in November 2007. The court eventually ordered Gottlieb to pay $30,000 in costs to Stikeman. With the dismissal of the case by the Ontario Court of Appeal added another $19,000 in costs to that claim, said Ben Zarnett, the veteran Toronto litigator who represented Stikeman in the case. “The judge basically said this was a malicious prosecution case and you can’t sue for that unless you are acquitted of those charges,” he told Canadian Business magazine.

Calls to Gottlieb’s lawyer in the case, Melvyn Solomon, were not returned.

Claims made by Gottlieb in the civil case were repeated during the recent Livent criminal trial that wrapped up earlier this month. Eddie and Brian Greenspan, the lawyers representing Drabinsky and Gottlieb in the criminal trial, repeatedly accused Stikeman Elliot lawyers of manipulating information, suborning perjury, tampering with evidence and planting incriminating documents in an effort to shore up charges of accounting fraud against their clients.

In one dramatic courtroom confrontation, Brian Greenspan compared a transcript of an interview of former Livent controller Chris Craib conducted by Stikeman Elliot lawyers with an audio recording of the same interview. In the audio recording, Craib tells the lawyers that Gottlieb did not attend a controversial April 1998 management meeting where accounting manipulations were allegedly discussed. The answer was not transcribed leaving the impression that Gottlieb was at the meeting, Greenspan said.

Drabinsky and Gottlieb will return to court on Feb. 2 to hear when Justice Mary Lou Benotto will deliver her verdict in the criminal case.

But on the final day of the trial, lawyers continued to clash. Prosecutors argued before Justice Mary Lou Benotto that they have presented an “overwhelming” amount of evidence proving the guilt of the two executives while the defence insists their clients are innocent and urged the judge to ignore the testimony of witnesses they characterize as “accomplices” and “perjurers” who have colluded to frame the pair.

Defence lawyers Edward and Brian Greenspan presented their final oral arguments earlier today recapping many of the points they made in the extensive written arguments filed last month. But Edward Greenspan expanded on his written arguments by:

•    Criticizing prosecutors for failing to call expert witnesses: “I can’t recall a single case involving accounting where an accounting expert was not called,” Greenspan said. “The lack of expert evidence is astounding… the crown has relied on the testimony of admitted accomplices.”
•    Relying on the testimony of unreliable witnesses who colluded to frame Drabinsky and Gottlieb: “There is collusion upon collusion upon collusion,” Greenspan argued. “There’s palpable evidence of collusion, improper tainting of the evidence, which must be assessed.”
•    And failing to prove a satisfactory motive for the crime: Since Drabinsky and Gottlieb owned a large number of shares in the company and were Livent’s highest paid executives, they had the most to gain from the fraud, the crown argues. However: “Using that simplistic reasoning, every CEO of every company has a motive to defraud the companies they owe a fiduciary duty,” Greenspan said. The defence also pointed out that neither Drabinsky nor Gottlieb ever sold Livent shares on the public market, and in fact, bought shares as late as 1997.

Greenspan also expressed his indignation that prosecutors so dismissed as “preposterous” his theory that Livent’s accounting staff, new Livent managers and a group of Toronto lawyers conspired to frame Drabinsky and Gottlieb by planting incriminating documents and lying to cops, regulators and the court. “I don’t believe in conspiracy theories,” said Greenspan, “I believe Lee Harvey Oswald killed President Kennedy.”

There are four pillars of reasonable doubt establishing Drabinsky and Gottlieb’s lack of knowledge about the massive fraud at the theatre company, Greenspan argued. The first pillar is the much-discussed 1998 deal negotiated by Drabinsky and Gottlieb that saw former Hollywood mogul Michael Ovitz buy a controlling stake in Livent. As a result of the deal, Ovitz brought in his own team of accountants from KPMG to conduct a due diligence audit of the company and installed his own management team at Livent. Drabinsky would never have agreed to the deal had he known about the fraud, Greenspan argued since he had to know that new management would inevitably uncover the fraud.

The second pillar relates to the evidence of former Livent controller Tony Fiorino, who testified Gordon Eckstein, Livent’s senior accountant, instructed him to remove details about allegedly fraudulent transactions from a summary report he produced for senior managers. That backs up the defence’s contention that Eckstein was directing the fraud without the knowledge or approval of Drabinsky or Gottlieb. “This is a pillar of reasonable doubt,” Greenspan said. “Eckstein is making the determination about what should be shown or not.”

The third pillar comes from Drabinsky and Gottlieb’s decision to hire Maria Messina—their former auditor—in 1996. The executives would not have hired the Deloitte and Touche chartered accountant had they known about the fraud because of the danger she would learn about the fraud and blow the whistle, Greenspan explained.

Messina did learn about the fraud sometime in 1997 and did not expose the improper accounting. Instead, she revealed truth about Livent’s books to new U.S. managers in 1998. Defence lawyers say Messina conspired with other witnesses to frame Drabinsky and Gottlieb and accused her of lying on the witness stand. Greenspan argued the judge should ignore Messina’s testimony since she has worked for the past 10 years for the law firm that is currently suing Drabinsky, Gottlieb and Livent’s former auditors—a job that has paid her nearly $3 million over the past decade. “You have 3 million reasons to disregard her testimony,” Greenspan urged the judge.

The fourth pillar relates to the firing of Robert Topol, Livent’s former chief operating officer after Drabinsky and Gottlieb discovered he had “misappropriated” several thousand dollars in company securities. If Drabinsky, Gottlieb and Topol had been co-conspirators in the fraud, firing him would have been an insanely risky move, Greenspan told the court. After all, he could have easily blown the whistle. “This is an irrational act if Topol is a co-conspirator,” Greenspan said. “It’s illogical that two fraudsters would fire a third fraudster for stealing a small amount of money.”

However, Justice Benotto posed a question that could undercut at least two of those pillars. Couldn’t it be argued, Benotto asked Greenspan, that Drabinsky and Gottlieb felt that a massive writedown Livent took at the end of the 1997 financial year cleaned up much of the fraud? “If the defendants were aware that there was some sort of misrepresentations in the financial statements, but believed that the writedown would have cleared that up, would that not then go a long way toward explaining the facility for Topol to be fired and the willingness to have KPMG come in to do the due diligence?” she asked.

Greenspan asked for some time to consider his response and came back with a five-part answer after the lunch break. The answers were:
1.    If Drabinsky and Gottlieb had known about financial fraud, they surely would have consulted their co-conspirators Eckstein and Messina. There is no evidence they did so.
2.    There was no evidence the writedown was considered in February when Topol was fired.
3.    Even with a writedown there is nothing to stop Topol from “squealing.”
4.    The writedown covered over-valuation in Livent’s pre-production costs, not any problems with the company’s fixed assets, “which were hidden from Drabinsky,” Greenspan said
5.    This is a theory the crown cannot advance, because if the writedown was supposed to be some sort of “cure” for the fraud, what was Drabinsky doing suggesting more fraudulent manipulations to the company’s books at the controversial April management meeting. You remember that meeting? It’s the one Drabinsky said he could not have attended because he was busy having lunch with then-U.S. president Bill Clinton.

Of course there are another couple of explanations. Drabinsky and Gottlieb may not have feared the detection by a KPMG due diligence audit since their regular auditors had not found any indication of the fraud during any of the annual year-end audits. And the fact Drabinsky and Gottlieb even wanted to take a writedown in the first place shows they knew their books were incorrect, prosecutors argue.

As for Topol, he was “up to the eyeballs in the fraud,” prosecutors say. Had he “squealed” about the fraud he would have been in as much legal jeopardy as his co-conspirators. “Topol was not likely to confess to anyone,” said chief prosecutor Robert Hubbard during his final rebuttal argument.

Greenspan also complained that prosecutors failed to adequately deal with that controversial April 24, 1998 management meeting where two Livent accountants testified they heard Drabinsky openly discuss a plan to manipulate the company’s financial statements. That’s the meeting Drabinsky claims he could not have attended since he was having lunch with Clinton. “This is an incredibly important meeting,” Greenspan argued. “It’s been blown out of the water… it’s rubble.”

Prosecutors argue that Drabinsky was back in Livent’s offices later that day and could well have attended the meeting. Whether that meeting occurred exactly as the witnesses remember it is immaterial since the alleged fraud took place over years—and not at a single meeting.

Brian Greenspan, the lawyer representing Myron Gottlieb, also expanded on many of the arguments he put forward in his written final arguments. Greenspan argued that prosecutors routinely overstated the evidence and relied on documents that none of the witnesses talked about to prove their case against Gottlieb.

Prosecutors failed to prove Gottlieb knew the millions of dollars paid to him and Drabinsky as part of a “kickback scheme” with Livent’s construction suppliers were improperly booked to the company’s financial statements, Greenspan said. Under the scheme, two construction companies paid Gottlieb and Drabinsky millions for work they never performed. The companies were reimbursed for those payments by filing false and inflated invoices that purported to be for legitimate construction work. Gottlieb handled those invoices and was the only one who knew they were not legitimate construction expenses. Yet there is no evidence he did anything to ensure they were not booked to the company’s balance sheet where they ultimately made the company look more valuable than it actually was, prosecutors argue.

However, some of the invoices were for “consulting work” and would not obviously be booked to the company’s balance sheet, Greenspan argued. It didn’t make sense for Gottlieb to put the false invoices on the company’s balance sheet since if they were expensed right away, it would have reduced Drabinsky and Gottlieb’s tax bill. This whole discussion begs the question: what is the appropriate accounting treatment for an improper kickback scheme? If there is any, I don’t think Livent was using it in this case.

Even if those false invoices were buried in Livent’s balance sheet, prosecutors have not proven that it mattered to investors, Greenspan argued. For instance, prosecutors failed to analyze exactly where those millions wound up on the balance sheet and how much of that money may have already been written down by the company under its routine accounting policies. Besides, Livent’s balance sheet didn’t seem to be of interest to investors, Greenspan said. It is not mentioned once in the selling document distributed to potential Livent investors. It may be the first time in history that an investor did not care about a company’s balance sheet.

In their final rebuttal, Hubbard rejected the defence’s arguments about the kickback scheme. “The accused is telling lies and asking others to act on it. The presumption is that when you tell a lie in a civil transaction you are putting the property of others at risk. Otherwise why tell the lie?” Hubbard argued. “Once [the false invoices] are incorporated on the balance sheet, the lie is complete.”

As for failing to call any accounting experts, five chartered accountants testified at the trial—four former Livent accountants, and an accounting expert hired by the RCMP, Hubbard argued. Besides, this case was not about aggressive accounting that went too far, the evidence showed that Livent was arbitrarily selecting millions of dollars in invoices and pushing those expenses to future periods or burying the bills in the company’s fixed assets. There could be no possible accounting justification for the transactions.

Defence lawyer David Roebuck spent an entire day going through documents highlighted by prosecutors and explaining how they were either “not nefarious” or ambiguous and would not have raised any concern about impropriety with either Drabinsky or Gottlieb. But if the documents are so innocent, Hubbard asked, how can the defence claim they were planted as part of an elaborate frame up? “The defence appears to be going off in different directions,” he said.

Hubbard also dismissed the defence contention that the witnesses in the case lied on the stand and that Drabinsky and Gottlieb had no motive to commit the fraud. “If Maria Messina had 3 million reasons to lie, then Drabinsky and Gottlieb had 550 million reasons to engage in fraud,” Hubbard said referring to the millions in stocks, bonds and other securities sold to investors during the life of the company.

The lawyers will return to court on Feb. 2—Groundhog Day—to learn when Justice Benotto will deliver her verdict. Canadian investors will have to wait to learn if the Livent founders will be found guilty of accounting fraud, or if they must experience another six weeks of white-collar crime winter.

The magnifying glass was a replacement for reading glasses that Roebuck had misplaced, but it could have been a signal to courtroom observers about the level of detail he would delve into over the coming hours. That detail was so great, at least one defence lawyer appeared to briefly fall asleep during the lengthy presentation and even the judge appeared restless. At one point, Benotto was shuffling papers on her desk for so long that Roebuck stopped to ask if there was something he could help the judge find.

Unlike the brief and simple oral arguments made by prosecutors yesterday, Roebuck argued that the evidence in this case is far from simple and not as it may appear at first glance. “The documents in this case arise from a very complex factual matrix,” he told the court. “It is our position that these documents do not speak for themselves.”

In trying to prove their case, prosecutors relied on the six members of Livent’s accounting staff to explain what the documents meant. However, those witnesses were little more than biased accomplices in the fraud who engaged in what the defence says is perjury to put forward the most nefarious interpretation of the documents, Roebuck said. “In terms of trustworthiness, this is a very unique group of six,” he said. “The trustworthiness of these witnesses asked to give testimony is seriously under attack.”

Many of the documents contain what those witnesses said were Drabinsky’s own handwriting, but that doesn’t prove anything, argued Roebuck. After all, the crown did not call a handwriting expert to verify that the handwriting was, in fact, Drabinsky’s. Roebuck also reminded the judge that one witness even mistakenly identified Drabinsky’s handwriting on one document when in fact it was the handwriting of an RCMP officer. “In my submission, the evidence of handwriting could not be weaker,” said Roebuck.

And what Drabinsky wrote on those documents—what Drabinsky allegedly wrote on those documents—does not necessarily indicate that the he knew there was fraud at Livent, said Roebuck. “Many notations are very brief and need context,” Roebuck told the court. “Context could be given by individuals who knew the background—not by admitted accomplices.”

Throughout the trial, prosecutors have suggested that phrases in Livent’s internal financial statements suggested massive fraud. But phrases such as “roll forward,” “expense roll,” “show-to-show transfer,” “move to fixed assets” are either legitimate accounting terms or too ambiguous to be indicative of fraud, said Roebuck. “No expert witness was called to suggest some universal meaning, and even among Crown witnesses there was a lack of consistency attributable to the meaning of any terminology,” said Roebuck.

Even the words “reported” and “actual” were apparently too ambiguous to raise any red flags with Drabinsky and Gottlieb. According to the defence, the term “actual” doesn’t actually mean “actual.” As in those now notorious quarterly and year-end management financial summaries that seemed to clearly state that Livent was going to “report” millions in profits when it was “actually” losing tens of millions nearly every quarter. “There are many reasons why there could be discrepancies between actual and reported. In my submission it does not necessarily connote fraud,” said Roebuck.

Even the judge seemed a little stunned by that argument. The only questions Justice Benotto asked during Roebuck’s entire day-long presentation was: “So is it your submission that when the report says ‘net reported income’ and ‘net actual income’ those phrases are ambiguous?”

“Yes,” replied Roebuck.

Besides, Drabinsky did not have enough time to keep close track of his company’s accounting, Roebuck added. He was travelling extensively overseeing the creation of new Broadway shows, as well as tracking the progress of other shows travelling throughout North America, Roebuck argued. “It’s all very well for the Crown to imply that despite all these functions [Drabinsky] could still monitor the accounting affairs but that is simply too much for one individual,” Roebuck said. “He didn’t have the training, he didn’t have the time.”

Many of the documents prosecutors say show Drabinsky and Gottlieb were active participants in the alleged fraud can be ignored, argued Roebuck. Many of the documents related to financial projections or budgets and had nothing to do with the allegedly false financial statements that would eventually be submitted to investors and regulators. The documents that do relate to the company’s financial statements were often created early in the weeks-long and complex process Livent went through to create its final financial numbers and there is no proof that many of those alleged manipulations actually resulted in fraud on the company’s books, he said.

Defence lawyers Edward and Brian Greenspan will continue the defence argument tomorrow.

Throughout the six month trial, defence lawyers Edward and Brian Greenspan have insisted that Drabinsky and Gottlieb knew nothing about the financial manipulations that began almost from the start of the live theatre company and continued for more than eight years. The defence insists that Gordon Eckstein, the company’s senior accountant, conducted the fraud himself and members of the accounting staff, new Livent managers, lawyers and others, conspired to frame the executives. But there is another explanation—a simpler and more logical explanation—insists crown lawyer Amanda Rubaszek. “The accused did it,” she told the court. “There is no conspiracy. The evidence is what it is.”

Rubaszek mocked the defence claims that the mountain of documents that indicate Drabinsky and Gottlieb knew about the financial manipulations were planted by members of the so-called conspiracy and that handwriting on those documents—that has been identified as Drabinsky’s—either belonged to someone else, or was forged. “It doesn’t make sense—none of it does. It’s speculation on the part of the defence who are trying quite desperately to distance themselves from some very incriminating documents.”

If new Livent managers brought into the company by former Hollywood mogul Michael Ovitz cottoned on to the fraud after just five weeks at the company, how could Drabinsky and Gottlieb not realize their books were cooked after running the company for more than eight years, Rubaszek asked. It is not believable that the Livent founders were unaware of the actual financial state of their company. Gottlieb, who signed every company cheque and has been described as an “astute cash manager,” should have seen this clearly, Rubaszek said. “He ought to have been stunned to have seen expenses being far lower than the amount of the cheques he was signing,” she said.

The defence has argued that Justice Mary Lou Benotto should not believe Eckstein’s testimony and have suggested that the accounting manipulations may have been the result of his incompetence. But it is “ridiculous” to suggest that Eckstein handled the manipulations on his own, and if he was incompetent, why wasn’t he fired until after new Livent managers took control of the company, Rubaszek argued. “Our submission is that he was needed by the accused. He was an integral link … and he kept the accused sufficiently insulated from the manipulations,” she said.

The assertion that Eckstein was solely responsible for all of the accounting manipulations flies in the face of logic and the evidence when it comes to the fraudulent manipulations undertaken when Livent was a private company, says prosecutor Alex Hrybinsky. In 1990 Gottlieb initiated a “kickback scheme” in which two Livent construction suppliers were instructed to pay the Livent founders millions of dollars for business services that were never supplied. The construction companies were repaid after submitting false and inflated invoices for construction work that had not been done. Those invoices were ultimately booked to Livent’s balance sheet where they inflated the company’s value by $6-8 million at the time of its initial public offering in 1994.

While the defence has not disputed that Drabinsky and Gottlieb did in fact engage in the “kickback scheme,” they insist the money was used for business purposes and that that it was Eckstein who inappropriately booked the false construction invoices.  But that’s impossible, argues Hrybinsky, since only Gottlieb and Drabinsky knew the true nature of the invoices. “Eckstein would have had to have the scheme explained to him,” he says. “There is no evidence the accused told him to do anything different.”

But Justice Benotto may have thrown a wrinkle in the prosecution’s case when she asked prosecutors to comment on the defence assertion that Livent’s books were not really over-valued at the time of its initial public offering. The defence has suggested that Livent’s books were actually undervalued at the time of the IPO since the value of the Pantages theatre in Toronto was actually understated in the company’s financial prospectus. But that is a specious argument, Hrybinsky said. “Publicly filed documents are supposed to be truthful. In this case, they were deliberately untruthful,” he told the court. “You can’t say there are false bookings on our balance sheet, but that’s okay because they are more than offset by this theatre value so there is no need to tell anyone.”

Chief Crown Prosecutor Robert Hubbard spend much of his time trying to deflate the defence argument that the witnesses cannot be believed because of a single disputed meeting in April 1998 where both Eckstein and Livent controller Chris Craib said Drabinsky openly discussed financial manipulations. The defence contends that Drabinsky could not have attended the meeting (he was having lunch with then-U.S. President Bill Clinton—although he was in the office later that day) and thus the witnesses are lying.

Whether Drabinsky was at that April meeting or having lunch with Bill Clinton is immaterial, Hubbard argued. Drabinsky’s own daytimer shows he attended at least seven separate meetings to discuss the preparation of Livent’s year-end financial statements in the weeks prior to that controversial meeting. Prosecutors pointed out more than a dozen documents—some with Drabinsky’s handwriting—produced for those meetings that showed that Livent was contemplating more than $22 million in financial manipulations. Many of those documents were seized from Drabinsky’s own office. “This shows how long and involved this process was,” Hubbard told the court. “And this period is no different from any other period at Livent.”

If the judge has any doubt that the handwriting on the documents is that of Drabinsky, she can simply compare it to the 10-page handwritten love letter Drabinsky wrote to his “mistress.” The same letter where he complained about the “crushing personal debt” he had been struggling with.

Defence lawyers begin their final oral arguments tomorrow and are expected to take two days to complete.

The defence explanation – what a surprise – it was all Eckstein’s fault. He’s the one who improperly booked those fruadulent invoices.

Forget the testimony that Drabinsky’s longterm partner Myron Gottlieb came up with the scheme, signed the cheques and thus saw the bogus invoices that indicated where those inflated invoices would be booked. Forget the testimony of Peter Kofman, one of participants in the scheme, who actually wrote a memo to Drabinsky laying out how much he had been paid for legitimate construction work and how many millions went to Drabinsky and Gottlieb for bogus business service.

As for the second fraud count and the charge of uttering forged documents – the company’s financial statements – the Crown has not proven its case, the defence argues. Eckstein provided Drabinsky and Gottlieb with “reasonable rationales” for Livent’s accounting practices – even though those practices were often not implemented or even appropriately used.

Of course, if Drabinsky and Gottlieb knew about the accounting moves, Ecksstein was making, but had been convinced they were both legal and appropriate, why is there no evidence that they discussed those moves with the company’s auditors about their practice or “rolling” expenses forward? These were executives who were not afraid to confront their auditors when they did not agree on how to book a transaction.

The defence also argues that hiring Maria Messina as the company CFO is “completely irrational”  if the executives knew about the fraud. Messina was the company’s former auditor and maintained strong ties with Deloitte and Touche, the company’s accounting firm. But was it irrational? Just ask executives at Enron who recruited many of their accountants from Arthur Anderson – the company’s auditing firm. Legislation enacted in Canada and the U.S. following the Enron debacle now mandates a cooling period of at least a year before a company hires a former auditor.

Messina – and other members of the accounting five – never thought they were engaged in fraud, the defence argues. They accepted Eckstein’s rationalizations. Had they thought they were involved in fraud, they would have walked away, Greenspan says. “Messina did not walk away from her position at Livent because she, with the assistance of Eckstein, rationalized the accounting treatments being employed there. The same is true for the other accounting five.”

But if that’s the case, why did they not talk about those rationalizations with Drabinsky, Gottlieb, the auditors or anyone else? Somehow, the accounting five realized that those accounting rationales would not be accepted by new management and sprung into action, the defence argues. Their plan: conspire to frame Drabinsky and Gottlieb for the fraud using a conspiracy that would have put Machiavelli to shame.

In the end, it’s still up to Justice Mary Lou Benotto whose argument she finds more compelling.

Funny, they seemed pretty clear to me. The line that said “actual” profit/loss (almost always a loss) compared to the “reported” profit/loss (almost always a nice healthy profit) was pretty eye-opening.

The defence then goes on to note several alleged manipulations that don’t appear to make sense involving millions of dollars in “rollovers” and “rollforwards.”But these accounting transactions are not necessarily fraud, the defence argues. “Essentially the crown relies upon the negative connotation imputed to the terms “rollforward” and “rollover” by biased and unsavory wintesses to argue that rollforward  automatically means manipulation.”

“

Sometimes that evidence was given in haste. For instance, one time Winkfein identified a document that she said contained Drabinsky’s handwriting, but that handwriting was in-fact that of the RCMP Sergeant in charge of the Livent documents.

As for Eckstein, there was no evidence given to support his familiarity with Drabinsky’s handwriting.

Messina testified that she could easily identify the handwriting of Drabinsky, Gottlieb and other Livent managers, but that testimony was general “fell short of the mark,” when it came to establishing her abilities, the defence argues.

And while the defence did not call any evidence to refute the identifications, the crown did not call any independent expert witnesses to butress their claims about Drabinsky’s handwriting, the defence argues.

There were days of testimony about the continuity of documents at the trial, the circumstances in which KPMG investigators found many seemingly incriminating documents and what those documents actually meant.

Ultimately the judge will have to decide whether she believes the prosecution allegation that Drabinsky and Gottlieb saw the documents, had the documents in their possession – and sometimes even wrote instructions on those documents.

But those documents have been tampered with, the defence contends. It would have been a simple matter for Robert Webster, the audit partner on the botched due diligence and Livent executive vice president who took the confessions of the accounting five to plant inciminating documents, the defence says. “By this time, [Webster] would have been familiar with Livent’s peculiar acocunting  issues… He would have known what documents would have been relevant in the investigation,” the defence says.

The fact that KPMG investigators found a treasure trove of incriminating documents in Drabinsky’s office just days after the revelations of the accounting five doesn’t mean that they weren’t planted either before or after the search.  Investigators initialled the back page of each document, but someone could have taken that signed back page and substituted the rest of the package with more incriminating documents, the defence argues.

And while Winkfein did not have regular contact, with Drabinsky or Gottlieb, what little she did was dramatic. Winkfein testified prior to the interview of a new accountant at the company, Drabinsky mentioned that Paula Adler – an accountant Drabinsky was interviewing would not be involved in the accounting manipulations of the company’s financial statements. During the trial, Greenspan grilled the controller for hours about the story.

The Paula Adler story cannot be believed since Winkfein only recalled it at the preliminary hearing for the trial and not during any of her previous interviews by cops, regulators or lawyers involved in the numerous Livent civil suits.

The other “lie,” relates to whether or not Malcolm asked for any extra benefit to participate in the fraudulent scheme. He told lawyers in one of the Livent civil cases that he never had, but it turns out that the in Feb 1998, Malcolm had in fact sent Eckstein a letter asking for a better job and a raise.

There is no discussion of Malcolm’s testimony that Gottlieb had told him that he shouldn’t worry about Livent’s accounting “baggage” when day-to-day managment of the company was turned over the new managers brought in by Michael Ovitz.

“Craib and Messina remain close confidants to this day,” the defence argues. They talk on the phone, attend brunches together – the defence fails to mention that the two admitted to attending a George Michael concert earlier this year.

There is no discussion about the executive summaries that Craib produced. The summaries that clearly laid out that Livent was reporting millions in earnings, while “actually” producing millions in losses.

The defence dismiss the story as an outright lie. But Messina did write that memo and she did have a meeting with Drabinsky and Gottlieb. The memo, the defence argues, never uses the word “fraud” or even states that the alleged manipulations are not in accordance with gnerally accepted accounting priniciples (GAAP).

In the meeing, Messina tesified that she told Drabinsky and Gottlieb that she was not comfortable reporting any earnings for the first quarter of 1998. (The company ultimately reported a $20 million loss for the period). Messina’s description of Drabinsky and Gottlieb’s reaction “seriously undercut her testimony,” the defence argues. “If Drabinsky and Gottlieb knew about the fraud, they would have understood the memo to mean Messina wouljld not continue to support the fraud. So there should have been a furious reaction.” Greenspan argues.

Of course, if they didn’t know about the fraud, wouldn’t they be more than a little confused? But in fact, there is no evidence that the Livent founders ever asked “what are you talking about?”

The defence rejects the notion that Messina’s most explosive revelations are backed up by company documents. Messina, is a biased and unreliable witness, Greenspan argues. “She came to this court as an advocate, not as a witness. This is not a case of documents independently corraborating Messina’s evidence. it is indisuputable that Messina has used selected documents as stepping stones to tread upon to support a seemingly plausible chronology,” the defence says.