By: John Gray

It’s over. The criminal fraud trial of Garth Drabinsky and Myron Gottlieb has finally drawn to a close. It’s been more than 18 years since the first hint of fraud allegedly occurred at Livent, 10 years since company founders Garth Drabinsky and Myron Gottlieb were suspended from the company after allegations of the fraud came to light, six years since the pair first faced criminal charges and more than eight months since the start of the trial. Now we just need a verdict.

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.