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.

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.

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?”

Defence lawyers dismiss the letter as irrelevant and urge the judge to completely disregard it. “The letter is not dated. There is no evidence whatsoever that this document was ever sent,” Greenspan argues. “The letter is irrelevant and unstrustworthy.”

But there is one more motive in the letter that neither the Crown, nore the defence discuss. In the letter Drabinsky tells Poppell that he should have told her that he was not going to be able to meet a March 31st “deadline” set – apparently for Drabinsky to leave his wife.  “I never wanted to admit weakness to you or dilute your confidence in me,” Drabinsky writes.

Having to admit that Livent was losing money – and lots of it – would have “diluted the confidence” of investors, creditors, critics and others in the theatre and financial communities. Having to admit that the Drabinsky vision of a successful and glamourous theatre company that raked in enough money to pay for private jets, gala parties and the best live theatre productions ever performed would have been humiliating, wouldn’t it?

Unfortunately, that simplistic theory has proved to be true all too often.

But Greenspan goes on to argue that Drabinsky and Gottlieb had to motive to falsely report higher corporate profits, because Livent shareholders didn’t really care about that sort of stuff. They were much more interested in the good reviews that the company’s shows received in the New York Times. And Livent’s stock did go up after positive reviews of Ragtime were published in Toronto in 1996. The company’s stock dipped after negative reviews of the show appeared in the New York Times in 1998 and Livent shares barely moved after it announced a $30 million loss in the first quarter of 1998.

Still, this may be the fist company in history whose shareholders didn’t seem to care about profits. After all, didn’t the shareholders think that positive reviews would eventually translate into profits somewhere down the line?

The defence pointed to a Deloitte and Touche statement that allowed Livent to book some advertising costs to the Ford Theatre in New York – putting a lie to Messina’s testimony that you could never book advertising to fixed assets. Of course, those expenses were for specific ads related to the grand opening of the theatre – and not for the millions in advertising expenses that Livent allegedly buried into other theatre construction accounts.

The defence argues that it was proper to push advertising from one year to the next since the tickets were sold in future periods. An argument could be made for that, witnesses said, if Livent set up the transactions as a pre-paid expense. Livent didn’t do that, they arbitrarily pulled advertising invoices from one period and shoved the into future periods, prosecutors argue.

As for the improper show-to-show transfers, LIvent’s accounting policies allowed those transfers, but Drabinsky and Gottlieb were unaware of the arbitrary nature of Eckstein’s transfers. “Drabinsky and Gottlieb were not chartered accountants. They were not trained to make accounting decisions,” the defence says. “Things that were very clear to Eckstein wer not clear to others in the accounting department of Livent and certainly would not be clear to two business people with no accounting background.”

Um, alright. But Brian Greenspan argued in his final summation that the budget-to-actual process wasn’t that important in the fraud. In fact, he criticizes prosecutors for not making a clear distinction between the year end financial meetings that Gottlieb supposedly attended on an “as-needed basis,” and the budget-to-actual process that Gottlieb was deeply involved in.

Tony Fiorino, a Livent accountant, actually testified to a conversation with Eckstein where he told him the so-called Nuremburg defence didn’t work for the Nazis and it wouldn’t work for him.

Eckstein testifed that he instructed Grant Malcolm, another member of the accouting five, to show Messina schedules that showed how Livent had improperly “rolled forward” millions in advertising expenses from 1996 to 1997. He later admitted that the schedule may not have been indicated fraud. “Ecskstein’s testimony, to  the effect that I put certain words in documents to connote ‘fraud’ so I could rely upon the documents later, is really his attempt in the witness box to impart a more sinister meaning into the words taht do not connote ‘fraud’ on their plain meaning.”

Fair enough. But the defence has so far not explained how that fits into the quarterly and year-end financial summaries that clearly showed that Livent was “reporting” millions in profits, while it was “actually” losing tens of millions of dollars.