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.

We decided to check out the CFOs of Canada’s largest public companies and came up with some interesting numbers. The median compensation for the 60 CFOs for the latest fiscal year was $2,236,100 — or about 25 times the median CA level. With the values of options exercised removed, the median came in at $1,487,950.

The annual compensation ranged from over $10,000,000 for Wayne Brownlee of Potash Corp. to $408,300 for Mark Gow of Fording Canadian Coal Trust. A total of 47 CFOs made more than $1,000,000 last year. Considering that the average Canadian tax filer pulled in about $39,900, accounting is certainly a profitable profession.

Greenspan spent most of yesterday afternoon and a good part of this morning cross-examining Winkfein, the former Livent controller who has admitted in court that she has a “lousy memory,” about three internal Livent financial documents: one printed at 12:19 p.m., one at 4:04 p.m. (both April 23rd) and another at 1:17 a.m. on April 24th.

The documents printed at 12:19 and 4:04 are covered with handwritten notes from Winkfein and Gordon Eckstein, Livent’s former senior vice president of finance and administration, that the defence contends are instructions to improperly manipulate Livent’s financial results for the first quarter of 1998.

Over the past two days, Greenspan meticulously went through testimony Winkfein has given over the past decade reading 14 examples where she stated – or at least agreed – that the meeting in which those notes were written occurred on the April 23. As a result of the alleged manipulations, Livent’s financial loss for the period dropped from $23.745 million at 12:19 p.m. to just under $18 million at 1:17 a.m.

Then came the bombshell – if you can call the revelation of when a note was scrawled on a piece of paper a bombshell. As Greenspan was quizzing Winkfein about a note in which Eckstein allegedly instructs Livent accountants to improperly add $1 million in deferred revenue to the company’s current financials, Winkfein told the court that despite her numerous statements to the contrary, she now believes that the note was actually written the next day on April 24th.

“You testified at the preliminary inquiry that you actually saw Gordon Eckstein transpose that note to on April 23 during the 4:04 meeting,” Greenspan protested incredulously, noting that this was the first time she has ever mentioned that the notes may have been made on April 24.

“I gave that answer, but I think it was wrong,” replied Winkfein. “There were two meetings on two days,”

“You confirmed 14 times that the meeting occurred on April 23rd,” Greenspan said. “You made it clear that it was April 23rd.”

“If you read the rest of my testimony you will see that it wasn’t clear,” Winkfein replied. “I settled on the date based on the dates on the documents.”

This is the second bombshell Winkfein has dropped on defence lawyers. At the preliminary hearing in 2005, she revealed the now-infamous Paula Adler story in which Winkfein described a brief conversation with Drabinsky that appears to affix him with knowledge of the alleged financial fraud at Livent as early as 1995. When Greenspan probed the circumstances surrounding her epiphany, it only made matters worse, as she added details that made her new-found recollection seem not only believable, but plausible. Greenspan wasn’t going to make that mistake again. When Winkfein asked: “Can I explain why I think there were two meetings?”

“No, not now,” Greenspan replied. Not now. Not ever.

The reason the date is so important is because on April 23, Garth Drabinsky was not in Toronto to give Gordon Eckstein instructions on how to manipulate the company’s financial statements. At the time, Drabinsky was in New York meeting with representatives of former Hollywood mogul Michael Ovitz to negotiate the sale of a controlling stake in the company, Greenspan has told the court. During the testimony of Gordon Eckstein, Drabinsky produced flight records from Livent’s corporate jet to prove that Drabinsky was not in the office.

Greenspan continued to slam Winkfein about her most recent recollection about the meeting asking her if she reported this new epiphany to prosecutors. Winkfein replied that she had. When Greenspan asked her if she reported that she now thought that Eckstein wrote his notes on April 24, she said she had not – she didn’t think it was important. “I have no idea what is important at this trial,” she said.

“I would suggest to you that one thing you know is very important is that if directions were given to you by Mr. Eckstein to do any manipulations before any meeting with Mr. Gottlieb and Mr. Drabinsky, then it means he was doing it on his own,” Greenspan said.

In his testimony earlier in May, Eckstein testified that he always got instructions on which Livent accounts to manipulate before instructing staff to make allegedly fraudulent manipulations to the company’s computerized financial records. He also insisted that he met with Drabinsky to receive his marching orders for the quarter on either on April 23 or 24.

Eckstein also testified that many of his notes on those April 23 financial statements were not directions to manipulate the company’s financials, but were actually legitimate questions and adjustments he normally made in the course of preparing the financial statements.

But Drabinsky could not have given instructions to manipulate Livent’s financials on April 24 either, the defence maintains. On that day, Drabinsky traveled from New York to Washington to attend a Ragtime-themed Democratic Party fundraiser with then-U.S. President Bill Clinton.

Eckstein insisted that a meeting occurred on either the 23rd or the 24th and that the meeting was attended by former Livent accountant Chris Craib. Sometime after that meeting Craib telephoned former Livent CFO Maria Messina to inform her that Drabinsky was allegedly planning to continue to manipulate the company’s financial statements. Messina testified that that telephone call prompted her to write a memo to Drabinsky and Gottlieb threatening not to support the financial statements to the company’s board of directors and auditors if they contained the manipulations.

The first quarter of 1998 is not the only period where Drabinsky was not around to direct the alleged financial fraud at Livent, Greenspan told the court. Drabinsky left Toronto on the company’s corporate jet on April 21, 1997 and was out of the office until April 28. This may be the first time in history that an executive’s use of the corporate jet has been cited as an alibi against allegations of financial fraud. According to Livent’s financial records, numerous manipulations were made to the company’s general ledger during that period that pushed Livent’s financial performance from a loss of more than $8 million to a profit of more than $5 million.

“Do you see you were inputting manipulations without any direction from Mr. Drabinsky or Mr. Gottlieb?” Greenspan asked Winkfein. “Doesn’t that surprise you now?”

“Not particularly, no,” replied Winkfein.

“I’m going to suggest to you that it should surprise the hell out of you,” Greenspan continued. “Does it not surprise you that Gordon Eckstein was giving you instructions without getting the approval of Mr. Drabinsky or Mr. Gottlieb?”

“No. The financial statements were issued and they were issued with their approval,” Winkfein countered.

“I didn’t ask you that. Doesn’t it surprise you that the orders for manipulations didn’t come from them?” Greenspan repeated.

“Not particularly, no,” Winkfein said.

Greenspan also questioned Winkfein extensively about her day planner that was seized following the collapse of the theatre company. In the diary, Winkfein not only kept track of birthdays and significant company events, but made extensive notes about the dates and times that members of Livent’s accounting staff were meeting with investigators from the RCMP, U.S. Justice Department and U.S. Securities and Exchange Commission.

Winkfein insisted that she kept track of her colleagues’ meeting dates because it was merely a “point of interest.” But Greenspan insisted that it suggested collusion among the accounting staff that was trying to keep their stories straight with authorities. “I would think that Fort York would be a ‘point of interest’ in this city,” Greenspan said. “But Maria Messina going to see the RCMP is a point of interest?”

“Yes sir,” Winkfein replied.

“What’s the point of interest, if not for you people to all get together and make sure you’re working for the team against Garth Drabinsky and Myron Gottlieb,” Greenspan said.

As evidence of that collusion, Greenspan cited Winkfein and Grant Malcolm’s decision to “plead the fifth” and not give evidence in her first meeting with the SEC on Oct. 8, 1997. It was a decision that was clearly linked to the notation for “$125 million” – a reference to the US$125 million in bonds that Livent had sold to U.S. investors in the fall of 1997 – Winkfein had written by the date, Greenspan suggested.

Now, stick with me, because it’s kind of complicated. That bond sale was important because, at the time, the SEC was considering charging Maria Messina with fraud in relation to the bond sale, Greenspan said. Those charges would stem from the fact that in her initial testimony before the SEC on Sept. 9, 1998, Messina had indicated she may have first learned about the fraud from a brief discussion with Winkfein and Malcolm in June 1997. Messina quickly retracted the statement and later told the SEC that she did not fully learn about the fraud until much later in the year.

By pleading the fifth and not telling the SEC about her conversation with Messina about the fraud, Winkfein aided Messina in avoiding additional charges in the U.S., Greenspan insisted. “[Messina] gives the SEC her story about finding out about the manipulations after talking to you and Grant Malcolm… you knew that,” Greenspan charged.

“No, I didn’t,” Winkfein replied.

“I’m going to suggest to you that [Messina] called you the night of her SEC testimony,” Greenspan continued.

“No sir, she didn’t,” said Winkfein, shaking her head and smiling.

“I’m going to make a serious allegation so wipe that smirk off your face,” Greenspan said. “Messina is very concerned about this US$125 million bond offering. She is going to get charged with financial irregularities if she knew about the manipulations before the offering – you know that.”

”No sir, I didn’t,” said Winkfein. “It was never discussed.”

Winkfein could not recall why she had written the “125 million” notation in her diary, but suggested that it was a reminder that an interest payment on the bonds was due the next week. Sure enough, next week there is a notation that the interest payments were to be paid. However, Greenspan countered that nowhere else in the diary was there a notation about other interest payments due to the bondholders.

Greenspan continued to interrogate her about the diary for some time. Winkfein insisted that while the finance staff did talk about what was happening, they changed their statements. “The only statement I was ever asked to present was the truth. I was never asked to change my statement,” she said.

After three days of cross examination, Edward Greenspan wrapped up his questioning today. Tomorrow she will face questions from Myron Gottlieb’s lawyer, Brian Greenspan.

Moments after Winkfein started to testify, Greenspan objected to her statements and suggested that Winkfein had little to offer when it came to talking about roles Drabinsky and Gottlieb played in the alleged fraud. “By [Winkfein's] own admission, she knows nothing about accounting,” Greenspan said during her questioning by prosecutors, and is “not in a position to speculate” on how Drabinsky or Gottlieb’s role in the alleged fraud.

In spite of that, Winkfein’s testimony and her performance under cross examination have scored points for the prosecution. Winkfein only testified for a few hours for the prosecution, but has been cross examined for two days so far by Edward Greenspan – the lawyer representing Garth Drabinsky. Livent lawyers have been on a break for the past 10 days, but before that break Greenspan spent a considerable amount of time grilling Winkfein about a brief conversation she testified about having with Drabinsky in 1995 concerning the hiring of a new controller.

In an unusual move, Drabinsky insisted on conducting the interview personally. The prospective new hire was Paula Adler, a chartered accountant. Before bringing Adler in to meet Drabinsky, Winkfein testified that she asked Drabinsky about whether he was concerned about Adler. “I asked him if she would have a problem with what we were doing with the numbers because we were shifting the numbers around,” Winkfein testified earlier. Winkfein testified that Drabinsky told her: “Oh, don’t worry about that. She won’t be involved with that.”

On the face of it, the conversation seems kind of innocuous. So innocuous that Winkfein testified that she forgot about it entirely until 2005 when she was called to testify at the Livent preliminary hearing. It was a revelation that was met with incredulity by Greenspan. “Ten years later, after giving thousands of pages of interviews, talking to the SEC, talking to the FBI, people who wanted Garth Drabinsky, the first time you mention this it is 2005 because you have such a fantastic memory,” Greenspan said sarcastically.

Greenspan spent more than an hour listing 14 different occasions where Winkfein had an opportunity to relay this story – a story that would fix Drabinsky not only with knowledge of the alleged fraud in 1995, but portrays him taking active steps to ensure that Livent’s alleged accounting manipulations were not discovered by some nosy chartered accountant. Greenspan painstakingly read excerpts from every one of those 14 interviews, depositions and sworn testimony, citing examples where Winkfein could have told “your Paula Adler story.”

But Winkfein would not budge. She acknowledged that she could have told the story in 1998 in interviews with Livent’s new managers, in 1999 in interviews with the RCMP or in 2000 during depositions with lawyers looking to sue Drabinsky and Gottlieb. But she just didn’t remember at the time. “Maybe your memory, 10 years later, is faulty,” Greenspan asked.

“Anything is possible, but I do recall the incident as I’ve recounted it to you,” Winkfein replied.

The more Greenspan grilled her about the story, the more believable it seemed to become. And things only got worse when Greenspan tried to probe the circumstances surrounding how she remembered the incident. Winkfein didn’t remember the conversation, because she hadn’t thought about Paula Adler in years. The chartered accountant was eventually hired by Drabinsky, but she only stayed with the company for two months, Winkfein told the court. “When you had this epiphany did you pick up the phone and call a lawyer?” Greenspan asked. “Did you call your best friend, did you call the police?”

“I didn’t think it was significant enough to call anyone,” Winkfein replied.

“If you didn’t think it was a big deal, why say it,” Greenspan asked.

“It was a conversation I had with Mr. Drabinsky.”

Greenspan continued to grill Winkfein about the Paula Adler story today and Winkfein continued to remain adamant about the conversation. But he did manage to move her slightly. At the preliminary hearing Winkfein testified that she asked Drabinsky if he thought Adler would be concerned about “how we handle our accounting,” not “shifting around the numbers,” as she testified at the trial. That slight change in wording means that Drabinsky could have thought Winkfein was referring to Livent’s penchant for aggressive accounting, rather than outright fraud, Greenspan suggested. “These are different stories,” Greenspan said. “[How we handle our accounting] clearly embraces aggressive accounting.”

“That portion of my statement [concerning shifting numbers] was not what I said to Mr. Drabinsky,” Winkfein said.

But has the damage been done? After all, Winkfein was an employee that Drabinsky trusted. He hired her as a bookkeeper at his law firm and she worked with him on many of his private ventures into filmmaking and attempts to open a film studio. She moved with him to Cineplex Odeon and finally was hired at Livent. Will that history make her revelations more credible to Madam Justice Mary Lou Benotto? Will Benotto ultimately believe Greenspan’s contention that Winkfein’s faulty memory cannot be relied upon? Or will she side with prosecutors and rule that the now-infamous Paula Adler story is not only plausible but believable and affixes Drabinsky with damaging knowledge?

But Greenspan has landed more than a few punches of his own. On the first day of Winkfein’s cross examination he landed a major blow when it came to the issue of Drabinsky’s alleged handwriting on Livent’s internal documents. Prosecutors are relying on that handwriting to prove the Livent founder was not only aware of the alleged fraud at the company, but was instrumental in directing those financial manipulations.

While showing Winkfein dozens of documents that illustrated the alleged financial fraud, Crown prosecutor Robert Hubbard asked Winkfein about a brief two-word notation stating “ask Diane” written on an internal Livent financial document from 1995. Winkfein stated that the handwriting looked like that of Garth Drabinsky.

But Greenspan showed Winkfein two versions of the document – one in hard copy format that is included in the mass of binders containing the internal Livent financial statements, memos and other documents that are the lifeblood of the case, and another electronic version. While the hard copy contained the “ask Diane” notation, the electronic copy did not. “I’m going to suggest to you that it is absolutely, utterly impossible for Garth Drabinsky to have written that on that page because when it left Livent, it had no writing on it,” Greenspan said.

Winkfein agreed.

That revelation prompted the prosecutors to call for a short recess while they huddled over the document to try and figure out just whose handwriting that was. Hubbard even asked Greenspan if he wanted a sample of his handwriting and then casually handed Greenspan a note – presumably with the words “ask Diane” in his handwriting.

The matter was quickly cleared up with a phone call to Sgt. Ann Koenig – the longest serving member of the Livent team, who has worked on the case for the past eight years. Koenig was not in court that day since she was recovering from a recent back injury. It turns out the notation was hers. “It was my fault,” Hubbard told the court. “If Sgt. Koenig had been here yesterday, she would have corrected me.”

Besides the handwriting, Greenspan has gotten other concessions from Winkfein. Despite her controversial conversation with Drabinsky, Winkfein agreed that she never received any direct orders from either Drabinsky or Gottlieb to manipulate Livent’s financials. All of her instructions regarding Livent’s accounting came from Gordon Eckstein, Livent’s former senior vice president of finance and administration, Winkfein told the court. “The instructions came from Eckstein? You never received those instructions from Garth or Myron,” Greenspan suggested.

“Correct,” Winkfein replied.

The trial is sitting for three days this week before taking another two-week break until early September. Greenspan is expected to wrap up his cross examination of Winkfein on Wednesday followed by questions from Brian Greenspan, the lawyer representing Myron Gottlieb.

The court rejected Drabinsky and Gottlieb’s argument that a judgment handed down by a U.S. court should be overturned because they could not travel to the U.S. to defend themselves without risking arrest from American authorities. “Since the appellants chose to do business and file a registration statement with the U.S. authorities, it is hardly unfair or disorderly to recognize the resulting civil judgment arising from their misrepresentations in this statement,” wrote Appeal Court Justice Susan Lang on behalf of the panel.

The case stems from a 2005 judgment by a New York judge who ordered Drabinsky and Gottlieb to pay US$23 million plus interest (now totaling US$36.6 million) to holders of Livent’s investment notes who lost money when the company collapsed in 1998. U.S. courts ruled against an appeal of that decision as well as a subsequent motion filed by Drabinsky and Gottlieb citing evidence from the preliminary hearing in the criminal fraud case they say showed that others at Livent had committed the alleged fraud without their knowledge or approval. Last year an Ontario court ruled that the original New York judgment could be enforced in Canada.

Neither Drabinsky nor Gottlieb testified during the original U.S. civil trial, citing their right to remain silent. Instead, the pair relied upon depositions, documentary evidence and an affidavit from Robert Topol, Livent’s former chief operating officer, in an effort to convince the judge they had performed adequate due diligence on Livent’s allegedly fraudulent financial statements. None of which particularly impressed the original U.S. judge.

Ironically, the appeal was heard on May 5th – the same day as the start of Drabinsky and Gottlieb’s criminal fraud trial.

In another cruel twist, George Glezos, one of the lawyers representing the Livent noteholders died suddenly on July 20 – just eight days before the ruling came down. Glezos, 53, was a well-known and respected Toronto securities lawyer who represented shareholders in a number of high-profile lawsuits.

The criminal trial resumes August 11th.

But earlier today she added another line in the work history section of her Drabinsky resume: witness for the prosecution. While Winkfein had plenty to say about the alleged accounting fraud that occurred at the theatre company Drabinsky and his partner Myron Gottlieb founded, ironically, her testimony may be more damaging to Gottlieb.

Winkfein testified about meetings she had with Gordon Eckstein, Livent’s former senior vice president of finance and administration, and Gottlieb shortly after the announcement that new managers would be arriving at Livent following the sale of a controlling stake in the company to former Hollywood mogul Michael Ovitz. She testified that she told Eckstein she would no longer participate in the accounting manipulations unless new managers were made aware of what was going on. Eckstein told her that “everybody does it” and not to worry. Soon after, Winkfein was called to a meeting in Gottlieb’s office.

Gottlieb acknowledged that Livent had “had some difficulties,” but he had been a director at Corona Corp. – a company that he said had accounting issues – and they had been handled “in an orderly fashion with no damage to the share price,” Winkfein testified. New management was going to be too busy in New York and Gottlieb, Drabinsky and Eckstein would continue to oversee Livent’s financials for the second quarter, despite the fact new managers would be on the scene by then. “I said, ‘do you want me to lie to new management?’” Winkfein told the court. “He didn’t answer, he smirked, looked away and basically that ended the conversation.”

Winkfein also testified that Gottlieb was involved in hiding the alleged accounting manipulations from the company’s auditors. During the 1997 year-end audit, company auditors uncovered six invoices for transactions that had been allegedly and improperly booked to the company’s fixed assets. Winkfein testified that she kept the auditors at bay for as long as she could, but eventually they insisted on seeing the back-up documentation for the transactions. Eckstein suggested she get Maria Messina, Livent’s former chief financial officer, to deal with the problem, but Messina refused to mislead the auditors, she told the court. “Gord told me to send the schedule up to Myron and let Myron handle it,” she said.

Winkfein also testified that Messina was purposely kept in the dark about the alleged accounting fraud at the company. At the time, Livent accountants were concerned about her joining the company since Messina was a former auditor who had overseen the company’s books as part of her job at Deloitte & Touche, Winkfein said. “I told Gord, ‘isn’t this a problem?’” Winkfein told the court. “She is from the auditing firm and we have been lying to her.”

Eckstein said he had spoken with Drabinsky and it was not going to be a problem – although they should not tell her about the alleged manipulations, Winkfein said. “Eckstein said that because she was from the auditing firm it would be too black and white. Keep her out of it. Once she is hooked we would slowly let her in,” she told the court.

Messina became aware of the fraud in 1997 when Eckstein went on vacation and left her in charge of preparing the financial statements, Winkfein said. Eckstein told Winkfein that she and former Livent controller Grant Malcolm should sit down with Messina and tell her what was going on. They brought her into an office, closed the door and briefly explained that they had been manipulating the company’s financial statements, Winkfein testified. “[Messina] said ‘Oh my God. Oh my God. Oh my God.’ She was clearly distressed.”

Drabinsky also came under fire in Winkfein’s testimony – but not without a few objections from Edward Greenspan, the defence lawyer representing the former Livent CEO. The first objection came fairly early in her testimony when she testified: “Garth ran the company. There was very little that happened without his knowledge or approval.”

Greenspan quickly objected. “I’m very concerned about the way this is coming out. The questions are being put to her in a way that we are getting hearsay, double hearsay, triple hearsay,” Greenspan told the court. Winkfein – who has no official training as an accountant, “is not qualified to offer an opinion about accounting,” Greenspan continued.

After being cautioned by the judge to limit the questions strictly to what she saw and did, prosecutors continued.

Winkfein testified that she had several meetings with Drabinsky in which he demonstrated a good grasp of accounting. “Mr. Drabinsky asked very intuitive questions and caught some mistakes that had been made,” she said.

At another meeting around the time Livent had gone public, Drabinsky called Winkfein to return to the office and explain a number on the company’s balance sheet he thought was incorrect. Drabinsky soon realized what the number was, Winkfein testified. “It was a number we had moved, I think it was from for the Pantages South Development for which there was very little backup.”

In 1995, Drabinsky actually conducted interviews for the job of production controller at the company. Before bringing the interviewee into Drabinsky’s office, Winkfein asked him if he was worried the accountant might “have a problem with what we were doing with the numbers,” Winkfein told the court. Drabinsky replied: “Don’t worry about that, she won’t be involved with that.”

Drabinsky also told Livent accountants he wanted the auditors out of the building as fast as possible, Winkfein said. “Gord [Eckstein] said that Garth wanted them out of there in two weeks. No one was going to tell him how to run his company,” Winkfein said.

Every quarter Livent accountants would spend up to six weeks preparing the company’s financials, Winkfein testified. The process would begin with accountants ensuring that the company’s books were up-to-date. They would forward the financials on to Eckstein for review who would direct the accountants to make any changes to the books. “When Gord was satisfied with the numbers, he’d prepare management statements and review them with the executives. And then eventually he’d come back to us with certain adjustments that were required,” Winkfein said.

Prosecutors took Winkfein through dozens of examples of the alleged manipulations in the company’s books. Printouts from the company’s general ledgers showed the scope of the alleged manipulations as the company’s net income swung from a loss of more than $8 million in the first quarter of 1997 before the alleged manipulations, to a reported profit of $4 million after the accounts had been adjusted. In the second quarter of 1997, Livent’s income went from a net loss of $21 million, pre-adjustment to a reported $8 million in profits. Livent’s general ledger showed a loss as large as $41 million in the third quarter that eventually was allegedly adjusted to show a loss of just $2 million.

Many of the manipulations were for relatively small amounts of money including $44,129 in directors fees paid to Livent’s board members that were reversed on the company’s books and moved to a later time period. There were also alleged manipulations of $150,000 in interest payments owed to Thomas H. Lee, a noted U.S. investor who had a stake in Livent and was a member of the company’s board of directors.

Livent accountants also manipulated expenses related to the company’s corporate jet, Winkfein testified. For instance, a $25,500 bill for a round trip flight between Toronto and Burbank, Calif. – including a $233 bill for phone charges on the flight – was moved from 1996 to 1997, Winkfein said.

By the time the alleged fraud was uncovered at Livent, Winkfein was earning $86,500 per year – although she received a $10,000 bonus the last year she was at the company. But when the alleged fraud was uncovered she was disciplined by the U.S. Securities and Exchange Commission and forced to personally pay $8,000 in fines and penalties – about the same amount of money she earned by exercising Livent stock options, she told the court.

The trial continues tomorrow with Winkfein facing cross examination from Edward Greenspan.

The document was a list of production reports created by Malcolm that mentioned “transferred amounts,” along with a list of Livent’s senior managers who received those reports. That mention of “transferred amounts” is important because Malcolm has testified that – since most of the transfers of costs between various Livent productions referred to in the reports had no accounting justification – the term was essentially a short hand for fraud.

But the term itself would not be enough to tip off a reader that the amounts were illegitimate, suggested David Roebuck, the defence lawyer acting for Drabinsky. It was a notion that Malcolm agreed with. “It was meant to be ambiguous, yes,” Malcolm told the court.

The reports typically went to top Livent executives such as Drabinsky, Robert Topol and Gordon Eckstein – all men who prosecutors allege had knowledge of the fraud. However, in May of 1997 the reports were also being distributed to former Livent chief financial officer, Maria Messina – a full two months before she said she first learned about the alleged fraud.

Gerry Blair, a Livent employee who joined the company from Andrew Lloyd Webber’s Really Useful Group Theatre company in England, also received the reports. Before joining Livent, Blair had been involved in monitoring royalty payments from Livent to Webber and had actually been involved in an audit of Livent’s financials to ensure the company was making accurate payments, Roebuck suggested. “You knew that just having a schedule referring to transfers doesn’t indicate to Mr. Gerry Blair that there was a fraud going on at Livent,” he suggested.

“That’s right,” Malcolm replied.

But Malcolm disputed Roebuck’s suggestion that another Livent executive – Frank Scardino, the company’s general manager – also received the reports and did not understand the hidden meaning of the term “transferred amounts.”

“He never referred to them as fraud, but he did have a way of characterizing them. He referred to them as ‘the bullshit transactions,’” Malcolm told the court.

Roebuck seemed taken aback for a moment, but quickly went back to that document he had, noting that Blair had received 17 of the 24 reports that mentioned “transferred amounts.” But by then, the cat was out of the bag and chief crown prosecutors shouted out: “How many reports did Mr. Drabinsky get?”

Brian Greenspan, the defence lawyer representing Gottlieb, quickly piped up: “How many times is Mr. Gottlieb’s name on the list?”

“Excuse me, Your Honour,” Mr. Roebuck said. “I seem to be losing control of my cross examination.”

Hubbard would get a chance to ask the question officially during his brief re-examination of Malcolm at the end of the day. The answer, of course, was that Drabinsky received every one of the reports. Oh, and as for Gottlieb, his name didn’t appear on any of the distribution lists for the reports.

As an aside, Drabinksy wasn’t in the courtroom to hear the outbursts. Late last week the Madam Justice Mary Lou Benotto granted him leave to be absent from court from the day because of an important engagement that could not be rescheduled, explained his lawyer Edward Greenspan. And while Drabinsky did not provide an explanation for his absence, co-incidentally Andrew Lloyd Webber is in Toronto to appear for a taping of the final episodes of the Canadian version of the CBC reality show The Trouble with Maria, which is searching for the lead to appear in an upcoming production of The Sound of Music. That’s the same network that broadcast Drabinsky’s own musical reality show Triple Sensation. Now, back to the accounting.

Many of the “transferred amounts,” listed in Malcolm’s reports were actually legitimate accounting adjustments, Roebuck suggested. The topic of show-to-show transfers had even been addressed by Livent’s audit committee, the defence lawyer said. “You knew there could be proper allocation of costs between shows,” Roebuck said.

“As I said, it was meant to be an ambiguous term,” Malcolm replied.

Roebuck went on to suggest that even though Drabinsky was receiving the reports, Malcolm had no idea how closely he was reading them. After all, the reports could run between 150 to 200 pages long and Drabinsky was a “perfectionist” who was an active producer of Livent’s productions. “It’s reasonable to conclude a perfectionist with 10 or more shows running at any time has got a pretty full day with respect to the actual production side of the business,” Roebuck said. “Mr. Eckstein had 100% of his time to deal with accounting issues, but Mr. Drabinsky was a personal and hands-on producer of Livent’s shows.”

But Malcolm wasn’t biting when Roebuck asked him to comment on some advertising adjustments relating to ad campaigns under contract in New York, or for advertising in cities that were close together. Malcolm agreed that some transfers could be legitimate, but added: “In most cases, that’s not what we were doing.”

Malcolm disagreed when Roebuck suggested that transfers between the account of Show Boat Toronto and its touring production were legitimate. “Ten years later, that sounds like a reasonable assumption,” Malcolm said. “But at the time, these were costs that legitimately belonged to the productions listed, and in fact they were inappropriately adjusted.”

Roebuck persisted and pointed to explanations in Livent’s financial statements. “The reader would not be aware of any financial irregularities. The footnote does not say these were all baseless and arbitrary,” Roebuck said.

“No, it doesn’t. Did you expect it would?” Malcolm snapped back.

“I’m here to ask the questions,” Mr. Roebuck responded.

Roebuck also took issue with Malcolm’s testimony regarding the production reports he sent to new Livent managers who arrived after former Hollywood mogul Michael Ovitz bought a controlling stake in the company. Malcolm told the court that while new Livent managers were on the distribution list for his reports that listed the allegedly fraudulent transfers, in fact, Malcolm had been instructed to send them reports with all mention of those transfers removed. “I’m going to suggest to you that your testimony makes zero sense,” Roebuck said.

”That may well be, but I’m just telling you what happened at the time,” Malcolm said.

Roebuck also confronted Malcolm about his testimony about his one and only private encounter with Drabinsky. Malcolm told the court that Drabinsky had summoned him to his office in June 1998 and asked him to explain the amounts that had been allegedly transferred to the accounts for Show Boat. Malcolm told Drabinsky that the transfers were affecting Show Boat and the other productions and produced a memo showing the allegedly improper transfers to the account.

But Roebuck spent a considerable amount of time presenting numerous documents that outlined extensive stage expenditures for Show Boat’s three touring productions that could have been legitimately charged to the different Show Boat city accounts. One of the expenditures included nearly $1 million for the construction of a “jump set” – a fourth set for the show that could be moved to a new venue when the three Show Boat shows were being used. Malcolm disagreed.

“When you reported to Mr. Drabinsky, you didn’t say anything about ‘problems [with the transfers],’… You just say here are the numbers,” Roebuck said.

“No, I didn’t,” Malcolm replied.

But the documentation that could show that Drabinsky was only interested in the expenses associated with that jump set, are also rife with other information related to the alleged fraud, Hubbard pointed out in his re-examination of Malcolm. The same documents contain reference to millions of dollars in “rolled costs” and “rolled amortization,” Hubbard pointed out.

Greenspan also challenged Malcolm on his testimony about his one private encounter with Gottlieb. Malcolm testified that shortly after the Ovitz transaction was announced, Gottlieb called him into his office to talk about Livent’s accounting “baggage.” He assured Malcolm that Drabinsky and Gottlieb were committed to “cleaning up” the alleged accounting manipulations over the next two quarters, and that both Gottlieb and Drabinsky would remain in charge of the company. It’s a story that makes no sense, says Greenspan.

Malcolm didn’t even remember the term “baggage” until Greenspan suggested it to during his testimony at the preliminary hearing, Greenspan suggested. And Livent’s founders would have no opportunity to clean up the alleged accounting manipulations over the next two quarters, Greenspan said, since new managers were already very much involved with the finances of the company.

Greenspan presented Malcolm with memos from Gottlieb to new management that accompanied drafts of Livent’s first quarter financial statements for their review. “Isn’t it apparent from this document that new management were going to be in control not just for the second quarter, but the first quarter as well?”

“It is apparent from this document,” Malcolm replied, “but I’m not arguing that.”

A more likely scenario was that the context for the meeting between Gottlieb and Malcolm was not to allay his concerns over alleged accounting fraud, but rather to assure him that Livent’s head office would not be moving to New York following the takeover by the Ovitz group, Greenspan suggested. Those fears were fueled by an article that appeared in the Toronto Star newspaper speculating on such a move. But Malcolm would not budge. “That’s all well and good, but my context is my context,” Malcolm said. “What I recall of the meeting is my recollection.”

Greenspan also took his own shot at arguing that the alleged manipulations Malcolm was involved with were actually legitimate. Greenspan pointed out the invoices from Dec. 1994 that Malcolm had reversed and convinced Echo to re-issue in 1995 in an effort to boost the company’s profits for 1994. But there is a flaw in that plan, Greenspan pointed out.

While the invoices were cancelled and identical invoices were issued in 1995, the invoices clearly state that the ads ran in Dec. 1994. This would be legitimate if the ads were clearly linked to revenue being earned in 1995, Greenspan said. “Whether or not the invoice is dated in 1994 or not, the dates [for the ads] clearly shows that they ran in 1994 – the auditors are going to say this isn’t a 1995 expense, it’s a 1994 expense,” he said. “Unless, they took the position that based on the matching principle, it could be a 1995 expense.”

“I don’t think so,” Malcolm replied.

The trial continues tomorrow with a new witness – longtime Livent accountant Diane Winkfein.

That was the question David Roebuck, a defence lawyer representing Garth Drabinsky, posed to Grant Malcolm earlier today. Malcolm, a former Livent controller, has testified that managing the widespread alleged fraud at the theatre company eventually became a job that consumed all of his days and most of his nights and weekends at the company. One of Malcolm’s biggest jobs was manipulating millions of dollars in Livent’s advertising expenses. Malcolm has already testified that just about every financial quarter, he would select large numbers of advertising and other invoices from Livent’s current financial period and “roll them forward” to future periods, thus making the company seem more profitable than it was in reality.

But defence lawyers have argued that moving those advertising expenses to future periods might have been a legitimate accounting treatment. After all, if a Livent show was sold out at the time the ad ran – but there were tickets available in a future financial period – then it would seem reasonable to book that invoice into that future period where the expense would match the revenue.

In 1994, for instance, Livent was carpet-bombing southern Ontario and even northern New York state with “Buy Phantom by Phone” ads announcing it had extended the run of the largely sold-out Phantom of the Opera production in Toronto, but that new tickets were available for future performances. Livent could have set up those advertising payments as a prepaid expense that could legitimately be put on the balance sheet and amortized over future periods when those new tickets were available, Roebuck suggested to Malcolm.

Livent didn’t do that, replied Malcolm, “If that was a legal treatment, we would have done it at the time,” Malcolm said. “[Advertising expenses] were set up as an operating expense… they were pulled from the general ledger and made to disappear.

But Roebuck persisted: “If a proper accounting basis existed in 1994, you didn’t know about it and Gordon Eckstein [Livent’s former senior vice president of finance and administration] didn’t tell you about it.”

“No, he didn’t,” replied Malcolm.

Defence lawyers have questioned both Eckstein and Maria Messina, Livent’s former auditor who left the accounting firm of Deloitte & Touche to become the company’s chief financial officer about that “legitimate” treatment of Livent’s advertising expense. Neither one agreed that it was an accounting treatment that would have likely passed muster with the company’s auditors. Especially since Livent was not adjusting advertising invoices based on the how many tickets had been sold in a particular period and whether those ad expenditures could legitimately be pushed forward to future periods where tickets were available. When prosecutors asked Malcolm how and why he chose certain invoices to be “rolled forward,” he replied simply: “They’re big.”

Under cross examination today Malcolm did admit that by deleting and re-issuing advertising invoices, he subverted a financial control set up by Drabinsky to monitor advertising expenses. Drabinksy hired Janet Young, Livent’s vice president of advertising, to personally scrutinize and initial all advertising invoices. Roebuck pointed out Young’s initials on the original invoices that Malcolm pulled and deleted from Livent’s accounting files. The replacement invoices did not have Young’s initials.

“I’m going to suggest to you that by obtaining replacement invoices and not submitting them to Ms. Young, you were effectively sidestepping this control mechanism, a control mechanism put in place by Mr. Drabinsky,” Roebuck said.

“I can’t say he put it in place but it certainly is a normal control mechanism, yes,” Malcolm replied.

Roebuck accused Malcolm of misleading the court when he testified about meeting with Livent’s U.S. advertising agency to convince the company to go along with a fraudulent billing scheme. Malcolm testified he met with John Wilner, an executive with New York-based LeDonne, Wilner and Weiner, in Dec. 1996 to ask him to provide false invoices that would allow the company to shift its advertising expenses to future periods. It was a scheme Livent already had in place with its Toronto ad agency Echo Advertising that ensured the advertising agencies’ financial records would match with Livent’s if auditors asked for third party confirmation. LeDonne agreed, but they never had to act on the agreement, Malcolm testified. “You say that 1996 was the starting point of your understanding with Mr. Wilner about his cooperation on the invoices,” Roebuck said. “So it follows, as day follows night, that there should only be original invoices from LeDonne before that time, correct?”

“That’s correct.”

But many of the invoices originally submitted in 1995 – and later deleted and resubmitted in 1996 – were not original. Roebuck suggested, and Malcolm agreed that the invoices were fraudulent. Roebuck accused Malcolm of forging the invoices himself on his computer a full year before he met with LeDonne to get their permission to go along with the scheme. “This is a false invoice, isn’t it,” Mr. Roebuck said.

“I’d say yes, it is,” Mr. Malcolm said.

Malcolm testified that he had experimented with trying to create the false invoices, but could not recall actually using any of the invoices he made.

“I suggest to you that when you gave your evidence, you slandered Mr. Wilner,” Mr. Roebuck charged. “You suggested he was the one who permitted some kind of facility here. I’m suggesting to you that before you met with him, you created some kind of facility yourself.”

Roebuck then confronted Malcolm with a memo he wrote to Eckstein in Feb. 1998 in which he asked for a raise and promotion commensurate to new duties he had been assigned. That flies in the face of evidence he gave in a civil action in which he testified he never asked for any “quid pro-quo” for his work relating to the alleged fraud. “I had frankly forgotten about the letter altogether,” Malcolm said.

Roebuck also quizzed Malcolm about the manipulations he allegedly made to the invoices of other advertising suppliers who had not agreed to the Livent scheme. One schedule of advertising invoices that were allegedly manipulations included more than $1 million in billings from Echo Advertising, but also included about $17,000 in invoices from the Toronto Sun and $7,000 from the Globe and Mail newspapers. “You didn’t have an agreement with the Globe and Mail, did you?” Roebuck asked.

“No we did not.”

“This is typical of Mr. Eckstein and his insane risk-taking,” said Roebuck said.

“Nobody suggested there was no element of risk in any of this,” Malcolm replied.

“I’m suggesting this is a bizarre and extraordinary risk,” said Roebuck who went on to ask if Malcolm ever considered whether Eckstein masterminded the fraud on his own without the knowledge or consent of Drabinsky or Gottlieb.

“What I’m telling you is I don’t believe he acted independently,” Malcolm said.

The trial continues on Monday.

It took less than an hour for assistant crown prosecutor Amanda Rubaszek to elicit testimony from Cheong about how he made several modifications to the programming of Livent’s accounting software that enabled accountants at the theatre company to delete or move accounting entries without leaving an audit trail. Cheong told the court he made the first modifications to the company’s Lawson accounting software shortly after he was hired in 1990. He made subsequent modifications in 1993 and again in late 1995 or 1996. Cheong was ordered to make the changes by Gordon Eckstein, Livent’s former senior vice president of finance and administration, as well as Diane Winkfein, and Grant Malcolm, both former Livent controllers.

The changes removed controls from the system that prevented transactions from being deleted or altered on the company’s general ledger and accounts payable systems, Cheong said. The changes allowed Livent accounts to “take a transaction that had been posted to a specific period and putting it back into a state where it can be posted again to another period or another account,” Cheong told the court.

Those changes made it possible for Livent accountants to remove invoices from the company’s accounting computers and move them to other accounts or to future time periods, thus making the company appear more profitable.

Cheong also made modifications to the software that allowed accountants to search for invoices that could be allegedly manipulated, as well as change the dates on numerous invoices with a single keystroke – as opposed to going through each invoice and manually changing the dates, he testified.

Cheong was sometimes enlisted by Winkfein to help the accounting department make changes to accounting invoices. Winkfein made a point of telling him to do the changes in his office with the door closed, he testified.

Cheong was never given an explanation for why the changes were to be made, but said that he was uncomfortable making the alterations. “It was definitely wrong. I thought it would be a one-time occurrence,” he said. “It became a nuisance because it became voluminous – the number of requests that came every quarter.”

During one audit in 1996, computer experts from Deloitte & Touche – the accounting firm that audited Livent’s financial statements – spent at least 28 hours evaluating the company’s information systems, but failed to detect the changes, the court heard. Any inquiries from the auditors about changes were referred to Eckstein, Cheong said. A Deloitte report on Livent’s computer systems, however, noted the company’s lack of data security and warned: “The lack of sufficient logical security may result in unauthorized access to programs or data.”

Livent’s auditors were not the only ones kept in the dark about the manipulations Cheong had made to the company’s computer system. Cheong told the court he never discussed the changes with Maria Messina – the company’s former auditor who left Deloitte to become Livent’s chief financial officer and who ultimately who blew the whistle on the alleged fraud.

At one point during a lunch with accounting staff Cheong made a comment about the changes to the group, but Diane Winkfein glared at him. “She gave me a look of disgust,” Cheong told the court. “She looked like she really didn’t want to discuss it.”

Cheong also testified he never discussed the alterations to the company’s computer system with Garth Drabinsky or Myron Gottlieb.

Cheong described his time at Livent as “bittersweet.” He enjoyed working for the theatre company and being involved in the glamorous business and attending the opening night gala parties, but the work environment was very hard and often abusive, he said. “The nature of people’s personalities – like Gord’s – were intimidating and abusive,” he said. “[Eckstein] swore at me, he called me ‘an idiot’ and sometimes embarrassed me in front of vendors.”

But Eckstein wasn’t the only one with an abusive personality. When Livent’s computer systems went down, Cheong could find himself on the receiving end of an angry phone call from Drabinsky, he told the court.

Drabinsky’s outbursts were never personally aimed at Cheong, but were merely the result of a frustrated executive who could not get the reports he needed from the company’s computer system, suggested defence lawyer Edward Greenspan.

Greenspan was more interested in quizzing Cheong about his dealings with Les Wittlin, the lawyer who Messina testified she hired in 1998 for advice on how to deal with the alleged fraud. Wittlan eventually represented Messina, and four other Livent accountants whose revelation of the alleged fraud at Livent prompted new company managers to suspend – and ultimately terminate – Drabinsky and Gottlieb’s employment. “Did you have any idea that Mr. Wittlan – before he became your lawyer – acted for just about everybody?” asked Greenspan.

“Yes, I heard that,” Cheong replied.

“Do you understand the phrase ‘conflict of interest’?” Greenspan asked.

Greenspan also asked if he knew that Wittlan had been “kicked off the file,” by the U.S. Securities and Exchange Commission because he was representing too many players in the Livent investigation. “No, this is the first time I’m hearing about that,” Cheong replied.

The trial continues tomorrow as former Livent controller Grant Malcolm returns to the witness stand.

Grant Malcolm, Livent’s former senior production controller, spent most of the morning going through volumes of documents prosecutors have compiled to track the alleged accounting fraud. Even the judge found it hard slogging and could be seen stifling the occasional yawn. But prosecutors have to go through the painstaking process of proving that a fraud occurred at Livent. And the fraud, as prosecutors say, is in the company’s documents.

There are certainly a lot of those. The number of documents speaks volumes as to how the alleged fraud grew at the company. For instance, for 1994 and 1995 prosecutors have just one volume of allegedly improper accounting manipulations for each year. For 1996 there are two volumes of allegedly improper transactions. For both 1997 and 1998 – the last year of the alleged fraud – there are three volumes of allegedly bogus transactions for each year.

As chief crown prosecutor Robert Hubbard took Malcolm through the reams of documents, Malcolm described the daisy chain of allegedly improper accounting transfers that saw millions of dollars in advertising and production costs transferred from show to show or deleted from the company’s financials and moved to future periods. “Expenses were moved between shows, they were moved to fixed assets or into future periods,” Malcolm told the court. “The transactions were allocated to places where they didn’t belong or places where they didn’t originate.”

Expenses for Livent’s production of Show Boat in Minneapolis, for instance, were moved to Show Boat in Los Angeles. Expenses from Los Angeles were transferred to productions in Detroit, expenses from Chicago were moved to Boston and so-on and so-on and so-on.

When there wasn’t room in the production budgets, costs were then transferred to the company’s fixed assets under the guise of theatre construction, Malcolm told the court. One schedule prepared by Malcolm in 1997 outlined more than $2.1 million in production and operating costs that were to be allegedly moved to Livent’s fixed assets accounts.

Eventually the alleged fraud became so widespread there was no more room in many of the theatre’s pre-production accounts. At that point, even legitimate pre-production costs had to be moved from the accounts of the shows where the costs were incurred to other shows, to hide the fact that the existing budgets were bloated with so many allegedly illegitimate entries, Malcolm said. “There were cases where pre-production costs had become so overstated we had to move those costs to other productions,” he said.

Advertising was a large expense that was often allegedly manipulated – eventually with the co-operation of two of Livent’s largest advertising agencies, Malcolm testified.

In his earlier testimony, Malcolm told the court about how Toronto-based Echo Advertising – Livent’s Canadian ad agency – willingly cooked its own books by cancelling advertising invoices in one period and then re-issuing the identical invoices in future periods. That had the effect of reducing Livent’s expenses for the period in question and making the company appear more profitable.

Today, Malcolm testified how he used the same scheme with LeDonne Wilner & Weiner Inc., Livent’s New York-based advertising agency. Robert Hubbard showed Malcolm dozens of LeDonne invoices that had been originally issued in Dec. 1995 for ads that ran on television, radio and newspapers. Malcolm testified that the invoices were subsequently cancelled and he deleted them from Livent’s financial accounts. Identical invoices were then re-issued in 1996, helping to boost the company’s profits for 1995. “It was LeDonne’s accommodation – to make it seem the invoice belonged in a different period,” Malcolm told the court.

Malcolm had testified earlier that he flew to New York to convince the ad company to participate in the scheme. When he arrived, he found that someone – although he could not say who – had already convinced the agency to co-operate and even agreed to provide Livent with copies of its own letterhead so the company could create its own invoices. Getting the ad agencies to co-operate was important because Livent’s auditors would often contact the agencies to ensure that their accounts matched, Malcolm told the court.

One schedule presented in court entitled “1998 First Quarter Adjustments Including 1997 Carry Forwards,” detailed just under $19 million in allegedly improper accounting manipulations.

As the alleged fraud grew at Livent, so did the number, and violence, of the outbursts by some Livent senior managers, Malcolm testified. “It became more and more brutal and demanding,” he said. “They were always characterizing us as stupid or not knowing anything.”

When asked by chief crown prosecutor which Livent managers were responsible for such treatment, Malcolm responded: “Typically it was Mr. Drabinsky and Mr. Eckstein.”

Hubbard wrapped up his examination of Malcolm by asking why he stayed in such a volatile and abusive environment.

“I had a family to feed,” Malcolm replied.

In responding to questions from David Roebuck – the defence lawyer who has represented Garth Drabinsky in much of the civil proceedings surrounding the collapse of Livent and who stepped in for Edward Greenspan – Malcolm testified he knew the accounting adjustments he was making were fraudulent but he did not fully consider the effect they would have on the company’s shareholders. “You are not a child and this wasn’t a game,” Roebuck said. “You knew you were participating in fraudulent manipulations… that would have severe consequences for the company, its shareholders and creditors.”

“I didn’t dwell on it, but I knew,” replied Malcolm. “I didn’t think there was an expectation we would get caught.”

But by the time new management came to Livent, it became clear that the fraud was going to be revealed and Malcolm prepared to reveal what he knew, he said. “My resolve was I wouldn’t lie to them, regardless of the consequences,” Malcolm told the court.

But there were little consequences for Malcolm and other member of the accounting department who eventually disclosed the fraud to new managers who joined the company following purchase of a controlling stake in the company by former Hollywood mogul Michael Ovitz, Roebuck suggested.

Even before the accountants had disclosed what they knew about the alleged fraud – and their role in it— Livent managers offered the group an indemnity agreement that guaranteed they would keep their jobs, the company would pay for legal representation and the company would not sue them for their participation in the alleged fraud. “In some religious circles you’re expected to confess and repent,” Roebuck said. “I haven’t heard of any confession or repentance before this agreement.”

Malcolm testified he would have told Livent managers everything he knew even without the agreement. “The indemnity was not a motivating factor for me,” Malcolm testified. “I was going to tell what I knew to the authorities. The indemnity wasn’t going to change that.”

After Malcolm and other members of the Livent accounting department revealed their knowledge of the fraud, Livent’s new managers were looking for someone to blame – and that someone was going to be Drabinsky and Gottlieb, Roebuck suggested. “Livent is not willing to forgive everyone – they were looking for someone to pay for this financial situation,” Roebuck said. “Let’s be candid, you knew they were looking to pursue Mr. Drabinsky and Mr. Gottlieb, isn’t that right?”

“That’s right, yes,” Malcolm replied.

Even if Malcolm would have talked without the indemnity agreement, it was a very valuable consideration, Roebuck argued. In the agreement Livent agreed to pay legal bills up to $10,000. But Malcolm never received a bill for his legal advice, despite the fact that between Aug. 26 and Sept. 8, legal bills for the five Livent accountants who blew the whistle on the alleged fraud had already reached more than $35,000.

One could even call the agreement a “free lunch,” Roebuck said. But Malcolm disputed his suggestion that the agreement was, in fact, a “quid-pro-quo” in which the accountants agreed to help Livent pursue Drabinsky and Gottlieb in exchange for the indemnification.

“I don’t make that characterization,” Malcolm said. “There was never ‘you do me a favor and I’ll do you a favor’ for this.”

Roebuck then questioned Malcolm about his working relationship with Eckstein, quoting extensively from Malcolm’s initial interview with the RCMP. Eckstein felt he was smarter than everyone else and smart enough to successfully pull off the alleged fraud, Malcolm told the RCMP in Nov. 1998. But Malcolm soon added: “We believed that the nature of the manipulations we were doing were undetectable,” he told the court.

Roebuck quoted a letter Malcolm wrote to the Institute of Chartered Accountants of Ontario in support of former Livent chief financial officer Maria Messina as part of her disciplinary hearing before the institute. “Gordon Eckstein intimidated the accounting staff by screaming profanities at individuals and referring to them as ‘stupid’ or ‘idiots,’” the letter read. “[Eckstein] made it clear that he was in charge and that his decisions should never be questioned.”

The letter went on to explain that Eckstein often imposed impossible deadlines on his tasks and dropped assignments on staff at the last minute that often required them to work well into the night – sometimes straight through the night without a break. “The fatigue associated with the intense pressure along with the fear of failing to get the job done clearly interfered with our ability to react reasonably to his requests,” Malcolm wrote.

But Eckstein was not the only Livent official to come in for criticism for his violent and unreasonable management style. Malcolm also wrote that Garth Drabinsky was an “extremely volatile” manager who often “resorted to screaming” at staff members.

Roebuck didn’t read that part of the letter into the court transcript. Prosecutors used a printer in the courtroom to print off a copy of the entire letter and offered it to Roebuck so that he could make it an exhibit that the judge could read. But he politely declined.

Malcolm’s cross examination will continue on Thursday, since tomorrow he has a medical appointment that cannot be changed. Taking the witness stand in his place is Raymond Cheong, Livent’s former manager of information services, who is expected to testify about how he hacked into Livent’s accounting software and changed the program to allow for transactions to be manipulated without leaving an audit trail.

But Grant Malcolm, with his receding hairline, round features and non-descript grey suit looks like the guy you would hire to do your taxes. The irony is he isn’t an accountant at all. The former Livent controller graduated from the University of Victoria with a BA in economics but has no official accounting designation. As far as accounting, he learned that on the job at what I’m sure defence lawyers will soon refer to as “The Gordon Eckstein School of Accounting.”

In his first day on the witness stand, Malcolm testified he eventually spent all of his time at Livent tracking the alleged widespread fraud that occurred at the doomed theatre company. “It was virtually 100 per cent of my time—more than 100 per cent. The volume increased to the point where it couldn’t be maintained on a periodic basis,” Malcolm told chief crown prosecutor Robert Hubbard.

Malcolm testified that the alleged accounting manipulations began in 1994—before the company went public —and continued until 1998 when Messina finally revealed the extent of the alleged manipulations to new managers brought in by former Hollywood super agent Michael Ovitz.

Malcolm told the court Eckstein would tell him and other members of the accounting staff how much of Livent’s ballooning losses would need to be trimmed from the company’s financial statements. Malcolm and other accountants would go through the company’s general ledger and identify invoices from advertising, pre-production costs and other large expenses. Those items would then be deleted from the company’s computerized accounting system and then “rolled forward” into future periods, transferred to the accounts of other shows or applied to the company’s fixed assets, such as theatre construction. “Was there any reasonable accounting explanation for any of this activity on your part?” Hubbard asked.

“In my opinion, no,” Mr. Malcolm replied.

Hubbard posed the question again after reviewing a long list of advertising expenses Malcolm had deleted from the company’s system at the end of 1996—thus increasing the reported profits of the company for that year—and then re-entered into the system a month later in 1997. “Was there any particular magic as to why these [advertising] invoices were reversed?” Hubbard asked.

“They were big,” Malcolm replied.

Defence lawyer David Roebuck—who has represented Garth Drabinsky in many of the civil lawsuits surrounding Livent and who has been sitting with Drabinsky’s criminal lawyer Edward Greenspan for much of the trial—was quick to object. After all, who is Malcolm to say whether or not the accounting was proper, Roebuck, who will handle the cross-examination of Malcolm, told the court. “As my friend has pointed out earlier, Mr. Malcolm does not have an accounting designation.”

To conceal the alleged fraud from Livent’s auditors, Malcolm testified he convinced two advertising companies to cook their books, as well, to reflect Livent’s alleged manipulations. Auditors would check the accounts of large Livent suppliers to ensure the books of the two companies matched. Malcolm testified about conversations he had with Robin Pullen, an executive with Toronto-based Echo Advertising in which he would tell Echo which invoices Livent was going to delete from its ledger. Echo would then credit Livent for those accounts and re-issue the invoices at a later date to make the company appear more profitable.

Malcolm testified he travelled to New York to meet with Livent’s advertising supplier for the U.S. to start a similar scheme. Malcolm thought he would have to explain the entire process to the agency, but when he arrived, he discovered that someone—although he testified, he never found out whom—had already explained what Livent required.

Malcolm had very little contact with either Garth Drabinsky or Myron Gottlieb. All of the instructions to allegedly manipulate the company’s books came from Gordon Eckstein, Malcolm testified. However, Malcolm did meet face-to-face with both men on two separate occasions that seemed to support the prosecutor’s contention that both men had intimate knowledge of the fraud.

In the spring of 1998, Gottlieb called Malcolm on the phone and summoned him to his office. It was the first time he had been called to Gottlieb’s office, Malcolm testified, and may have been the first time he had really spoken to the Livent founder outside of casual hellos in the company elevator, he said.

Gottlieb told him that he wanted to talk about the new owners who were going to be coming into the office and wanted to alleviate any of Malcolm’s concerns, he testified. “He talked in terms of the ‘baggage’ that Livent had,” Malcolm told the court. “[He said] that over the next few quarters they were committed to cleaning everything up… And for that quarter, he and Mr. Drabinsky would remain in charge, and everything was going to be okay.”

In June 1998 Malcolm was called into Drabinsky’s office to explain the amounts that had been allegedly transferred to the accounts for the musical Show Boat, Malcolm testified. “He wanted to know how much problem existed in future cities that had been transferred from other productions,” Malcolm testified. “I told him [the transfers] were affecting Show Boat and other productions as well.”

Soon after the meeting, Malcolm produced a report—which was shown in court—that included a breakdown of each of the amounts that had been allegedly and illegitimately transferred to the Show Boat accounts, Malcolm said.

During that same time, Eckstein ordered Malcolm to produce a report that included details of accounting manipulations on the accounting for Ragtime’s Vancouver account. The report, which was also presented in court, indicated that it had been distributed to top Livent officials, including David Maisel, who was now acting as Livent’s new president. However, Maisel was not actually given the report, Malcolm testified. Rather, Maisel received a cleaned-up version of the report that did not include any mention of the accounting manipulations. “It was made to appear he was on the distribution list, but he did not receive this document,” Malcolm said. “It was supposed to appear that everyone received the same copies.”

That was not the first time Livent executives had concealed knowledge of the fraud from new mangers, Malcolm testified. When former auditor Maria Messina joined the company, Livent accountants were told to keep her in the dark about the alleged fraud, Malcolm told the court. Eckstein reportedly said he wanted to “hook her and reel her in slowly,” Malcolm said. “Over a period of time she would reach a point of no return where she would be committed to participating in the ongoing fraud.”

The plan appears to have worked since Messina testified she did not learn about the fraud until July 1997— more than a year after joining the company, and then was too “immobilized by fear” to blow the whistle. And while she testified she took steps to negate or stop the fraud from the inside, she did not ultimately reveal her knowledge of the fraud to new Livent managers until more than a year later.

But before Messina arrived, Malcolm testified he was quite open about the accounting manipulations he had been ordered to engineer. Malcolm produced voluminous reports detailing the type and amount of accounting manipulations he was engaged in and reconciling those manipulations to Livent’s actual financials. The reports helped to avoid “nasty” disagreements between Livent managers about the company’s financials. Malcolm often hand-delivered those reports to former Livent chief operating officer Robert Topol and routinely placed the documents in the “In Box” outside Garth Drabinsky’s office. “There was no secret to what I was doing,” he testified. “It was prudent to identify what should have been to what existed.”

When asked why he agreed to make the manipulations, Malcolm paused and then replied that—at the time— there were a lot of reasons: “It started off as a short-term process. I didn’t know at that time it was going to continue quarter after quarter, year after year. It was part of my job. I did what was expected of me.”

The alleged manipulations even produced gallows humour among the accounting staff, Malcolm said. “In the later years, Mr. Eckstein used to refer to us all being fitted out with pinstripes, referring to the fact we’d all be likely spending some time behind bars,” Mr. Malcolm said.

In the end, Malcolm did not spend any time behind bars. He entered into a plea agreement with authorities in both Canada and the U.S. in which they agreed not to charge him with any offence in exchange for his testimony.

Malcolm is expected to wrap up his testimony tomorrow. He will likely face a long and gruelling cross examination by defence lawyers.

The most interesting question on that final day on the stand came not from defence lawyers Edward or Brian Greenspan, but from the judge herself. At the end of Messina’s testimony, Madam Justice Mary Lou Benotto asked the witness a number of questions. Most were innocuous, such as how long Messina had worked at Deloitte & Touche (11 years); whether when she joined Livent in 1996 as its vice-president of finance, it was anticipated that she would eventually become the company’s CFO (yes, it was in her contract) and why she joined the theatre company in the first place (the chance to work with Gottlieb, expand her business horizons and join what she thought would be an exciting, entrepreneurial and growing company).

But then Benotto asked Messina to examine notes she had taken of a meeting she had with Gottlieb on April 25, 1998 – a day after former Livent controller Chris Craib had told her of a meeting where Drabinsky, Craib and Eckstein had allegedly openly talked about improperly slashing about $20 million in expenses from the first quarter financial results. In the notes, Messina recalled telling Gottlieb to reconsider those alleged manipulations especially since the independent accounting firm of KPMG was poised start a due diligence investigation of Livent’s financials as part of an investment deal with former Hollywood super-agent Micheal Ovitz. In the notes, Messina says she told Gottlieb: “I don’t care if I’m let go if they want somebody else as CFO or because they are moving the head office to New York but I will not be let go for fraudulent misrepresentations.”

“Fraudulent misrepresentations…. Is that the first time you used that phrase with Myron Gottlieb,” the judge asked.

“Yes, I think it was,” replied Messina.

“Did you ever use that word with Garth Drabinsky?” the judge asked.

“No, I don’t think I did.”

The exchange could be important since prosecutors need to prove not only that a fraud occurred at Livent, but that Drabinsky and Gottlieb knew about the fraud and were active participants in it. Is it conceivable that the defence could convince the judge that Drabinsky and Gottlieb knew about the financial “manipulations,” yet did not honestly believe they were fraudulent?

Greenspan seemed to be trying to make that point when he grilled Messina about notes she made about the phone call the CFO received from Chris Craib the day before that meeting with Gottlieb.

The notes include several examples of alleged manipulations that were discussed by Drabinsky, Gottlieb and Gordon Eckstein. Those included improperly increasing sponsorship revenue by $750,000; eliminating $1 million from the profit and loss statement and capitalizing $5.7 million to fixed assets.

In Messina’s notes regarding that $5.7 million alleged manipulation, she started to write the words “very aggressive” before crossing them out. “I suggest to you those adjustments were aggressive, not fraudulent,” Greenspan said.

“Absolutely not,” Messina replied. “I can assure you… it was fraudulent.

But the defence was soon back to alleging that Messina had simply made up key points about her testimony. After all, defence lawyers have suggested to both Messina and Eckstein they are lying about that meeting to allegedly manipulate Livent’s first quarter financials and no such meeting ever took place. Inconsistencies in Messina’s story show that her testimony is made up, Greenspan suggested.

In Messina’s notes of that Sat. April 25 meeting, Messina described how Gottlieb called her at home and asked her to come into the office to give him an accounting schedule. Messina, who was preparing her taxes at the time, came into the office and went to Gottlieb’s office. “I was nervous because I wanted to speak to him about the Q1 results and the due diligence of KPMG [related to the pending investment by former Hollywood mogul Michael Ovitz],” Messina recalls in the notes.

However in her testimony Messina said she never spoke to Gottlieb about the due diligence. “You didn’t say a word about the due diligence, you only spoke about this supposed meeting the previous day,” said Greenspan.

“Sir, they were related. There was a fraud and the results were being manipulated and now KPMG was coming in,” Messina replied. “My whole concern was the ongoing perpetration of a massive fraud.

Her notes go on: “I took a deep breath and said: ‘Myron, have you and Garth really thought about what’s being contemplated and the ultimate impact…what’s going to happen at the end of Q2 when they find out what the results are really like.’”

Gottlieb was not responsive, which indicated he didn’t know what Messina was talking about, Greenspan suggested.

“He never said, Maria what are you talking about because he had already talked to Garth,” to which Greenspan suggested that was pure speculation.

At that meeting, Gottlieb gave Messina a list of financial data KPMG required as part of their due diligence investigation for Ovitz. Most of the responsibility for gathering that data fell to Messina, but Gottlieb did not instruct Messina to obstruct or hinder KPMG in their investigation of the company, Greenspan said – not exactly the behavior of somebody engaged in a high-level fraud.

“It was just like the audits every year,” Messina replied before being cut off.

“He did not say anything to you about keeping information away from KPMG!” said Greenspan. “You were free to do what you wanted to as CFO. He does not give you any instructions to suppress a single word, not a single document.”

“Yes sir,” Messina replied.

Messina continued to insist Gottlieb and Drabinsky reconsider their plan to allegedly manipulate the company financials, according to the notes. It’s at this point Messina made the comment about “fraudulent misrepresentations” that so interested the judge. The notes continued. “Myron said I will not be let go. He and Garth have never lied to me and they would protect me.”

However, in her testimony at the trial and at the preliminary hearing, Messina also said Gottlieb assured her the alleged manipulations were just “income smoothing” and that everyone does it. However, those words appear nowhere in her notes about the meeting, Greenspan pointed out. “Every time you talk about this discussion you mislead people,” Greenspan charged.

Messina said he may or may not have used the words “income smoothing“ at that meeting, although he did in meetings shortly afterwards. “He said it in the same time period,” Messina said. “He said what he said.”

The lack of a satisfactory response from Gottlieb prompted her to write a memo to Gottlieb, Drabinsky and company lawyer Gerald Banks stating she would not support the allegedly manipulated first quarter financial statements. But Messina has told different stories about meetings she had with Gottlieb after circulating that memo, insisted Greenspan.

In her testimony to prosecutors, Messina said Gottlieb called her about the memo and told her he didn’t know what she was talking about because she had not attached any financial statements to the memo. Messina testified she told Gottlieb “You know what I’m talking about.” When Gottlieb insisted he did not, Messina responded: “Fine, if you want to play that game, I’ll give you the financial statements,” and instructed Chris Craib to give Gottlieb most recent accounting schedules.

However, shortly after disclosing the fraud in Aug. 1998 she told a slightly different story to Livent managers and lawyers from Stikeman Elliot, Greenspan said. The general details are the same, except in that first interview she says Gottlieb phoned her and asked her to come up to his office. In that account, Messina makes the “Fine, if you want to play that game…” comment face-to-face with Gottlieb, rather than over the phone.

“I suggest to you that you never said ‘you know what I’m talking about,’ and you never said ‘fine, you want to play that game,’” Greenspan said.

Messina said she misspoke when describing the meeting to Livent managers. The interview was extremely stressful since occurred less than 24 hours after she first disclosed her knowledge of the alleged fraud. “I’m surprised I remember anything,” she said.

Allegations that Drabinsky and Gottlieb were planning to manipulate the first quarter 1998 financials are “preposterous,” said Greenspan since the Ovitz group was going to be intimately involved in the company and was overseeing those financial statements. “I suggest to you from the moment Ovitz was involved in this deal, Mr. Ovitz not only insisted that [he] had the right to review the financials, they were intimately involved with the first quarter,” Greenspan said.

“No, I only knew what Mr. Gottlieb told me,” Messina replied.

“Did you discuss that with him? Did you say: ‘Myron how can you conceivably allow them to be involved?’?”

“I discussed it with him before,” said Messina. “I had taken the position that it was going to be enough to stop the fraud…obviously it was not.”

Greenspan also pointed out Messina has been changing the words she uses to describe the alleged fraud at Livent. In an interview she gave to the Institute of Chartered Accountants of Ontario in 1999, she said she could not support “the decisions” of management regarding the quarterly financials. At the preliminary hearing, she said she could not support the “adjustments” to the financials and in her testimony at trial she said she could not support the financial “manipulations.”

“I have not changed the word,” Messina replied. “The adjustments were manipulations.”

She reiterated her answer during a brief re-examination from prosecutors. Prosecutors also asked Messina about the numerous outside accounting opinions Livent senior managers sought regarding a dispute with Deloitte & Touche over how to account for income from a naming rights deal. When asked if either Gottlieb or Drabinsky had ever sought an outside opinion regarding the Livent’s alleged practice of pushing expenses into future periods or improperly transferring costs between disparate shows, Messina replied “No sir, they did not.”

The trial continues on Monday with testimony from former Livent controller Grant Malcolm.

Under questioning from Brian Greenspan, the defence lawyer representing Livent co-founder Myron Gottlieb, Messina conceded she did not tell anyone about the suspected bugging. “Did you tell a therapist?” he asked.

“Excuse me?” Messina replied.

“Well, if you thought your office was bugged, isn’t that a little paranoid?”

“No sir. There was a pervasive fraud going on and I was afraid of that,” she replied.

While Messina was urging Deloitte & Touche to be more aggressive with Livent’s senior managers, she did not disclose the fact the company’s books were allegedly filled with bogus and fraudulent entries, she said. “I was trying to do what I could to mitigate the effects of the fraud,” Messina said.

But those efforts were frustrated when Deloitte continued to allow Livent’s aggressive accounting. “I’d say…you know what these guys are like. If you let them get away with something once they will do it every time,” Messina told the RCMP in an interview shortly after she blew the whistle on the alleged fraud. “I have no credibility, because every time I say that the auditors won’t allow it, you allow it. So they don’t listen to me…. They just slough me off as Ms. conservative, or Ms. nuisance.”

In one instance, Messina urged Deloitte auditor Claudio Russo to reject Livent’s aggressive accounting of a sponsorship deal with American Express. Messina expressed frustration when Russo said he would need a rationale to reject Livent’s proposed treatment of the deal. Since the decision was a pure judgment call, no rationale was needed, Messina told Russo. “I’ve already laid down the foundation, so you can say no,” she told the RCMP. “They’re expecting you to say no.”

Messina warned the auditors of another contentious Livent transaction in the fall of 1997. Messina testified that Deloitte auditor Peter Chant was “surprised and shocked” to learn that Livent planned to book revenue from selling the naming rights to the Pantages theatre in the third quarter of the year, even though the deal had not yet been concluded.

Livent and its auditors eventually came to blows over the deal, with both Livent and Deloitte & Touche seeking outside opinions about when the deal should be recognized on the company’s books. Eventually Deloitte relented and agreed to book the revenue in the 1997 third quarter.

Messina had told the RCMP that Drabinsky and Gottlieb “hate professionals” and uses them only when necessary. However, the events surrounding the naming rights issue showed that Drabinsky and Gottlieb had no hesitation about using professionals when it came to the company’s accounting, Greenspan suggested. “Garth Drabinsky and Myron Gottlieb not only used professionals, they relied on them for advice,” he said.

“No sir, it shows that they dominated the process for accounting for transactions,” Messina replied. “They bullied Deloitte & Touche. They were relentless in getting what they wanted.”

”They were ruthless with Deloitte,” Greenspan shot back in a reference to her earlier testimony of Myron Gottlieb as “ruthless.”

Greenspan also accused Messina of changing her testimony when it came to using the word “manipulations.” Messina used the word often in answering questions from prosecutors, but Greenspan suggested that she never used that word when dealing directly with Gottlieb or Drabinsky.

Greenspan read back her testimony regarding her discussions with Gottlieb on April 25, 1998 – a day after she had been told by former Livent controller Chris Craib about a meeting he attended where “manipulations” of the company’s first quarter financial results were openly discussed. However, in her testimony at the preliminary hearing, Messina used the word “adjustments,” Greenspan said.

Messina used the words “manipulations” to describe her meeting with Drabinsky and Gottlieb shortly after writing a memo in which she said she would not support the “manipulated” first quarter financials. In describing the same event at the preliminary hearing, again, Messina used the word “adjustments” instead of “manipulations,” Greenspan pointed out.

Greenspan suggested the change was no innocent slip of the tongue, but that Messina deliberately changed the word. “Isn’t it curious that virtually every time you use the word ‘adjustments’ at the preliminary inquiry, you use the word ‘manipulations’ here at the trial,” Greenspan said.

Messina conceded she may not have used the word manipulations in speaking with Drabinsky or Gottlieb. However: “I was speaking with Mr. Gottlieb specifically about the fraud and whether I used the word adjustment or manipulation, he knew exactly what I was talking about,” Messina replied.

Messina is expected to wrap up her testimony tomorrow.

“It’s just the way it was sir,” Messina said. “It was the threat of lawsuits, writing letters, he was always saying people had to be silenced,” she told the court.

One such critic silenced was Alex Winch, a former hedge fund manager, who criticized Livent’s accounting policies in a letter to Forbes Magazine in 1995. Livent sued Winch for US$10 million, but eventually settled for an apology as well as a gag order forbidding him to comment on Livent for three years. That order expired in 1999 – nearly a year after Livent declared bankruptcy. “All he said was that Livent’s accounting was not conservative and his life was destroyed,” Messina said. “I can only imagine what would have happened to me.”

But far from having his life destroyed, Winch spent only US$13,000 on legal fees and another $42,000 in costs for a total legal bill of $55,000, said Greenspan. At the same time, Winch made US$56,000 short-selling Livent’s stock. “Alex Winch won by $1,000 by selling short and getting sued,” he said.

But Messina’s hands aren’t totally clean when it comes to dealing with Alex Winch, Greenspan charged. In a draft memo discussing Livent’s response to Forbes, Messina actually suggested adding a section that said there may have been “a clear motivation on Mr. Winch’s part to distort facts.”

Greenspan disputed her testimony pointing out that neither Drabinsky nor Gottlieb retaliated against the New York Times for a lengthy Page One story on the theatre company that openly questioned its accounting policies.

Greenspan also confronted Messina with testimony she gave before the Institute of Chartered Accountants of Ontario (ICAO) in which she speculated that Gottlieb and Drabinsky deliberately hired “introverted” accountants that would not challenge their manipulation of the company’s books. “You thought they were a bunch of misfits,” charged Greenspan.

“Introverted,” replied Messina.

Many of the accountants who actually executed the fraud were hard working, but lacking in confidence and introverted, Messina told the ICAO. “The only odd hire was me,” said Greenspan quoting her testimony before the accounting body.

“Yes, but I went on to say that I guess [Drabinsky and Gottlieb] thought about me the same way,” she said. “I was naive…. They knew I had no business experience so that made me the perfect candidate…the perfect frontman.”

Greenspan suggested that did not make any sense. “They hire the former audit partner with the hope that they will be able to either convert that partner into a fellow traveller in the fraud or pull the wool over your eyes forever?”

“Or they felt they wouldn’t have to perpetrate the fraud any more because the company was taking off,” Messina replied.

“I suggest to you [Drabinsky and Gottlieb] never believed they were engaged in a fraud,” Greenspan shot back.

“Facts are the facts, whether they make sense or not,” Messina told the court.

Greenspan suggested Gottlieb and Drabinsky never knew about any fraud because any unusual transactions or accounting red flags were covered up by the accounting staff that provided “reasonable and rational” explanations. “I’m going to suggest to you that’s what happened at Livent, there was always a reasonable explanation being provided for what was happening.”

“No, sir,” replied Messina.

Gottlieb would not be able to spot those red flags since he had only a “macro” understanding of Livent’s financial statements, insisted Greenspan. And despite Messina’s earlier testimony that Gottlieb was “confident and conversant” about accounting, Gottlieb had only a rudimentary understanding of accounting, Greenspan insisted. “You expressed disdain and mocked Mr. Gottlieb for his position on certain accounting issues,” Greenspan charged.

“I disagreed with certain positions, yes.”

Greenspan then presented a fax coversheet of a memo Messina sent to Robert Webster, one of the new managers brought in by former Hollywood mogul Michael Ovitz, after he bought a controlling stake in Livent. On the sheet Messina had written: “Please don’t laugh too hard when you read Myron’s memo on ‘Deloitte and Touche.’”

In the three-page March 1998 memo, Gottlieb outlines to Drabinsky how he has complained to Deloitte & Touche that the auditors “appear to be reviewing the affairs of Livent on a basis that is too rigorous.”

Messina conceded that her message to Webster on the cover sheet was “a stupid thing to say.” However, Deloitte was certainly not treating Livent too rigorously. She said she sent the memo to Webster because she had told him about how Gottlieb and Deloitte had clashed after Gottlieb actively mislead  Deloitte & Touche in their auditing of a number of transactions. “Mr. Gottlieb was misleading Deloitte & Touche,” said Messina. “As we all were misleading Deloitte by not disclosing the truth.”

The trial continues tomorrow.

The testimony in question involves a series of conversations Messina says she had with Drabinsky in June 1998, in which the Livent founder instructed Messina to deliberately manipulate financial projections for the company’s second quarter before handing those figures over to new managers brought in by former Hollywood super-agent Michael Ovitz. When Messina presented Drabinsky with the financials that anticipated a $13 million loss for the period, the theatre impresario exploded and allegedly said: “These numbers are all fucked up. You don’t know what the fuck you are doing,” Messina testified earlier. “You can’t show these to anyone. The new guys don’t understand the business. I have to teach them.”

Shortly after that conversation, Drabinsky allegedly insisted on removing millions of dollars in expenses from the projections and adding millions in additional – and nonexistent – revenue. By the time he was done remaking the document, the loss was magically transformed into a modest profit. Messina made the changes, but told the new Livent managers about the manipulations who then instructed her not to show Drabinsky any more financial documents before they saw them.

Messina’s account of the encounter is almost exactly the same one she produced for Stikeman Elliot as part of her work to prepare for a lawsuit against Drabinsky Livent co-founder Myron Gottlieb, Greenspan pointed out. “Your testimony on this count is scripted, rehearsed and performed,” he said. “[It’s been] idealized and sanitized and you come here and present it like it’s your memory.”

“It is my memory,” Messina shot back. “I created the document. I know what happened.”

Much of the rest of today’s cross examination was spent going over the events in late April and early May of 1998 – the period in which Messina finally stood up to Drabinsky and Gottlieb over the alleged fraudulent manipulations occurring at Livent and wrote the men a memo saying she would not support the accounting irregularities.

That memo was prompted by advice from her lawyer – Les Wittlin – after former Livent accountant Chris Craib told Messina on April 24th that he had attended a meeting with Drabinsky and Gordon Eckstein where financial manipulations were openly discussed. However, Greenspan pointed out that Messina’s first meeting with Wittlin occurred on April 23rd – the day before that alleged meeting – and during Messina’s two-hour meeting with the lawyer, she made no mention of fraud at Livent.

(Here’s another item for the Livent trivia collectors. Messina did not pick Wittlin – a senior corporate lawyer at the Toronto firm of Lang Michner – at random. She met him at a Bar Mitzvah she attended while dating Aaron Glassman, a partner at Messina’s old accounting firm Deloitte and Touche as well as one of the partners overseeing the Livent file.)

Messina says she first met with Wittlin because she suspected Livent managers were planning to continue to cook the books. She contacted the lawyer again after Craib told her about the meeting – and that’s when he told her to write the memo. Messina conceded she did not disclose the alleged fraud during her first meeting with Wittlan but lost her nerve after the lawyer suggested that: “Maria Messina, professional chartered accountant and woman of honesty and integrity would not let that happen.”

“It was like a knife through my heart and that’s when I ended the meeting,” Messina told the court. And while she did not disclose the full extent of the fraud to the lawyer, she did discuss her suspicions that company managers would engage in “accounting entries that were not in accordance with Canadian GAAP [Generally Accepted Accounting Principles].”

Wittlan testified at the preliminary hearing that he got the impression that in their discussions Messina was referring merely to aggressive accounting, not fraud. And anyone who read the memo Messina produced would not think she was accusing Drabinsky and Gottlieb of fraud, Greenspan insisted.

In the memo, Messina complained that she was concerned that Livent’s first quarter financials would not “fairly” represent the company’s true financial results and that she could not “support the judgments made by management in the preparation of the 1998 Q1 financial statements.”

“Why not use the word fraud [in the memo]?” Greenspan asked.

”At the time I was afraid to put those words down on paper,” Messina replied. “I was afraid to use those words.”

“If Mr. Drabinsky and Mr. Gottlieb did not know about the fraud, [this memo] would not alert them to it,” Greenspan said. “I’m going to suggest to you that this memo was circulated so you could do nothing and later claim you were against the fraud.”

“I completely disagree with you because it’s not true,” Messina said.

Whether the memo used the word fraud or not, it stopped the alleged fraud – at least for a little while – Messina told the court. “The [illegal accounting] rolls stopped after the first quarter for the first time,” she said. “The memo accomplished what I wanted.”

All this debate over accounting manipulations in the first quarter may be moot, since – according to Greenspan – the meeting where those manipulations were discussed never happened. Greenspan accused Messina of colluding with Chris Craib to fabricate their evidence regarding the meeting. “I’m going to suggest to you that you know that Chris Craib made up the April 24th Q1 story about these so-called manipulations,” Greenspan said.

”He did not, sir,” replied Messina.

“And the reason you know is because you made it up with him,” Greenspan continued.

”That’s ridiculous,” Messina told the court.

Brian Greenspan, the defence lawyer representing Myron Gottlieb, begins his cross examination of Messina tomorrow.

On his fifth day cross-examining Maria Messina, Edward Greenspan – the defence lawyer representing Drabinsky – accused the former Livent chief financial officer of concocting a story where former Livent accountant Chris Craib told Messina about a meeting held on April 24, 1998 where Drabinsky and Gottlieb allegedly openly discussed manipulations to Livent’s books. Messina testified that Craib called her late that evening and told her about the fraud and she wrote a memo about the call after consulting with a lawyer. “I’m going to suggest to you that Craib banded together with you to create an entire story to put the blame on others,” Greenspan charged. “You and Craib decided to put the blame on what was happening in the accounting department on Mr. Gottlieb and Mr. Drabinsky.”

As for the notes of the conversation she had with Craib. Greenspan alleged that Messina wrote the memo months later as back up for her concocted story.

“That is so nonsensical, sir. It is not correct,” Messina replied.

As evidence to support this theory Greenspan cited a “flip-flop” in Messina’s testimony about when she contacted that lawyer. Messina told several investigators that she contacted her lawyer after Craib’s late night phone call. However, Messina’s calendar shows that the first meeting occurred the day before the Craib call, Greenspan suggested. And at that meeting, Messina made not mention of any ongoing fraud at Livent.

Messina disputed that there was any significant discrepancy in her testimony. She agrees that she did indeed call the lawyer before the Craib call, but that call was over her suspicion that Livent officials were going to continue to allegedly cook the books – fears that were confirmed the day after that first meeting. She did not refer to the first meeting in her statements to investigators because the meeting was pretty much a bust. She had intended to disclose the ongoing alleged fraud, but lost her nerve at the last minute when the lawyer told her: “Maria Messina – a professional chartered accountant and woman of integrity would not let that happen.” At that point, she didn’t have the heart to disclose to the lawyer that she already had let it happen.

“I was humiliated and ashamed and didn’t have the guts to tell him I was already associated with the fraud,” she told the court.

Greenspan has already disputed that the meeting ever took place – and certainly it could not have taken place on April 24th. Former Livent vice president of finance and administration Gordon Eckstein also testified he attended the meeting where alleged accounting manipulations were discussed but could not remember the exact date of the meeting. It couldn’t have been on April 24th, Greenspan maintained, since Drabinsky and his girlfriend at the time (or his “mistress,” as Eckstein testified) were in Washington attending a lunch hosted by then-U.S. President Bill Clinton.

Greenspan has accused Eckstein of being the real mastermind of the fraud and yesterday expanded that to include Messina. After all, Messina did not disclose the fraud to accountants working for KPMG who pored over Livent’s books during a due diligence examination of the company in the spring of 1998 prior to former Hollywood mogul Michael Ovitz investing in the company, Greenspan said.

“You didn’t go to him and say, ‘Are you nuts?’” Greenspan asked.

“No,” replied Messina.

“You don’t go to him and say, ‘Are you out of your mind? Why didn’t you give us a heads up?’” Greenspan said. “I am going to suggest to you that he would say to you, ‘I don’t know what you are talking about,’ because he didn’t know about the fraud.’”

“That’s a complete absurdity,” said Messina.

But how to explain all those documents with Drabinsky and Gottlieb’s handwriting on them showing explicitly the millions of dollars of manipulations to Livent’s financials? Well, Greenspan’s got a theory about that too: the notes aren’t really instructions to manipulate the books at all, Greenspan suggested.

For instance, On a draft financial statement for the year-end of 1997, Drabinsky wrote “roll forward” next to entries for Livent’s office expenses and theatre operating expenses. Those notes, the prosecution alleges, are instructions to manipulate those entries. And indeed in the next draft of the financials, entries for more than $4 million in office expenses are slashed, as are expenses of about $775,000 for the Pantages Theatre in Toronto and $870,000 for the Ford Centre in Vancouver. However, in the final version of the financial statements – the ones actually presented to investors – those numbers are actually higher than in the original draft. “Are you suggesting that Garth Drabinsky giving instructions for those expenses to be manipulated and no one is listening to him?” Greenspan asked.

“Everything changed in the various versions of the financial statements because nothing made sense,” Messina replied. She tried to offer to take Greenspan through the entire document and explain each of the manipulations, but Greenspan cut her off.

The case resumes July 7.

Myron Gottlieb was not the architect of the frauds that ultimately destroyed Livent as prosecutors allege, but rather was instrumental in bringing a fraudulent ticket purchasing scheme to an end, a Toronto court heard today. Gottlieb was upset when Peter Kofman — an engineer who worked on Livent's theatre projects — complained to him that tens of thousands of dollars worth of theatre tickets had been charged to his personal credit card, Kofman testified under cross examination.

Both Drabinsky and Gottlieb have pled not guilty to fraud and forgery charges. Both men have maintained their innocence and have long maintained that any fraud at the theatre company was masterminded by other Livent executives.

Kofman testified earlier that in 1997 and 1998 hundreds of thousands of dollars worth of tickets to Livent's production of Ragtime in Los Angeles were charged to him and his company, Kofman Engineering Services Ltd. He did not approve of the initial purchases, but went along with the scheme because he felt it was the only way he would get paid for his legitimate Livent work, Kofman told the court.

Kofman complained to Gottlieb about the scheme in December 1997 when he learned his personal American Express credit card had been used for some of the purchases — and that the card was now over its limit. "He was not happy that had occurred," Kofman testified.

Gottlieb assured Kofman he would be reimbursed and ordered cheques to be issued. Those cheques showed the payments came from Livent’s Ragtime account and were described in on cheque stubs as "Amex card reimbursement — L.A."

That's different from other reimbursements allegedly arranged by Gordon Eckstein, Livent's former senior vice president of finance. Those repayments were issued through Livent Realty New York or Livent Realty Chicago — special subsidiary companies established to manage Livent's theatre projects in those cities. The invoices for those payments made no mention of ticket purchases, but purported to be payments for Kofman's work on the company's theatres. "I’d suggest that when Mr. Gottlieb orders reimbursement, the cheque and the stub tell the truth," Mr. Greenspan said. "He doesn't say draw up a phony invoice."

Neither Brian nor Eddie Greenspan, who is acting on behalf of Garth Drabinsky, spent much time asking Kofman about the millions of dollars in payments Kofman made to the duo as part of another bogus invoice scheme that occurred before Livent became a public company. In his earlier testimony, Kofman described dozens of fraudulent invoices Drabinsky and Gottlieb submitted to him for "introductions" and other business expenses. None of that work was ever done, but Livent always reimbursed those payments along with Kofman's legitimate engineering expenses.

Eddie Greenspan did needle Kofman about an apparent inconsistency between his testimony yesterday and statements he gave police nearly 10 years ago about the details of a conversation between the two men regarding the phony invoice scheme.

Prosecutors allege the payments were designed to get around bank covenants that limited the amount of the money the pair could take from Livent. Defense lawyers, on the other hand, hinted that the payments were merely a way to reduce the amount of tax the company paid.

However, both lawyers spent considerable amount of time grilling Kofman about his strained relationship with Gordon Eckstein. Eddie Greenspan read out in court Kofman's earlier statements to investigators which described Eckstein as "arrogant" and "dictatorial" who was verbally abusive to Kofman's staff and even used racial slurs.

And while Eckstein was known to be in charge of Livent's accounting, Kofman testified he didn't know whether Eckstein was "pushing his own weight" around or taking direction from others. Prosecutors allege that Eckstein was merely a conduit for the widespread accounting fraud that Drabinsky and Gottlieb oversaw. Defense lawyers are expected to lay the blame on Eckstein and other members of Livent's accounting staff.

Eckstein, who was originally charged alongside Drabinsky and Gottlieb pled guilty to fraud charges last year. He begins his testimony Wednesday.