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

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

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

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

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

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

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

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

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

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

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

Peter Kofman, the president of Kofman Engineering, testified way back in May about a bogus invoicing scheme that saw the Livent founders charge Kofman and Execway Group Inc. – another Livent supplier – millions of dollars for work that was never performed. Kofman and Execway then billed Livent for the exact same amounts to recoup the payments. The scheme, prosecutors allege, was a means to circumvent restrictions imposed by their bankers on the amount of money the partners could take out of the start-up business. Today, Roy Wayment, the retired founder of Execway described his participation in the scheme, adding some more interesting details.

Wayment described a phone call he received in 1992 from Gottlieb in which he told him that he felt Drabinsky and Gottlieb deserved a “finders fee” as payment for the volume of work he was assigning to Execway. Wayment, who had built theatres for Cineplex Odeon when the pair were at the movie theatre company, told the court that Livent’s predecessor company – Live Entertainment of Canada Corp. (LECC) – accounted for about 40 per cent of his company’s work at the time.

“Myron felt that because of the amount of work that he and Garth had endorsed for Execway, to do that they were entitled to a finder’s fee,” Wayment said. “That’s basically how the conversation started.”

Wayment said he was surprised by the conversation and told Gottlieb that he felt that he was entitled to his own cash bonus based on the amount of work Execway was doing above and beyond construction.

In the end, Wayment and Gottlieb agreed to pay each other bonuses for the exact same amount, Wayment said. Over a three-month period Wayment said he wrote three cheques to King Commodities – a private company controlled by Gottlieb and Drabinsky. The first two cheques amounted to $53,500 and the third was for $74,900, totalling $181,900—$170,000 plus GST. Wayment then received matching cheques from LECC, he told the court.

“The procedure for the payments was Myron’s chauffeur would take a cheque to my office and my office would give the chauffeur a cheque of equal amount made out to King Commodities,” Wayment told the court.

Prior to the arrangement with King Commodities, Execway also paid Drabinsky and Gottlieb $147,125 in 1991, prosecutors alleged. However, Wayment could not remember the details of that alleged transaction, he told the court. Wayment’s memory of the nearly 20-year-old transaction was not refreshed when crown prosecutor Alex Hrybinsky presented Wayment with cheques and invoices from the Livent founders demanding payment for solicitations that have “assisted you with business development,” and a corresponding invoice from Execway for the exact same amount. The Execway invoice purported to be for work on the Pantages Theatre and North York Centre for the Performing Arts.

Kofman described similar payments during the same period and testified that Drabinsky and Gottlieb never solicited any business on his behalf. Earlier witnesses have testified that Drabinsky and Gottlieb collected $8.1 million through the bogus invoice scheme. At least $6.8 million in LECC payments to Kofman and Execway were then booked to the company’s balance sheet, making the company appear more valuable than it actually was when the company went public in 1993, prosecutors allege.

Wayment also testified about his participation in a ticket-purchasing scheme in 1997 to boost the sagging box office of Livent’s performance of Ragtime in Los Angeles. After visiting another Livent Executive, Wayment said Gordon Eckstein, Livent’s former senior vice president of finance and administration, called him into his office and asked him to buy tickets to the L.A. show.

“It was an accommodation,” Wayment said. “I didn’t think there was anything wrong with what he was asking for.”

There was nothing unusual about the request, Wayment told the court. During his time doing work at Cineplex, he noted that many free tickets were given away – even when the theatres were full. Hrybinsky asked Wayment if he had ever been asked to purchase Livent tickets before.

“No, I had been given lots of comp tickets before, but I hadn’t purchased tickets on behalf of Livent before,” Wayment replied.

Kofman also testified to participating in the ticketing scheme where prosecutors allege the suppliers eventually bought US$1.2 million in tickets to Ragtime, Los Angeles. Just as in the earlier transactions with King Commodities, many of the purchases by Kofman were reimbursed using false invoices that purported to be for work on the company’s theatre projects in New York and Los Angeles. Prosecutors allege that as much as $432,000 in those false invoices were buried in Livent’s fixed assets, once again inflating the value of the company.

Defence lawyers had very few questions for Wayment. Brian Greenspan, the lawyer representing Gottlieb, did not ask any questions about either the King Commodity or the ticket purchasing scheme. The only questions he asked were about statements he gave to the Ontario Securities Commission and the RCMP in 1998 and 1999. In both interviews, Wayment told regulators and investigators that he had told Gottlieb he was going to be interviewed regarding the alleged schemes. Gottlieb allegedly told Wayment: “Just tell the truth.”

There was bad news for Chris Craib, the former Livent controller who came close to breaking down on the witness stand as a result of nearly two-weeks of gruelling interrogation at the hands of the Eddie and Brian Greenspan. Defence lawyers had requested that Craib remain under subpoena until today pending a possible defence motion. Today, they filed that motion and Craib will be required to remain under subpoena for the next month.

In the motion, defence lawyers requested access to the original copy of notes Craib says he made during the now infamous April 24, 1998 management meeting where Drabinsky allegedly openly discussed manipulating the company’s first quarter financial results. The three-page document will be handed over to noted forensic document examiner Brian Lindblom who has permission to conduct “non-destructive” tests on the notes.

The trial now adjourns until Tuesday Oct. 21 when it will hear from the final prosecution witnesses. Both witnesses are investigators from the accounting firm of KPMG who were involved in the original seizure of documents from Livent’s offices in 1998. Their testimony is expected to take no more than four days in total.

Even before Livent became a publicly traded company, its financial statements were “materially misstated,” as a result of a payment scheme that saw Garth Drabinsky and Myron Gottlieb channel millions of dollars into their own bank accounts, a forensic accountant testified today at the criminal fraud trial of the Livent founders.

Between 1990 and 1993, Drabinsky and Gottlieb funneled $8.1 million from two suppliers of the company as part of a scheme to improperly divert money out of Livent, said Paul Coort, a forensic accountant who has been hired by the RCMP to analyze the complex web of allegedly fraudulent financial transactions that eventually forced the company into bankruptcy in 1998.

According to reports presented in court, the scheme worked this way: Drabinsky and Gottlieb charged Kofman Engineering and Execway Construction – construction companies that helped  Livent build its impressive theatres in New York, Chicago and Toronto – for bogus business services that were never performed. The construction companies would recoup that money by submitting inflated or bogus construction invoices to Live Entertainment Corporation of Canada (LECC) – a predecessor company of Livent that was controlled by MyGar Partnership – a private company controlled equally by Drabinsky and Gottlieb.

The scheme changed in 1992 when Kofman began paying millions to King Commodity Services, a private company controlled by Gottlieb. Drabinsky and Gottlieb would then bill King Commodity Services for the same amount.

Under the scheme, Drabinsky collected $3.98 million under the scheme while Gottlieb received $4.14 million between 1990 and 1993, said Coort.

Peter Kofman, the president of Kofman Engineering, has already testified that Drabinsky, Gottlieb and King Commodity Services never performed any work for him. Kofman testified that he felt pressured to participate in the scheme because Livent was his largest client.

Of the $8.1 million paid to Drabinsky and Gottlieb, about $6.8 million wound up recorded as assets on the balance sheet of LECC, Coort said. “The payments to Kofman [and Execway] that we traced to Mr. Drabinsky and Mr. Gottlieb were being recorded as assets of MyGar,” said Coort.

“If the payments… are unrelated to construction costs and unrelated to preproduction costs, is it proper to book them to the company’s balance sheet?” asked crown prosecutor Alex Hrybinsky.

“No,” Coort replied.

“What do those transactions do to the balance sheet?” Hrybinsky asked.

“Since these items are unrelated to the assets of MyGar, they would have overstated them,” Coort said.

Those improperly recorded assets on MyGar’s books were eventually rolled into the financials of Livent when the company filed its initial public offering in early 1993, Coort said. At the time of the IPO, Livent’s total assets were about $97 million, including about $6.8 million in allegedly bogus Kofman and Execway charges.

That is more than enough to mark the charges as a “material misstatement,” according to guidelines laid out in the Canadian Institute of Chartered Accountants handbook – the Bible of Canadian accounting, Coort said.

Prosecutors have alleged that the payments were a way for Drabinsky and Gottlieb to circumvent covenants in the company’s $60 million loan agreement with the Royal Bank that restricted the amount of money the pair could withdraw for the company.

In 1991, Drabinsky and Gottlieb were limited to a total of $900,000 each plus an additional $100,000 for expenses, Coort pointed out. In 1993 the bank increased that amount to $1.2 million plus the $100,000 in expenses.

Prosecutors also took Coort through several examples of allegedly fraudulent accounting practices such as “expense rolls” and “show-to-show transfers,” and “transfer to fixed assets” utilized by Livent. Other witnesses have descried the practices in detail over the five-month long trial.

An example of a “rolled expense” can be found in 1994 when Livent cancelled more than US$500,000 in invoices from Echo Advertising – Livent’s main advertising agency – that were incurred in 1994 and “rolled” them into 1995, Coort pointed out.

Those Echo invoices have been the subject of a great deal of testimony. Echo executives testified last week that cancelling the invoices and re-issuing them in 1995 was not an unusual practice for advertising clients.

Defence lawyers have grilled other witnesses about the probity of moving the advertising expenses from 1994 to 1995. After all, the defence lawyers have argued, the advertising would likely benefit shows in 1995, and thus make it an appropriate expense for that period.

But so far, no witnesses have agreed to that proposition. Gordon Eckstein, Livent’s former senior vice president of finance and administration, argued that it is impossible to know which ad benefits which future performance and so the expenses must be taken in the period that the ad ran. Maria Messina, Livent’s former chief financial officer testified that a show would have to be completely sold out before you could book advertising expenses into future periods.

Coort had a simpler explanation for why it was wrong. The items were essentially erased from the company’s computerized accounting system. “There is no reason for a company not to record an item,” he said. “These items were removed completely. I can’t see any justification for that.”

The forensic accountant pointed prosecutors to Livent’s 1997 financial statements to illustrate examples of “show-to-show transfers,” and “transfers to fixed assets,” Coort said. In that year, $600,000 in costs associated with Show Boat in Vancouver were transferred to other Show Boat productions in Los Angeles, Cleveland, Detroit, Boston and St. Louis.

Expenses from Show Boat Vancouver were also transferred to fixed assets, Coort explained. In one instance, Coort tracked the movement of an invoice from Echo Advertising for US$31,655 in ads purchased on a Seattle television station to promote Show Boat Vancouver. That expense was removed from the Show Boat account and reclassified as a fixed asset associated with the “signage” at Oriental Theatre in Chicago.

“The question is does it make any sense that this would be transferred to the fixed asset account of a theatre in Chicago?” Coort said. “I would say not.”

The trial resumes Wednesday after defence lawyers requested a day to prepare their cross examinations of Coort. Brian Greenspan assured the court they would wrap up their questioning of the forensic accountant in one day.

Craib, with his oval face, intense eyes and slightly receding hairline, bears a striking resemblance to the Oscar-winning actor. But the question prosecutors and defence lawyers may be asking is: which Spacey character comes to mind for Madam Justice Mary Lou Benotto – the judge overseeing the case – when she listens to the chartered accountant’s testimony.

Prosecutors perhaps hope that Craib reminds Benotto of Detective Jack Vincennes – the Los Angeles detective from L.A. Confidential who finally stands up and fights the corruption he finds all around him (We’ll just forget that Spacey winds up – Spoiler Alert – shot dead at the end of that movie.)

The defence, on the other hand, may be hoping that the judge thinks more along the lines of Verbal Kimt, the talkative criminal from The Usual Suspects who invents a fanciful yarn about Keyser Soze, the vicious – and (Another Spoiler Alert) ultimately imaginary – criminal mastermind, in order to save his own skin from the police.

According to Craib’s testimony the alleged masterminds of the alleged fraud at Livent were not imaginary at all – they were Garth Drabinsky and Myron Gottlieb.

Craib’s official job title at Livent was Senior Controller/Corporate Budgeting. That means he was in charge of overseeing the company’s budgets and financial forecasts. Craib attended dozens of meetings with Livent’s managers regarding forecasts and budgets and testified that Drabinsky, Gottlieb and former Livent Chief Operating Officer Robert Topol, all had intimate knowledge of the inner workings of the company.

“Sometimes it was hard for me to keep up,” he told the court.

However, Craib had another job as well: creating the quarterly and year-end executive summaries of the company’s financial performance. The summaries were distributed to Livent’s senior managers and showed tens of millions of dollars in expenses being kept off the theatre company’s books or being improperly buried in the company’s fixed assets. Prosecutors have already introduced copies of those summaries with what they allege is Drabinsky’s handwriting directing alleged manipulations.

Craib also testified that he once brought those summaries to a meeting and watched as Drabinsky allegedly discussed how to manipulate the company’s financial statements.

It was during preparation of those executive financial summaries that he first learned about the alleged fraud at Livent, he told the court. While preparing the summaries for the second quarter of 1997, Craib noticed that the company’s reported financial performance improved significantly from one version of the report to the next.

“The company’s initial version was reporting a very significant loss – approximately $20-million – and in the later iteration, the expenses had been reduced and the company was showing a profit of between $3-$4 million,” he testified.

When Craib confronted his boss Gordon Eckstein, Livent’s former senior vice-president of finance and administration, and asked him why there was such a huge difference, Eckstein mentioned something about “income smoothing” and replied: ‘Welcome to the real world,’” Craib told the court. “He was just very nonchalant.”

For the next three quarters Craib saw the same pattern with the executive summaries. The financial results would start out with massive losses and improve with each new version until the company finally reported a profit.

The summaries clearly showed the company’s actual and mounting losses and detailed “adjustments” such as the now infamous “expense roll” and “amortization roll” that represented tens of millions of dollars in alleged manipulations to Livent’s financial statements.

The summaries were produced at the end of every quarter as well as at the company’s year-end, and distributed to Drabinsky, Gottlieb and Topol.

When Craib began producing the statements he referred to the alleged manipulations as “carry forward” on the reports. However, Craib changed that term to “roll,” a term Craib said was more reflective of what was really happening at the company. “I was concerned that the wording used in the second quarter wasn’t as exact [so as] to tell exactly what was happening here, so I changed it to be more reflective,” he said.

“How is the term “roll” more reflective?” Crown prosecutor Alex Hrybinsky asked.

“It was the term management used,” Craib replied.

Craib testified that he did not attend any executive meetings where the alleged manipulations were discussed in 1997. However, in late Oct. 1997, he delivered copies of the executive summaries to Drabinsky’s office just as a meeting with Eckstein was about to take place. After placing the summaries on Drabinsky’s desk, Drabinsky told him to leave. Before he left the office he heard Drabinsky ask Eckstein: “What does he know about this?” Craib told the court.

“Mr. Eckstein responded, and I can only paraphrase, ‘Do you think I’m the only person who knows down there?’”

The term “down there” was a reference to the finance department one floor below, Craib said.

Later in Feb. 1998, Craib asked Eckstein straight out: “Is this a fraud?” he said.

“[Eckstein] told me to ‘shut the fuck up, you’re not paid to think,’” Craib told the court today.

But Craib was paid to keep track of Livent’s real financial performance as well as the allegedly fraudulent financial figures the company reported to investors and regulators. As part of that, Craib testified that he helped Eckstein prepare a report that detailed some $22 million in alleged manipulations to the company’s quarterly financials.

Sometime in Feb. 1998, Craib attended a meeting with Drabinsky and Eckstein in which that report was discussed, he told the court. The meeting took place in Drabinsky’s office and – for some reason – a fight broke out between the two men. “They were yelling at each other and Gord said ‘I told you this,’ and referred to the document,” he said referring to the report detailing the $22 million in alleged manipulations. “Mr. Drabinsky pulled the document out of his briefcase.”

But Craib’s most damaging – and what is sure to be his most controversial – testimony regarded a management meeting he attended on Friday April 24, 1998. It’s a meeting defence lawyers contend never took place.

Craib testified that he and Eckstein met with Drabinsky late in the afternoon of April 24 with a copy of the executive summary that Craib had produced the previous day. In the first half of the meeting Drabinsky and Eckstein went through the summary in great detail, occasionally asking Craib questions about the report. “Mr. Drabinsky and Mr. Eckstein went through the executive summary in a detailed basis, page-by-page, looking at the results,” he said.

Then the mood of the meeting turned, and Drabinsky and Eckstein began talking about changes and alterations to the company’s financial results.

“They were making changes that were completely arbitrary,” Craib told the court. “They were just pulling numbers out of a hat. Round numbers.”

After the meeting, Craib said that he was sickened by what he saw. “I was in utter shock. I dry-heaved because I finally understood what was occurring in front of me,” he told the court. “I was terrorized by it. I was almost physically ill.”

Craib made notes of what was discussed at the meeting – notes that were presented in court. According to the three pages of notes, Eckstein and Drabinsky allegedly discussed adjustments such as arbitrarily adding $100,000 to Livent’s merchandising revenue and adding another $50,000 to concession revenue.

The handwritten notes are dated Friday April 23rd – not the 24th when Craib testified the meeting took place. “I simply had the wrong date in my head,” Craib testified. “I wrote the right day but erroneously wrote the wrong date.” It may be a simple error, but defence lawyers will likely question Craib extensively about the error.

Later that night, Craib called Maria Messina, Livent’s former chief financial officer, and said “They are doing it again,” he told the court.

Craib had known Messina before joining Livent. Like Messina, Craib had worked as an auditor on Livent’s books while working for Deloitte & Touche.

Defence lawyers have suggested that Drabinsky could not have attended the meeting. He was in New York and Washington that week and Livent’s corporate jet landed late Friday afternoon – too late for Drabinsky to have attended the meeting.

The meeting is also important not only because it is an instance of Craib allegedly witnessing Drabinsky direct the manipulations to Livent’s financial statements, but also because that specific meeting is the catalyst for a series of other events. Messina testified that Craib’s disclosure of the manipulations discussed at the meeting prompted her to reveal the alleged fraud to her lawyer Les Witlin (although she also testified that she did not tell the lawyer about her participation in the fraud). Witlin, in turn, told her to detail her opposition to the manipulations in a memo.

A week later, on May 3rd, Messina did write the memo, Craib testified. It was a Sunday and Messina came into Craib’s office, trembling and obviously in physical distress. She handed Craib some handwritten notes and asked him to type a memo to Drabinsky and Gottlieb urging them to “reconsider” the manipulations to the company’s financial statements.

“She could not type it herself,” Craib told the court. “Her hands were trembling that much.”

The memo appeared to have the desired effect and a short time after the alleged manipulations appeared to stop, Craib testified, and Messina went about attempting to properly record the company’s expenses.

The fateful April 24th meeting was not the only time Craib kept notes of what managers said during meetings. Just a day after Messina wrote her memo to Drabinsky and Gottlieb, Craib attended a meeting with Eckstein and Livent controllers Grant Malcolm and Diane Winkfein.

At the meeting Eckstein said: “I have to keep all the lies straight. I have to know what lies I’m telling these people, I have told so many lies to these people I have to make sure they all make sense.” Prosecutors did not ask Craib to explain the context of the remark or whom Eckstein was referring to when he said “these people.”

When Hrybinsky asked Craib why he did not blow the whistle on the fraud or merely leave the company, the accountant replied: “I had initially tried to block it out, or tried to view myself as not being a participant in what was occurring, or that I was not responsible for what was occurring – it was far above my head.”

Craib is expected to finish his testimony tomorrow. Then he will face questions from defence lawyers.