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.

A defendant talking to a courtroom observer may not seem strange. Drabinsky often chatted with a small group of supporters who attended the trial. But this was no ordinary courtroom spectator: she was the wife of Peter Kofman, the structural engineer who helped Livent build its impressive theatres in Toronto, New York and Chicago. He was also the first prosecution witness. Kofman would soon tell the court about two schemes prosecutors allege Drabinsky and Gottlieb used to manipulate Livent¹s finances and ultimately defraud investors of nearly $500 million.

Kofman testified that Livent executives used his personal credit card without his permission to buy thousands of dollars in theatre tickets that were ultimately improperly recorded on the company’s books. He also testified that—on Gottlieb’s orders—his company paid the accused millions of dollars for business services that were never performed. With Gottlieb’s knowledge and acquiescence, Kofman said he recouped those payments by submitting bogus construction invoices to Livent. Those invoices were also improperly booked on Livent’s books, prosecutors alleged.

It was not the last time that Gottlieb would extend a friendly greeting to former employees and colleagues who were to testify against him. Maria Messina, Livent’s former chief financial officer, and Gordon Eckstein, the company’s senior vice-president of finance and administration, both provided extensive and potentially damning testimony against Gottlieb. Both also ¬received a courteous ”good morning” from Gottlieb when he passed them in the hallway outside the courtroom.

This friendly behavior is very much in character for Gottlieb, says Brian Greenspan, the defence lawyer representing him. “The almost universal description of Myron Gottlieb as a gentleman, who was quiet and reserved, approachable and non-confrontational is both consistent and in harmony with the role he played at Livent,” Greenspan said in his written final argument for the case filed with the court last week.

Gottlieb’s graciousness is not that surprising when you consider how closely he worked with many of the prosecution witnesses over the eight years that Livent grew from a small partnership to Canada’s largest publicly-traded live theatre company. Maria Messina told the court that she considered Gottlieb her mentor, and cited the opportunity to work and learn from him as one of the main reasons she left her job as the company’s auditor at the accounting firm of Deloitte and Touche to join the Livent staff. But friendliness was in short supply in the defence’s final written argument. “The prosecution’s reliance on unsavoury, disreputable, self-interested, discredited witnesses has not established with the requisite certainty Mr. Gottlieb’s awareness and participation in the accounting improprieties,” Greenspan said in his final submission.

By contrast, the Crown argues the evidence presented at the trial is “overwhelming.” In their final summation, filed last month, prosecutors Robert Hubbard, Alex Hyrbinsky and Amanda Rubaszek argue the executives should be convicted of the two counts of fraud and one count of filing false financial documents. Both Drabinsky and Gottlieb had intimate knowledge of just about everything that went on at the company, the prosecutors argue. “Both men attended meetings where the accounting manipulations were discussed and both men received memos and reports that meticulously documented the millions of dollars of manipulations the company employed every quarter.”

Gottlieb personally signed just about every cheque that was issued by the company, prosecutors maintain. “Given their positions at Livent, it is implausible that the accused were unaware of the financial state of the company,” the Crown lawyers argue.

Prosecutors produced dozens of reports, memos and executive summaries that allegedly showed how millions of dollars in expenses were improperly “rolled” to future periods or buried in the company’s balance sheet. These manipulations were clearly summarized and highlighted on reports that often contain handwritten notes from either Gottlieb or Drabinsky. “They are impossible to miss and would be obvious even to the most indolent CEO,” the Crown maintains. “It is inconceivable that these major reallocations could have escaped the attention of the senior executives.”

But that’s just what happened, Brian Greenspan argues in his submission. Gottlieb was “out of the loop” when it came to the day-to-day details of Livent’s accounting, says Greenspan, and had no motive to participate in the accounting shenanigans that ultimately destroyed the company. Gottlieb “acted with exemplary professionalism and transparency,” the defence submission states. “The evidence overwhelmingly supports the conclusion that he confined his activities to his areas of expertise and played to his strengths: corporate finance, revenue transactions, cash management, theatre construction projects.”

From the very beginning, it was Gordon Eckstein who was the true mastermind behind the Livent accounting fraud and was later aided by Maria Messina and the other company accountants who testified at the trial, the defence argues. Eckstein is a “rogue and a liar” and his testimony that Gottlieb was aware of the accounting fraud and attended meetings where the manipulations to company financials were openly discussed is “wholesale perjury,” Greenspan says.

Maria Messina’s testimony backed up many of Eckstein’s allegations. And while she has painted herself as a “whistleblower” that ultimately revealed the fraud to new Livent managers, her testimony amounts to little more than the utterances of “an opportunist” who is a biased and unreliable witness, the defence argues. Over the past decade, Messina has been paid approximately $3 million by Livent and its lawyers for her work advancing the civil and criminal case against Drabinsky and Gottlieb. “Despite Messina¹s spurious declaration that she stood for ‘truth and integrity’, there has seldom been a witness who more clearly qualified for special scrutiny,” Greenspan argues. “It would be difficult to conceive of a witness in the history of the criminal law in Canada, who has been more handsomely rewarded by a party adverse to the interest of an accused.”

Even prosecutors agree that the testimony of Eckstein and Messina should be approached with caution. Both are accomplices to the fraud who have pleaded guilty to criminal and professional charges. Both also pleaded guilty to criminal charges in the United States for which they have yet to be sentenced. Eckstein pleaded guilty to a single charge of fraud in Canada back in 2007 and received a conditional sentence with no jail time. That said, the evidence of both those controversial witnesses has, more often than not, been corroborated by either Livent’s internal documents or the testimony of other witnesses, the prosecutors argue.

COUNT ONE: FRAUD AT LIVENT PRIOR TO THE COMPANY’S IPO

Eckstein made one major charge that could not be backed up by testimony of other witnesses or company documents. Livent’s former chief accountant told the court that Gottlieb gave him explicit instructions on where to hide the inflated false invoices from Peter Kofman and Execway,¬ another construction supplier who entered into a similar “kickback” arrangement with Gottlieb and Drabinsky. Sometime in the spring of 1991, Gottlieb gave Eckstein handwritten instructions telling him how much of the false construction invoices to improperly book to the company’s fixed assets and pre-production costs, Eckstein alleged. He also testified he was overruled by Gottlieb after suggesting Livent write-down the value of the bogus invoices prior to the company’s initial public offering.

Defence lawyers argue that neither Drabinsky nor Gottlieb knew where those bogus invoices were booked and say inconsistencies in Eckstein¹s testimony should lead Justice Mary Lou Benotto—the judge overseeing the non-jury trial–to ignore his evidence entirely. Eckstein could not produce the handwritten instructions and wavered on when Gottlieb gave them to him. He first said he got the notes in 1991, but later changed that to 1992. Eckstein also testified that Kofman’s 1992 invoices were booked to construction projects related to the expansion and rejuvenation of Livent’s theatre in New York. However, that project was not even conceived until 1995, Greenspan points out.

And while Drabinsky and Gottlieb may have participated in some form of kickback scheme with the builders, the defence argues, that is not fraud. Livent was a private company at the time, and the funds funneled through Kofman and Execway did not go to enrich Drabinsky and Gottlieb, but rather went to pay off company-related expenses such as the repayment of loans associated with the takeover of Livent from Cineplex. LIvent’s bankers might not have liked how those transactions were booked and the taxman might have something to say about it, but neither Gottlieb nor Drabinsky are charged with tax fraud.

Once Drabinsky and Gottlieb used that inflated balance sheet to solicit outside investment, the whole thing became fraud, prosecutors say. The Livent founders knew their balance sheet was inflated and they don’t need Eckstein’s testimony to prove it, the prosecution argues. The bogus invoices were for construction-related expenses and – for the most part – were booked as such. Gottlieb and Drabinsky knew those invoices weren’t construction related, the prosecution says, yet did nothing to ensure they were booked properly. “Not only were no steps taken to prevent wrongful allocation, but Gottlieb personally approved cheque requisitions that, on their face, wrongfully allocated these payments,” prosecutors argue in their final summation.

LIVENT INVESTORS DIDN’T CARE ABOUT PROFITS OR BALANCE SHEETS

Livent’s balance sheet was not overvalued, because other assets ¬such as the Pantages Theatre in Toronto and the company’s ownership rights to The Phantom of the Opera ¬ were undervalued on the company’s books, the defence argues. Greenspan has also chided the prosecution for not calling any witnesses to testify that they relied on Livent¹s balance sheet when they made their investment: “The prosecution failed to call a single investor or a single accounting expert to suggest that the balance sheet was a material fact considered in their purchase of [Livent shares] at the time of the IPO.” That may be a bit of a stretch. It’s a bit like saying that because potential homeowners ask more questions about the bathrooms in the house rather than the foundation, that no one cares about whether the house was built on a solid footing.

Prosecutors also did not address the defence contention that Livent investors were more interested in positive theatre reviews than whether the company posted positive profits. “Once again, the prosecution led no expert evidence and the objective facts only support the conclusion that Livent’s share value was ‘show driven’,” says Greenspan.

The defence does have a point. The value of Livent shares did in fact go up in 1996 after Ragtime opened to glowing reviews. A year later, the shares drooped after critics panned Candide. Livent’s shares barely moved after The New York Times ran an article slamming the company’s aggressive accounting in early 1998. Nor did the shares budge after the company announced a $30-million loss in the first quarter of 1998 that followed on the heels of a $40-million year-end loss reported just three months earlier, the defence points out.

What drives investors to buy or sell stock at any given time can often confound even the sharpest analyst. Still, it does seem to defy credibility that investors were focused solely on whether Livent productions earned a thumbs-up or thumbs-down from theatre critics. Didn’t investors think that positive reviews would eventually translate into higher company profits? If not, it may be the first time in investment history that shareholders didn’t care whether the company was profitable or not.

Livent investors weren’t completely oblivious to the company’s accounting or profits. The value of the company’s shares plummeted in August 1998 when alleged accounting irregularities where revealed by new Livent managers brought in after Drabinsky and Gottlieb sold a controlling stake in the company to former Hollywood super-agend Michael Ovitz.

COUNT TWO: GOTTLIEB WAS “OUT OF THE LOOP”

It wasn’t just Livent investors who didn’t seem to be interested in the company’s financials or accounting. Gottlieb had only a “macro” understanding of how Livent operated and was not involved in the day-to-day management of its theatre productions, the defence argues. Gottlieb did not attend important management meetings that dealt with advertising and production and was “out of the loop” when it came to the alleged accounting manipulations that occurred at the company, Greenspan says. “The business and corporate records of Livent provide a clear testament to the contributions which Mr. Gottlieb made to the success and expansion of Livent,” he argues. “At the same time they provide an equally clear insight into Mr. Gottlieb’s lack of knowledge and participation in the operation of Livent’s core business—the production and marketing of live theatrical performances.”

During the trial, the defence even argued that Gottlieb would often literally fall asleep during important meetings. The “asleep at the switch” defence is not repeated in Greenspan’s final written summation.

Prosecutors never alleged that accounting manipulations were discussed openly at the advertising or production meetings. The only meetings where the company’s true financial picture was ever allegedly discussed were at the quarterly and year-end executive meetings. Defence lawyers argue that Gottlieb only attended the meetings on an “as needed basis,” and there were at least two quarterly sessions that he did not attend.

It was at those executive meetings that Eckstein would distribute his now notorious “executive summaries”—the simplified financial statements that clearly laid out the accounting manipulations being considered for the quarter. Those summaries showed the “actual” millions of dollars in losses Livent produced in just about every financial quarter and highlighted the accounting manipulations needed to produce the profits the company reported to shareholders and regulators. More than a dozen of the summaries were introduced as evidence during the trial, and many of the reports contain Drabinsky’s handwritten notes.

Those management summaries don’t jibe with the defence contention that Eckstein was the lone mastermind of the accounting fraud at the company, prosecutors argue. Drabinsky’s handwriting on the documents proves that senior Livent managers saw the reports and were active participants in the alleged fraud. Eckstein would not need those simplified financial statements if he were acting alone, prosecutors contend. “Eckstein knew exactly what was going on. He was a chartered accountant; he did not need summaries that presented the information in a simplified format,” the Crown maintains. “Documents such as the executive/management summaries prepared by Eckstein and later [by former Livent Controller Chris] Craib, were specifically for the senior executives, including Drabinsky [and] Gottlieb so that they could quickly and easily see the extent of the manipulations.”

The executive summaries are at the heart of the prosecution’s case against Gottlieb and Drabinsky, yet there is little discussion of them in the Gottlieb final summation. Rather, defence lawyers argue that the testimony of Eckstein, Messina and Craib, who all told the court that Gottlieb attended senior management meetings where accounting manipulations were openly discussed, cannot be believed and should be rejected outright. “The prosecution must rely upon disreputable witnesses whose testimony is suspect and who must be viewed with extreme caution,” Greenspan argues. “They are the admitted participants in a fraud who had a ‘stake in the prosecution’ and yet whose guilt was virtually excused by civil indemnity and criminal immunity. It is difficult to conceive of a greater incentive to falsely attribute responsibility to Mr. Gottlieb than the motive to shift blame which was shared by all of the prosecution’s principal witnesses.”

MOTIVE, MOTIVE, WHO’S GOT THE MOTIVE?

While Livent’s accountants may have had plenty of motives to lie about who was in actually in charge of the alleged fraud, Gottlieb had no motive to engage in the risky behavior alleged by the prosecutors, the defence says. The prosecutors’ argument that Drabinsky and Gottlieb falsely inflated the value of the company to ensure they continued receiving a high salary, generous bonus, stock options and perks, like use of the private company jet and luxury car, are not supported by the evidence, Greenspan says.

Gottlieb’s did not receive a bonus in either 1993 or 1997, and his total compensation of about $900,000 in 1996, $680,000 in 1997 and just over $700,000 in 1998 was about the same paid to executives of similar companies, the defence argues. As for the company jet, there was no evidence presented at trial that Gottlieb ever used it. “Furthermore, there is no evidence that Mr. Gottlieb had use of an ‘expensive’ automobile either leased or owned by Livent, nor is there a single word describing the model year or the type of vehicle which Mr. Gottlieb operated to justify the prosecution’s characterization,” Greenspan says.

The only time the court heard about Gottlieb’s driving habits was when Roy Waymont, the president of Execway, testified about his participation in the Livent “kickback scheme.” Gottlieb’s chauffer would come to collect the cheques that Waymont wrote for the bogus business services Gottlieb and Drabinsky purportedly provided. Drabinsky also had a chauffeur and logged thousands of miles on the company’s private jet.

In addition to the salary, occasional bonus and flight on the company jet, Drabinsky and Gottlieb were granted shares in the company—lots and lots of shares. At the time he was ousted from the company by new Livent management, Gottlieb and his family held more than $25 million in Livent stock. Prosecutors argue those sizable holdings gave the executives a staggering motive to use accounting manipulations to keep the value of the shares high. But the fact neither Gottlieb nor Drabinsky sold any of their shares proves they could not have been involved with the alleged fraud, the defence argues. “The prosecution’s position that Mr. Drabinsky and Mr. Gottlieb had the most to gain and the most to lose as a motivation for fraud, ignores the fact that at no time did Mr. Drabinsky or Mr. Gottlieb do as fraudsmen do—cash out,” says Greenspan.

That’s true. During their entire tenure at Livent, both Drabinsky and Gottlieb only sold Livent stock once—a private sale to a company controlled by noted U.S. investor Thomas H. Lee, who became a major Livent shareholder and eventually joined the company’s board of directors.
The defence asks another interesting question: With so much of their personal wealth tied up in Livent, why would Drabinsky and Gottlieb sell a controlling stake in the company to former Hollywood mogul Michael Ovitz if they were involved in the alleged fraud? Once Drabinsky and Gottlieb gave up day-to-day management of the company, it would be only a matter of time before new Livent managers uncovered the accounting manipulations riddled through the company’s books. “It is inconceivable that Mr. Gottlieb, an astute, experienced and sophisticated businessman, would have committed himself to this transaction if he had knowledge of the ongoing accounting improprieties,” says Greenspan.

GOTTLIEB AND DRABINSKY: CRAZY, OR CRAZY LIKE A FOX?

But turning the company over to Ovitz may not necessarily have been as crazy as defence lawyers contend. In April 1998, Drabinsky and Gottlieb announced that Ovitz had purchased a 12 percent stake in the company for US$20 million. As a result, the two executives would be turning day-to-day management of the company over to a team of new executives appointed by Ovitz. In conjunction with the investment, Livent agreed to write off more than $27 million in assets that Ovitz and his team felt were overvalued. Gottlieb and Drabinsky continued to negotiate the deal with Ovitz during the first quarter of 1998 when the company reported a staggering $30 million loss. Could Drabinsky and Gottlieb have figured that those two large accounting baths were enough to wash away most of the allegedly fraudulent manipulations?

There is another possible explanation for why the two accused may not have feared detection of the alleged accounting fraud. They could have been relying on the discretion of Michael Ovitz and his partner in the Livent investment: Roy Furman. Ovitz may have been putting up the lion’s share of the money for the Livent investment, but the former Hollywood agent and one-time president of the Walt Disney Co. had no plans to move into the head office and take personal control of the theatre company. Ovitz left that up to Furman, a New York-based investment banker he partnered with in the Livent investment, who would eventually became Livent’s new CEO.

Furman and Drabinsky knew each other well and had a long and collegial relationship. Furman’s company was consulted on just about every major deal Drabinsky worked on during his tumultuous time as CEO of Cineplex-Odeon from 1979 until 1989. “Roy’s an effervescent, enthusiastic character, effusive, but also loyal, supportive and always ready with cogent advice,” Drabinsky says in his 1995 biography, Closer to the Sun. If Drabinsky and Gottlieb had been aware of the alleged fraudulent manipulations on their books, could they have been counting on Furman’s “loyal” and “supportive” nature to discretely handle any potentially embarrassing accounting revelations?

And while Michael Ovitz had a reputation as a brilliant but brutal businessman (he used to hand out copies of Sun Tzu’s The Art of War to employees), Drabinsky had strong and cordial links with him as well. The two men first met in 1987, when Ovitz—who was then the head of Creative Artists Agency (CAA), the most powerful Hollywood talent agency—called on behalf of his client Robert Redford to ask for a meeting. As a result of a meeting held at Redford’s Utah ranch, Drabinsky signed a joint-venture deal with the Oscar-winning actor and founder of the Sundance film festival to co-produce five independent movies. He even bought a chalet from Redford, Drabinsky wrote in his biography.

The Redford film deal died when Drabinsky and Gottlieb were ousted from Cineplex in 1989 after losing the support of one of his largest shareholders: Lew Wasserman, then the head of MCA, a major Hollywood movie studio. There is little doubt that Drabinsky was cheering in 1990 when Wasserman was forced to resign after Ovitz acted as matchmaker for the sale of MCA to a Japanese conglomerate.

Drabinsky and Gottlieb appear to have been counting on the discretion of Furman and Ovitz if any accounting irregularities arose, according to the testimony of Livent junior accountants Grant Malcolm and Diane Winkfein. Shortly after the announcement of the Ovitz transaction, Gottlieb called Malcolm and Winkfein into his office for separate “pep talks,” the accountants said. Winkfein testified that Gottlieb told her she should not be concerned by the pending arrival of new management since Drabinsky, Gottlieb and Eckstein would remain in charge of the company’s financials for the coming second quarter.

Gottlieb went on to tell the accountant that he had served on the board of another company—Corona Corp.—that had experienced some type of accounting “difficulties.” Those problems had been “handled in an orderly fashion, and they had taken care of it [with] no damage to the share price,” Winkfein told the court. Winkfein testified that when she asked Gottlieb if that meant he wanted her to “lie to new management,” she testified that Gottlieb simply smirked and looked away ending the conversation.

Gottlieb did not tell the Corona story to Grant Malcolm. However, he did repeat that he Gottlieb and Drabinsky would remain in charge of the company’s finances and that they were committed to cleaning up the “baggage” that Livent carried. Messina also testified that Gottlieb told her they would remain in charge of the second quarter, but later revised her testimony to say she thought he was referring the company’s first quarter.

The defence did not really address the Corona story, but slammed the testimony of Malcolm, Winkfein and Messina as preposterous and unbelievable. The fact the stories are so similar proves that Messina fed the false story to the junior accountants, Greenspan argues. Gottlieb would never tell the accountants he was going to remain in charge of the company’s finances for the second quarter of 1998 since under the terms of the Ovitz deal the executives could not even conclude the company’s first quarter financials without Ovitz’s approval. “The source of Malcolm and Winkfein’s misconception about future quarters could only have come from Messina,” Greenspan argues in his final submission.

There is further evidence of “cross-contamination” of Malcolm and Winkfein’s evidence, Greenspan argues, since both refer to the meetings with Gottlieb as a “pep talk”—even though there was nothing peppy about either of the conversations.

While Drabinsky, Furman and Ovitz enjoyed a long and cordial relationship, they did hire the accounting firm of KPMG to perform a due diligence on Livent prior to the multi-million dollar investment. Despite the fact that a simple slip of the tongue from any one of the Livent accountants could have blown the lid off the alleged fraud, neither Drabinsky nor Gottlieb ever told Maria Messina or the accountants to keep their mouths shut, the defence points out.

The man in charge of the due diligence was Robert Webster, a KPMG accountant who later became Livent’s executive vice president. It is no coincidence that Webster would head up the internal investigation that found Drabinsky and Gottlieb were aware of and controlled the alleged fraud, the defence argues. Having botched the due diligence investigation, the defence says, Webster was looking to pin the blame on Livent’s most visible executives: Drabinsky and Gottlieb. “From the outset, the (Webster) interviews were contaminated by a lack of objectivity and an almost pathological focus on Mr. Drabinsky and Mr. Gottlieb,” Greenspan says in his submission.

MESSINA’S “MACHIAVELLIAN” MOVES

The fact that neither Drabinsky nor Gottlieb appear to be concerned about the discovery of any fraud by Ovitz proves that the executives were not aware of any financial irregularities at the company, the defence argues. By contrast, just about every accountant who testified at the trial told the court they were very worried that new management would uncover the alleged widespread fraud. In an effort to protect their jobs, Maria Messina conspired with Gordon Eckstein, Chris Craib and the other Livent accountants to hatch an elaborate scheme to “shift the blame” for their own wrongdoing and frame the founders for a crime they did not commit, the defence argues.

The plot—and here’s where things get complicated and more than a little bizarre—appears to have begun as early as April 24 1998, less than two weeks after the announcement of the Ovitz transaction. That’s the date that Chris Craib and Gordon Eckstein say they attended an early afternoon meeting with Garth Drabinsky where he openly discussed plans to manipulate the company’s upcoming financial results. That meeting never took place, the defence contends, and they have the pictures to prove it.

When Craib first told the story about the meeting to investigators, he said it took place around 2 p.m. that afternoon in Livent’s downtown Toronto offices. But it could not have taken place at that time, since Drabinsky was not even in the country. He was in Washington, D.C., attending a Democratic Party gala lunch with then U.S. president Bill Clinton. The defence even introduced a photo with Drabinsky, Clinton and Drabinsky’s girlfriend at the time to prove his attendance.

The defence spent days cross-examining Eckstein, Craib and Messina about the events surrounding the April meeting. Craib insists that he merely got the time of the meeting wrong. And Drabinsky did in fact fly back to Toronto on Livent’s private jet and was back in the office later that same afternoon.

Craib says he told Messina about the meeting and she mades notes of the conversation a short time later. In the notes, Messina incorrectly states that Gottlieb attended the alleged meeting – an error she repeated in early May 1998 when she and Craib wrote a memo urging Drabinsky and Gottlieb to reconsider their plan. While Messina never used the words “fraud,” “accounting irregularities” or anything else that would imply criminal behavior in the memo or in subsequent meetings with the executives, she did threaten not to support the company’s financial statements to either the auditors or board of directors.

The defence has labeled Messina’s notes as well as the memo to Drabinsky and Gottlieb as “pure fiction.” The ambiguous language in the memo as well inconsistencies between Messina and Craib’s stories regarding the alleged April 24th meeting and subsequent events, show the witnesses to be “unreliable” and expose Messina’s “sinister and malicious agenda,” Greenspan says. “It is not an overstatement to describe this memorandum as both self-serving and Machiavellian.”

Prosecutors dismiss any inconsistencies as “insignificant” and note that just because Drabinsky or Gottlieb did not attend one management meeting, does not absolve them of responsibility for alleged fraud discussed at others. Prosecutors also point out that when Messina revealed the fraud to new Livent managers in August 1998, they immediately launched an investigation and attempted to correct the company’s financials. Drabinsky and Gottlieb, by contrast, they say, did nothing—even when confronted by a CFO who threatened not to support the company’s financials.

If Drabinsky and Gottlieb truly had no idea about the alleged accounting fraud, wouldn’t they have been stunned to receive a memo from their CFO referring to a meeting they say never took place where she threatened to not to support the company financials? And what made Messina, Eckstein, Craib and the other Livent accountants believe that new management headed by Roy Furman – a longtime Drabinsky friend and confidant – would take their side over Drabinsky and Gottlieb?

If those questions give rise to doubts about Drabinsky and Gottlieb’s guilt, there are others that seem to support their innocence. For instance, if Drabinsky and Gottlieb knew about the alleged fraud, wasn’t it an act of insanity to hire Maria Messina—their former auditor—as company CFO, defence lawyers ask. Messina had no history of malfeasance and would have been duty-bound to report any accounting irregularities. Or why would the Livent founders fire Robert Topol, the company’s former chief operating officer and a major player in the alleged fraud, after they caught him “appropriating” company assets? Wasn’t there a danger he would rat them out to shareholders, regulators or even the cops?

Prosecutors did not address any of those issues during the trial, or in their final argument. However, there are some simple explanations. The hiring of Messina, for instance, doesn’t make much sense until you look at the accounting debacle at Enron and realize that the energy company whose name is now synonymous with fraud recruited heavily from the ranks of their auditing firm Arthur Anderson. New regulations enacted in Canada and the U.S. in the wake of the Enron scandal now force ban companies from hiring their former auditors for at least a year.

As for Topol, it appears that he was fired because even executives accused of fraud don’t like to be ripped off.  Had Topol blown the whistle he would have almost certainly been on the receiving end of millions of dollars in lawsuits from shareholders, bondholders and even Drabinsky and Gottlieb. And that’s only if he could manage to escape criminal or regulatory charges from cops and securities regulators in either Canada or the U.S.

And one truly baffling question remains. If the defence is right, and just about every witness who took the stand in the trial is part of an elaborate conspiracy to frame Gottlieb and Drabinsky, how could Gottlieb be so polite to them? These are the people whose fraudulent manipulations to Livent’s books not only destroyed Drabinsky and Gottlieb’s company, but also their reputations and their personal wealth. If Gottlieb is innocent, how could he bear to look them in the eye knowing they were willing to get up on the witness stand and perjure themselves in an attempt to send him to jail? Then again, how could Gottlieb look them in the eye if they are telling the truth?

But among the financial statement, corporate memos and other financial documents included in the prosecutor’s final submissions filed with the court earlier this week was one last document that was not dry and didn’t have anything to do with accounting: it was a deeply personal letter from Garth Drabinsky to Karen Poppell – his then girlfriend – detailing problems in their relationship.

In the handwritten and undated 10-page letter, Drabinsky writes about “an impossible level of personal debt” that had “strangled” him for the last five years and goes on to state “how complex it would be to eliminate” that debt. According to prosecutors, that discussion about the level of Drabinsky’s debt provides a motive in the fraud case against the former Livent executive. Drabinsky and Gottlieb had pledged their Livent shares “to cover loans and debt, which translated into a pressing need to keep the stock price up,” prosecutors say.

The letter, which was not discussed during the trial, could very well describe a motive for why the executive would want to boost Livent’s share price. It also provides a unique and unfiltered look into Drabinsky’s personality and his concerns in Drabinsky’s own words prior to the revelations of alleged accounting improprieties at the theatre company. This has been lacking in the trial since neither Drabinsky nor Gottlieb chose to testify on their own behalf or offer any of their own witnesses.

The revelations in the letter could also provide an explanation for why Drabinsky moved to sell a controlling stake in the company to former Hollywood mogul Michael Ovitz in early1998. Was that US$20 million Ovitz transaction what Drabinsky was referring to when he wrote to Poppell: “After a wonderful Christmas we entered the year buoyed up with a new confidence that in February my financing would close, you would move to Toronto…(and) by the end of March I would be out of my marriage.”

During his time with Poppell, Drabinsky writes that he was “involved in a huge personal transformation in my lifestyle” to rid himself of his mounting debt. He adds that he had begun to “investigate every conceivable avenue to liquidate enough of my asset base to free me of this suffering position.”

Drabinsky did not tell Poppell about that debt at the outset of their relationship. He eventually came clean and set timelines for when he would be out from under the debt. Drabinsky thought he would be able to meet those deadlines, but ultimately, he failed. “This was done because of my sense of optimism and confidence; that if I am determined I will not fail… I am not a gay deceiver, but I am too much of an optimist, I over-evaluate. I have learned my limits. The task was simply much larger than I appreciated.”

The crown introduced no evidence of this debt during its case and very little evidence about Drabinsky or Gottlieb’s personal finances in the final year of the company. The court heard brief testimony about the amount of Livent stock that Drabinsky and Gottlieb owned, how many stock options they were granted, the size of their annual compensation and bonuses.

The crown also introduced several statements of net worth that the executives had to provide to financial institutions as part of loans they took out in association with the takeover of Livent. For instance in 1990, Drabinsky reported to the Royal Bank that he had a net worth of $26.1 million. That included a personal art collection valued at $16.275 million; a $4 million home on Strathearn Rd in Toronto, a 50% interest in an ocean-front property in Antigua valued at $315,000; a chalet in Sundance, Utah – the home of the Sundance film festival, as well as $1.6 million in other real estate. Drabinsky valued his stake in Livent at $12.5 million. Those assets were offset by $11.5 million in loans to the Bank of Nova Scotia, Israel Discount Bank and Roy-l Capital, a private firm run by prominent Toronto businessman and philanthropist, Joseph Rotman.

By 1998, Drabinsky’s net worth had increased, but not without liquidating assets. According to documents Drabinsky provided to Brascan in association with another loan, his net worth had grown to $39 million. However, Drabinsky’s personal art collection was now worth about $7.9 million, the Utah chalet has been sold and the value of the house on Strathearn Rd was now listed at $3.25 million. The bulk of Drabinsky’s net worth — $30.8 million — was tied up in 2.1 million Livent shares that were trading at about $14.25 each. The value of Drabinsky’s outstanding loans has also dropped by that time, with the executive owing about $4.5 million to The Royal Bank, CIBC and Waterloo Capital Corp.

According to his net worth statement presented in court, Gottlieb had assets of about $33 million in 1991, offset by about $7 million in loans and other liabilities giving the Livent founder a net worth of about $26 million. As part of a lawsuit filed against the law firm of Stikeman and Elliot last year, Gottlieb says he has been all but wiped out financially.

While there has been little testimony during the trial about the personal financial situation of Drabinsky and Gottlieb, this is not the first time Drabinsky’s girlfriend has made an appearance in court testimony. Gordon Eckstein, Livent’s former senior vice president of finance and administration, testified that Poppell was Drabinsky’s “mistress” during a dramatic testimony early in the trial.

The testy exchange came after Edward Greenspan, the lawyer representing Drabinsky, confronted Eckstein with a photograph of Drabinsky, Poppell and then-president Bill Clinton taken during a “Ragtime” themed lunch in Washington D.C. organized by the U.S. Democratic Party in April 1998. The photo was taken on the same day Eckstein and Chris Craib, a Livent controller, testified Drabinsky was in Toronto attending a management meeting where accounting manipulations were allegedly discussed. The defence insists that the meeting never took place and – while Drabinsky did in fact return to the office later that day – the photo proves Drabinsky could not have attended the meeting when the witnesses say it occurred.

Greenspan disagreed with Eckstein’s characterization of Poppell as Drabinsky’s mistress, insisting that Drabinsky was separated from his wife, Pearl, at the time the photograph was taken. That may be the case, Eckstein replied, but Drabinsky was still married when he began seeing the woman. Poppell had been the subject of much talk in the office since Drabinsky had allowed the woman to live in one of Livent’s company apartments and had the company pay to redecorate the apartment to suit her tastes, Eckstein continued.

Drabinsky’s letter shows confirms that he had in fact been seeing Poppell while still married. The fact that Drabinsky seemed reluctant to leave his wife appeared to have been a sore spot in their relationship, according to the letter. Another source of disagreement was Drabinsky’s refusal to introduce Poppell to his dying mother as well as Poppell’s refusal to read Drabinsky’s autobiography. “My book, over which I labored for four years before I met you, became a major source of acrimony. You refused to read my life story. No matter what excuse you gave me, they were all feeble. There can be no excuse for not reading the story of the one you profess love for. This book meant too much to me. You shunned it and you shunned me.”

Drabinsky eventually did leave his his wife of 27-years, but problems persisted in the relationship. “Who is this Karen Poppell?” Drabinsky writes. Poppell appears to also have been upset that Drabinsky did not make their relationship public during the televised broadcast of the Tony Awards in New York. At one point Poppell fled Drabinsky’s car in the middle of traffic during an argument. Drabinsky complains that she grew upset over “improper place cards at the table,” and “improper forms (were) completed by my pilots” on the corporate jet Livent purchased in April 1998.

The couple’s relationship was not always so tense. Drabinsky describes in heartfelt detail the joy he felt in the early part of their relationship when they travelled to the United States, the Caribbean and Israel where “maybe we reached the essence of a true spiritual and emotional union,” Drabinsky wrote.

Despite all the acrimony, Drabinsky still professed his love for Poppell and ends the letter with hope the couple can still experience a full and wonderful life together. However, the two didn’t make it and eventually split. In 2005, Drabinsky married Elizabeth Winford, a former paralegal with Tremayne-Lloyd Partners who has attended much of the trial. The couple married in a private ceremony held at the Four Season hotel attended by celebrities such as Christopher Plummer, acclaimed Broadway director Hal Prince, Chita Rivera and former CTV broadcaster and Canada’s consel general to New York City, Pamela Wallin. Edward Greenspan and his brother Brian – who is representing Gottlieb, also attended the ceremony.

Drabinsky’s relationship with Poppell is history. Today, there is another woman the theatre impresario is trying to woo – Justice Mary Lou Benotto, the judge overseeing the case. Benotto is expected to deliver her decision on Drabinsky’s fate sometime in the new year.

Next week defence lawyers file their own final summation in the case. In the coming days, I will post a more extensive examination of the prosecution’s summation of the case.

In an abbreviated court session, lawyers told Madam Justice Mary Lou Benotto they wanted the trial to resume on Thursday when prosecutors will introduce the last of the documents they want entered as part of their case. On Thursday, we may (emphasis on may) finally learn if the defence intends to call any of their own evidence.

As always, the trial continues.

The accusations of lying started early Friday as Edward Greenspan, the defence lawyer representing Drabinsky, wrapped up his cross-examination of Gary Gill, a KPMG forensic investigator who was hired by former Livent managers to investigate the original allegations of financial irregularities. The accusation is a bit complicated so bear with me.

Gill and his fellow investigator John Beer previously testified that they searched Drabinsky and Gottlieb’s offices shortly after the Livent founders were suspended by Livent management and barred from the building. The offices were searched on August 11 and 12^th and documents seized during the search were moved to a locked boardroom on the building’s second floor on August 13 just prior to Drabinsky and Gottlieb’s return to the office to collect their personal belongings.

However, in an affidavit filed in the Livent civil suit in 2000 as well as in an interview with the RCMP in 2006, Gill incorrectly stated that the boardroom where the documents were stored was on the fifth, not the second, floor. Gill told the court that he noticed the error and corrected it in April this year after reviewing his affidavit, John Beer’s notes and the sign-in log for that second floor room.

While some might view that error as a minor discrepancy, the defence saw it as an illustration of how the witness was lying. “What you told us, I suggest to you, was not the truth,” Greenspan said.

There are other minor inconsistencies between Gill’s 2000 affidavit and RCMP statement made six years later that indicate the documents collected from Drabinsky and Gottlieb’s office could have been catalogued later than Gill originally suggested, Greenspan said. “The longer the boxes remain in that office the longer the opportunity for boxes to be interfered with.”

Greenspan went on to suggest that the KPMG investigation – and the efforts to maintain the integrity of documents seized from Drabinsky and Gottlieb’s offices were flawed. After all, there was no security guarding the second floor storage room ensuring that everyone that entered the room signed the log or did not remove or plant documents in the boxes. “When someone is kicked out of their offices, it is important to maintain the integrity of those offices,” Greenspan said. “It’s a priority, right?”

“It is important, that’s correct,” Gill replied.

“If that’s the case, how could you do such a sloppy job? How could you do such a porous job? We have no idea who is coming or going?” Greenspan said.

“This was a long time ago and I’ve tried to recall the facts as best as I could,” Gill replied.

“Unless some document had Beer’s signature on the back of it indicating it had been found in Drabinsky’s office, there is no way to determine if some document found in the boxes has been added to those boxes sometime between August 13 and August 28,” Greenspan suggested.

“No, I could not determine that,” Gill replied.

Gill acknowledged that he could not determine if anyone had added documents to Drabinsky or Gottlieb’s office between the evening of August 7 when Livent’s accounting staff disclosed the alleged accounting fraud that was occurring at the company and the afternoon of August 11^th when KPMG searched Drabinsky’s office.

Some of those documents could have even been planted during that search, Greenspan seemed to imply as he questioned Gill about who discovered one specific document during the search. Gill and Beer both gave testimony about the single page summary of $21.22 million in 1997 accounting “problems” that had been moved to 1998. In earlier testimony, Craib testified that the document had been produced by Gordon Eckstein – Livent’s former vice president of finance and administration – and he had seen Drabinsky pull the document from his briefcase and wave it in Eckstein’s face during an argument.

Gill testified that he specifically remembered finding the document in one of two brown leather briefcases located behind Drabinsky’s desk. When Greenspan suggested that it must have been Stikeman Elliott LLP lawyer Patrick O’Kelly who in fact found the document since the lawyer had been sitting at the desk right next to the briefcases – a notion that Beer dismissed during his testimony – even without being asked, Greenspan pointed out.

“I’m going to suggest to you that it’s more than a coincidence that [Beer] offered up that O’Kelly had nothing to do with that document. That’s too cute by half,” Greenspan said. “You and Beer must have talked before coming to this courtroom.”

“No,” Gill replied. “That’s not correct.”

Defence lawyers have suggested that Stikeman Elliot are part of an elaborate conspiracy to frame Drabinsky and Gottlieb for the alleged accounting fraud that eventually forced the company into bankruptcy.

And some documents seized during the KPMG investigation into those allegations of accounting irregularities have gone missing. Greenspan pointed out notations on several boxes indicating that several files or binders that had been catalogued after the seizure of documents from the executive offices have been lost.

“You can’t say whether these folders contained exculpatory evidence that may have been favourable to my client,” Greenspan suggested.

“No I can’t,” Gill replied.

Once the KPMG investigators completed their investigation, they left the seized documents locked in Gottlieb’s office, Gill testified. Several weeks later when the RCMP finally filed for a search warrant to seize those documents, some of the boxes had been moved to Drabinsky’s office or even the offices of Stikeman Elliot, further increasing the chances that their contents could have been tampered with, Greenspan suggested.

“All sorts of people had access to these documents,” Greenspan said. “I’m going to suggest to you that this is not what KPMG would call maintaining the continuity and integrity of documents.”

“We did the best we could under very trying circumstances,” Gill replied.

Brian Greenspan, the lawyer representing Myron Gottlieb, suggested that KPMG’s seizure of Livent documents was far from complete. The accountants, for instance, failed to seize Gottlieb’s Day-timers. “I’m going to suggest to you that these Day-timers were filled with exculpatory evidence and that’s why you didn’t take them.

“This is the first time I have seen them,” Gill replied.

Evidence of a potential conspiracy to frame Gottlieb can be found in the notes Gill and Jim Hunter, another KPMG investigator, made of an interview with former Livent manager Robert Webster. In the typed transcript of the interview Webster is quoted as saying that Garth Drabinsky and Myron Gottlieb were the “drivers” of Livent’s accounting policies. However, in Gill’s handwritten notes of the interview, Webster names Garth Drabinsky and Gordon Eckstein as the drivers of Livent’s accounting.

“There is nothing [in the notes] to suggest there should be a change from Garth Drabinsky and Gordon Eckstein to Garth Drabinsky and Myron Gottlieb,” Greenspan said. “Who suggested that we better implicate Myron Gottlieb in this thing for the report?”

“I don’t know. I submitted my typed notes to Mr. Hunter, he may have made changes,” Gill replied.

During a brief re-examination, lead crown prosecutor Robert Hubbard pointed to questions on the same page of that interview. When asked who was “calling the shots” with regards to Livent’s accounting policies, Webster replied Drabinsky and Gottlieb. When asked about the accounting knowledge of the two men Webster replied that Drabinsky had a high degree of accounting knowledge and Gottlieb less so.

Defence lawyers are expected to wrap up their cross-examination of John Beer on Monday. It is still unclear whether the defence will call any of their own witnesses or merely hope that they have undermined enough of the prosecution’s case.

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.

But stripped of all that drama, the prosecution’s case is relatively simple: When Livent was still a private company, Drabinsky and Gottlieb funneled millions of dollars out of the company using a fake invoice scheme with two of the company’s suppliers.

Those bogus invoices, where improperly booked onto the company’s balance sheet, made the company seem more valuable. As a public company, Livent continued to improperly book expenses onto its balance sheet as part of a larger scheme that involved shifting or outright eliminating expenses from its books to make the company appear more profitable.

Each of those alleged schemes were laid out yesterday by Paul Coort, the forensic accountant hired by the RCMP to help them understand Livent’s tangled books. Today the defence got its chance to answer those charges.

Let’s take those bogus invoices first. In his earlier testimony, Coort detailed how Drabinsky and Gottlieb collected $8.1 million in payments from Kofman Engineering and Execway Construction as part of the fake invoicing scheme. About $6.8 million of that was improperly booked to the company’s fixed assets, Coort said.

But during the same period between 1990 and 1993, Drabinsky and Gottlieb spent about $9.8 million of their own money to repay loans and cover other expenses related to the acquisition of the company from Cineplex Odeon, said Brian Greenspan, the lawyer representing Myron Gottlieb.

“You’ve got $8.1-million going one way, but you know and I know that during the same period, $9.8-million went from Mr. Drabinsky and Mr. Gottlieb back into company-related expenses,” Mr. Greenspan said.

Coort replied that the much of the money was not company-related but rather were personal loans to the executives.

But those loans were related to the start-up of the company, insisted Greenspan. The loans were associated with efforts by Drabinsky and Gottlieb to acquire the live theatre division that would eventually become Livent from Cineplex Odeon – Drabinsky and Gottlieb’s former employer.

As part of their deal to buy the theatre division, Drabinsky and Gottlieb borrowed $60 million from the Royal Bank, but as part of the deal MyGar, the private company owned by the two executives, was required to come up with $5 million of their own funds to complete the sale. But they were $2.5 million short.

The pair turned to Roy-L, a private company run by Joseph Rotman, the prominent Toronto businessman and philanthropist, who eventually became a member of Livent’s board of directors. Roy-L loaned the pair $2.5 million to help them start the company but the loan climbed to $4.1 million once interest and penalties associated with a default of the loan were included, the court heard.

Drabinsky and Gottlieb also took out another loan for $250,000 from the Canadian Imperial Bank of Commerce to cover expenses associated with the transaction, as well as $100,000 in professional fees paid to noted architect Moishe Safdi for work on the Pantages Theatre, Greenspan said. That loan climbed to $300,000 once interest payments were included.

Another $2.9 million was paid to Pen West Development Corp. as part of a deal to acquire a parking lot at Dundas and Bond Street. The land was included in a land swap deal with the City of Toronto as part of the expansion of the Pantages Theatre, Greenspan said.

Another $2.3 million was spent on fees to lawyers, bankers, accountants and other professionals involved in the failed attempt by Drabinsky and Gottlieb to completely take over control of Cineplex Odeon in the late 1980s, Greenspan said.

“So between this timeframe of January 1990, and May 1993, what we have in total is about $9.8-million of money going from Drabinsky and Gottlieb with respect to these expenses that I’ve outlined,” Mr. Greenspan concluded.

In his earlier testimony, Coort had suggested that the bogus invoicing scheme may have been an attempt by Drabinsky and Gottlieb to circumvent restrictions in the company’s loan agreement with the Royal Bank that limited the amount of money the pair could take out of the company.

In 1990 and 1991 those bank covenants restricted the executives to an annual draw of $400,000 plus expenses. But Greenspan disputed that theory, pointing out that MyGar’s financial statements for those years report that Drabinsky and Gottlieb took a total of $1.042 million out of the company in 1990 and $1.8 million in 1992.

Greenspan did not ask Coort any questions that suggest the defence disputes that the bogus Kofman and Execway invoices were improperly booked to the company’s balance sheet. Instead, he suggested that neither Drabinsky nor Gottlieb could have known where the transactions were booked without the assistance of their accountants. A notion that seemed to puzzle Coort.

“Are you telling me they didn’t know how to read their own general ledger?” Coort asked.

“Yes,” Greenspan replied. In fact, former Livent controller Tony Fiorino told investigators that Drabinsky and Gottlieb could not book a transaction on the general ledger “if their lives depended on it.”

“I guess you didn’t ask Mr. Fiorino about that did you?” Greenspan said.

“No,” Coort replied.

And while those Kofman and Execway invoices may have been improperly booked, the conservative accounting treatment Livent used for other assets resulted in Livent’s balance sheet actually being undervalued, Greenspan suggested.

For instance, Livent had already written off all of its pre-production costs associated with Phantom of the Opera and thus was not carrying any asset value for the show on its balance sheet, Greenspan said. Phantom would become Livent’s most successful show, running for more than nine years and grossing more than $420 million.

“At the time of the initial public offering, the best thing Livent had going for it was Phantom and its value appears on the books as zero,” Greenspan said.

Coort pointed out that the company had recouped its costs for that show and all subsequent profits would appear on the company’s income statement.

Livent’s other successful musical, Joseph and the Amazing Technicolor Dreamcoat only had an asset value of $2.4 million on Livent’s balance sheet, noted Greenspan. That show would go on to gross more than $225 million at the box office.

Coort said that he was not hired to do a comprehensive analysis of the value of Livent’s IPO, but only whether the Kofman and Execway and invoices were properly recorded – which they were not.

At the time of the IPO, Livent’s one fixed asset – the Pantages Theatre – was also undervalued, Greenspan insisted. The theatre was listed as valued at $56 million on MyGar’s 1992 financial statements, Greenspan said. However, a market valuation done three years earlier valued the theatre at between $70-$75 million, Greenspan pointed out.

The defence didn’t spend all its time talking about the pre-IPO period. David Roebuck, one of the defence lawyers representing Drabinsky, questioned Coort about the probity of Livent moving advertising expenses to future periods – something Livent did at the end of every year.

Roebuck suggested that this is allowed under “matching principles” laid out in the Canadian Institute of Chartered Accountants handbook – the bible of Canadian accounting. The handbook even lists direct response advertising – like that employed by Livent – as an example, he said.  “This is allowed under GAAP [generally accepted accounting principles],” Roebuck said. “Advertising can be treated like an asset and booked in future periods.”

“In theory, yes,” Coort replied. “But that was inconsistent with Livent’s accounting policies.”

But Roebuck pointed to a section of the due diligence report prepared by KPMG for Michael Ovitz prior to his investment in the company that quoted former Livent chief financial officer Maria Messina saying that the company was capitalizing advertising for Ragtime, New York, and Phantom of the Opera, Toronto.

Prosecutors followed up on that question during a brief re-examination of Coort. Crown lawyer Alex Hrybinsky asked if there was anything in Livent’s general ledger that indicated that the company had set up its advertising costs as a pre-paid expense as required if it were to book those costs to a future period.

“No,” replied Coort.

As for the suggestion that MyGar’s assets were really undervalued at the time of the IPO, Hrybinsky asked if that would provide any sort of accounting justification for improperly booking the Kofman and Execway invoices.

“No,” Coort replied once more.

The defence is arguing that their clients were improperly taking money out of the company, only to put it back in. It’s hard to tell how much traction that argument will have with Madam Justice Mary Lou Benotto, who is overseeing the case.

And the suggestion that Drabinsky and Gottlieb did not know where those Kofman and Execway invoices were being booked is a familiar refrain. Defence lawyers have suggested over-and-over that Gordon Eckstein, Livent’s former senior vice president of finance and administration, did all the accounting manipulations without their knowledge. Eckstein, Maria Messina and Chris Craib all testified that Drabinsky and Gottlieb not only knew what was going on, they were the ones directing the alleged fraud.

Does this mean that Drabinsky and Gottlieb will testify to try to convince the judge that Eckstein was doing the manipulations on his own, while providing them with bogus justifications?

The trial continues tomorrow.

Lawyers speculated that Craib could have been caught in transit delays that snared subway passengers in Toronto earlier this morning. But when he didn’t show up by 11:30, there was talk about dispatching a police cruiser to his home to see if he was all right.

An apologetic Craib finally arrived after lunch. He explained that yesterday, he had been confused about the start time for court today after lawyers had suggested moving times to accommodate a medical appointment for one of the prosecutors. That idea was quickly shelved and the judge clearly explained to Craib that the trial would start on time before court disbanded. But it was a direction apparently lost on Craib.

The judge was not pleased and scolded Craib: “Leaving aside the issue as to whether there was scope for misunderstanding, the financial, emotional and other costs of the trial are enormous,”said Madam Justice Mary Lou Benotto. “The size of this courtroom is enormous and we are not able to do anything without your attendance.”

Ironically, Craib’s confusion over start times has been a major focus for defence lawyers. A good part of their cross-examination has been spent grilling Craib about the exact start time of the now infamous April 24, 1998 executive meeting where Craib says he say Drabinsky and Gordon Eckstein, Livent’s former vice-president of finance and administration, openly discussed plans to manipulate the company’s first quarter financial statements.

Craib says the meeting started at 2 p.m. But that’s impossible since, at the time, Drabinsky was flying back from Washington and did not get back into Livent’s office until much later in the afternoon. Craib says he was merely confused about the time, but defence lawyers insist that Craib concocted the meeting as part of a plan he cooked up with his Maria Messina, Livent’s former chief financial officer, to frame Drabinsky and Gottlieb.

As a result of Craib’s tardiness, there was very little time to actually question Craib today. But Brian Greenspan, the defence lawyer representing Gottlieb, still found time to grill Craib about those discrepancies between the audiotape of his interview with Stikeman Elliot lawyers and a transcript of that interview that Greenspan highlighted yesterday; the indemnity agreement he signed with Livent in which he agreed to cooperate with their investigation in return for immunity from prosecution or civil action and an incident where he consulted a lawyer in an attempt to stop Eckstein from harassing him at work.

Before going to the lawyer, Craib and Messina met with Gottlieb to see if he could intercede on his behalf. Greenspan asked Craib why he would turn to the man he believes was responsible for accounting fraud at Livent for help in dealing with Eckstein.

“Let me get this straight,” Greenspan said. “You are cowering in a corner, fearful of all the terrible things that are going to befall you and you go to one of the evil-doers for wise counsel and you go to a lawyer for advice on Gordon Eckstein.”

“Yes,” replied Craib.

Prosecutor Alex Hrybinsky returned to that quote later during his brief re-examination of the witness and asked him if “cowering in the corner” was an accurate depiction of his time at Livent. Craib said it was not. And then, after six days on the witness stand and five days under intense cross-examination, he began to break down.

“There was always this undertow in your life and you just….” Craib’s voice trailed off and he began to choke back tears. “At various stages you have some fortitude and you tried to do something to address it. But ultimately you failed.”

But Craib’s time on the witness stand is still not over. A problem arose last week when prosecutors could not locate the original version of notes Craib says he took during that April 24 meeting. Searches by Stikeman and Craib’s lawyers were unsuccessful. However, the document was finally found in the files of the U.S. Justice Department. The document was actually delivered to the courtroom by Federal Express yesterday and opened in the presence of both prosecutors and defence lawyers.

But with the original document now in evidence, Eddie Greenspan has asked for the chance to ask Craib questions about that document. As a result, Craib will return to the witness box tomorrow morning.

That conspiracy theory took a not entirely unexpected twist earlier today as Brian Greenspan, the defence lawyer representing Gottlieb, accused Livent’s lawyers at Toronto-based law firm Stikeman Elliot LLP of altering evidence to prop up its claims against the Livent founders. And Greenspan has the tapes to prove it.

Transcripts of an extensive interview with Chris Craib about that now-infamous April meeting have been altered to eliminate Craib’s assertion that Gottlieb was not at the meeting, Greenspan told the court. Greenspan played audiotape excerpts of Craib’s interview with Robert Webster, Livent’s executive vice-president, and Stikeman lawyers Patrick O’Kelly and Peter Howard. In the tape, Craib is asked if Gottlieb attended the meeting and he clearly replies: “Myron was not at the meeting.”

But that is not in the interview transcript, Greenspan pointed out. “There are 2,000 questions asked to you and the other members of the finance department but that is the only Q&A not transcribed,” Greenspan said.

Greenspan played another taped excerpt from the interview where Craib is asked about the “Friday-night meeting.” Craib corrects the interviewers and says he believes they are referring to the Friday afternoon meeting with “Garth and Gord.” But in the transcript, “Gord” has not been included, leaving the impression that it was not a meeting limited to two participants, and opening the door to the idea that Gotlieb could have also been in attendance, Greenspan suggested.

“Two times they are trying to put Myron at a meeting that he was not at,” Greenspan said.

“I have no knowledge of this,” Craib replied.

“No knowledge of this? You are part of it. Part of the effort to frame Mr. Gottlieb,” Greenspan shot back.

Greenspan cited a third – and more troubling – example when comparing Craib’s transcript of his interview with Stikeman Elliot with an affidavit filed by Webster in Livent’s lawsuit against Drabinsky and Gottlieb. In the transcript, Craib says that when Drabinsky and Gottlieb began discussing plans to manipulate the company’s first quarter financial statements: “I wasn’t taking notes, I wasn’t doing anything.” However in Webster’s affidavit that phrase is transformed into “I was taking notes.”

“The Webster affidavit is a lie,” Greenspan said.

“I can’t speak to that,” said Craib.

“Stikeman Elliot has changed your evidence. Did they have your permission to change your evidence?” Greenspan asked.

“No. I don’t have any part of this,” Craib replied.

As I said earlier, the allegations are not altogether surprising. Gottlieb originally made them in a $50-million civil suit that named a group of prominent Stikeman lawyers, Michael Ovitz, the accounting firms of Deloitte & Touche and KPMG as well as Craib and Maria Messina, Livent’s former chief financial officer as defendants. In the 2006 lawsuit, Gottlieb accused Stikeman and others of carrying out “a concerted and planned scheme to manipulate documents and information” in an attempt to show that he attended that April 1998 meeting.

In their statement of defence, Stikeman called Gottlieb’s assertions “highly implausible.” They did not address how the errors appeared in either the transcript or the affidavit but argued that the suit should be dismissed since it is impossible to argue that you are the innocent victim of a conspiracy that led to criminal charges until a court finds you not guilty of those charges. A judge agreed and dismissed the suit late last year.

That’s not the only discrepancy between the transcript of Craib’s interview with Webster and the Stikeman lawyers and other evidence regarding that April 24 meeting, Greenspan said. In handwritten notes Messina made about her phone conversation with Craib following the meeting she notes a number of alleged accounting manipulations that were discussed.

One of the manipulations allegedly involved adding $1 million to Livent’s foreign exchange accounts. However, Craib said in his interview that April 24 was too early to be discussing foreign exchange accounts, Greenspan pointed out.

“What you say is a total contradiction with the telephone conversation you had with Maria Messina on April 24,” Greenspan said.

“It’s very complicated, but I did say this in my transcript,” Craib replied.

“It’s very complicated because the notes of April 24 are a complete fiction,” Greenspan fired back. “There were no notes. She was taking notes of a meeting you did not attend.”

Greenspan continued to insist that Craib fabricated his testimony about attending the April 24, 1998 financial manipulation meeting with Drabinsky and Eckstein. After all, why would Craib not correct Messina’s mistaken impression that Gottlieb attended the meeting? Craib previously testified that on May 4, 1998, Messina came into his office, trembling and in obvious physical distress and asked him to type a memo from her handwritten notes where she pleaded with Drabinsky and Gottlieb to “reconsider” their plan to manipulate the company’s financial results.

“First I’m with a woman who is trembling and crying,” Craib replied. ”I’m confused as well and I assumed she talked with Myron because in the first sentence there is a reference to that.”

“So you let her send something that was wrong,” Greenspan replied.

“Mr. Gottlieb was not at the meeting, correct,” Craib said.

The irony is that the first quarter of 1998 was the last quarter that prosecutors allege there was even an attempt to manipulate Livent’s financial statements. And ultimately, Drabinsky never went through with most of the alleged manipulations that were discussed at the meeting. Instead, Ovitz insisted the Livent managers take a $27.5 million write down as part of his deal to buy a controlling stake in the company. The deal was announced shortly after that April 24 meeting.

Afterwards, Gottlieb tried to reassure Messina about new management learning about the alleged manipulations and told her that Drabinsky and Gottlieb would be in charge of the company’s financials for some time after the takeover. Gottlieb allegedly told her that the “second quarter will still be ours,” Messina said. However, in her testimony at the trial, Messina said that she misspoke and said Gottlieb was referring the first quarter.

Messina corrected her story because it was a ridiculous assertion that had been concocted by Craib and Messina to implicate Gottlieb, Greenspan said. “I suggest to you that it was a story that you and Maria Messina were cooking up to cover the wrongdoing you were involved in,” Greenspan said.

“No sir,” Craib said.

Fiorino testified he got all of his instructions from Gordon Eckstein, Livent’s former senior vice-president of finance and administration, and the man defence lawyers have characterized as an omnipotent, irrational, volatile, abusive bully who pulled the wool over Drabinsky and Gottlieb’s eyes and was the real mastermind of the alleged Livent fraud. Fiorino’s one direct encounter with Gottlieb involved a scheme in which Livent used the accounts of Kofman Engineering and Execway – two of its construction suppliers – to purchase more than $1 million in theatre tickets to its production of Ragtime in Los Angeles. The tickets, some bought with the personal credit card of Kofman president Peter Kofman, were purchased to boost the sagging box office receipts of the L.A. production.

Eventually, the tickets were charged to the Ragtime box office and accounted for properly on the company’s books. But initially the ticket sales were improperly booked to the company’s fixed assets and Kofman and Execway were compensated by submitting bogus invoices that purported to be for construction work – not ticket sales. Fiorino testified that he personally hand delivered the invoices and cheques to Gottlieb for his signature – informing him that they were for “Kofman’s L.A .ticket purchases,” he told the court.

However, under questioning from Brian Greenspan, the lawyer representing Myron Gottlieb, Fiorino admitted he did not know if the cheques he delivered to Gottlieb were associated with the bogus invoices or with the legitimate payments. “If you said to Mr. Gottlieb that this cheque was for Ragtime L.A., it actually was for Ragtime L.A., isn’t it,” Greenspan said referring to one of the legitimate cheque payments. “There is nothing wrong with this cheque.”

“No, this one is offsetting the box office,” Fiorino replied.

That effectively takes away the sting of Fiorino’s earlier testimony against Gottlieb. If he can’t be sure if he was delivering cheques associated with legitimate or bogus invoices in regards to the ticket scheme, then the judge will have little choice but to disregard the only direct evidence the controller has to offer against the Livent executive.

Fiorino also testified that Gottlieb liked to send out memos giving his opinions on accounting issues the company was facing, but the memos were usually ill-informed and often, just plain wrong. However, in none of the memos did Gottlieb suggest the company’s accountants do anything illegal, Greenspan suggested. “At no time did he ever suggest something that was improper,” said Greenspan.

“Not in the memos that I myself had seen,” replied Fiorino.

Greenspan also scored a less direct hit when he questioned Fiorino about US$10 million in pre-production expenses that he helped transfer into the company’s construction accounts in the fourth quarter of 1997. Fiorino testified that he was concerned about the transfer because the amount was so large and would be difficult to hide and that many of the expenses related to advertising – an expense that had absolutely nothing to do with the “bricks and mortar” of construction.

However, in referring to Livent’s 1997 year-end audit conducted by Deloitte & Touche, Greenspan pointed out several promotional and advertising costs that were identified and approved as legitimate expenses relating to the construction of the Ford theatre in New York after auditors discussed the accounting the Eckstein.

The advertising expenses identified by the auditors, Fiorino pointed out, related to promotional ads for the grand opening of the theatre itself and not for radio ads promoting individual productions. “The invoices we looked at earlier were Echo advertising invoices that had nothing to do with the theatre,” Fiorino said.

“I didn’t suggest that the Echo invoices were proper,” Greenspan replied. “What I suggest to you is it’s clear that if someone [presumably the “omnipotent” Mr. Eckstein] told Mr. Drabinsky and Mr. Gottlieb that advertising numbers were going into fixed assets, he could have justified it to them just as easily as he justified them to Deloitte.”

“It’s possible,” Fiorino replied.

And while Greenspan may have effectively blunted Fiorino’s testimony against Gottlieb he did add to the general understanding of the alleged fraud that occurred at Livent as well as the complicated conditions under which the accountants were working. Maybe an attempt to understand those conditions is what prompted Madam Justice Mary Lou Benotto to ask a question of Fiorino at the end of his testimony.

Actually, it wasn’t even her question; it was a question from defence lawyer David Roebuck that Fiorino didn’t quite answer yesterday. The question related to two instances where Eckstein ordered Fiorino to delete information from reports circulated to Livent senior managers that indicated that expenses were being improperly booked to the company’s fixed assets. “The question was whether or not you were suspicious that people at the top were being kept out of the loop, but you didn’t answer.” Benotto asked.

“My impression was that the people at the top knew what was going on and deleting the information was not keeping them out of the loop,” Fiorino said.

“But you didn’t have any direct contact with them,” Benotto asked.

“No, I did not have any discussion with them,” Fiorino replied.

Prosecutors could take comfort from the fact the judge seemed to be interested in Fiorino’s impression about whether Drabinksy and Gottlieb knew about the fraud. On the other hand, the defence may be happy that she heard once again that Fiorino had no direct conversations with them about the fraud.

The trial resumes on Monday with the testimony of Chris Craib, a former Livent controller and a key prosecution witness. Craib produced numerous reports for senior managers that the prosecutors allege show that Drabinsky and Gottlieb were aware of the financial manipulations that allegedly occurred at the company. Other witnesses have also testified that Craib attended meetings in which Drabinsky allegedly ordered Eckstein to manipulate the company’s financial statements. If past witnesses are any indication, Craib will be on the witness stand for quite some time.

One of the motivations for keeping such detailed records was to ensure that — if the alleged fraud was ever exposed — Garth Drabinsky and Myron Gottlieb would not be able to claim they had no knowledge of it, testified Gordon Eckstein, Livent's former senior vice president of finance. "If anything went on, I knew Drabinsky and Gottlieb would say they had nothing to do with it," Eckstein told the court.

Eckstein ordered his staff to keep records of the allegedly-improper adjustments as back-up for meetings with senior Livent officials who constantly questioned why the company was not more profitable, Eckstein testified. In those executive meetings Garth Drabinsky would often challenge Eckstein as to the accuracy of the company's books and claim that they had not spent so much on advertising and other costs. "In those meetings, he would always state the numbers were double-accounted, it was incorrect," he told the court. "(There was always) a myriad of excuses as to why he had overspent."

Eckstein took chief Livent prosecutor Robert Hubbard through numerous internal company documents that clearly laid out how much the company had forecast for a given financial period, how much the company actually made — or lost — and what adjustments needed to be made to bring the company's reported financial picture more in line with those forecasts. Advertising expenses were often moved to future dates; costs that should have been expensed were moved onto the balance sheet or buried in other parts of Livent’s financials to help boost profitability.

Neither Gottlieb nor Drabinsky are trained accountants, but both men had a sophisticated understanding of accounting, Eckstein told the court. Gottlieb was on Livent's audit committee and was the chairman of the audit committee of Dundee Bancorp. "On many occasions (Drabinsky) told me he is smarter than any accountant in the world," Eckstein told the court.

Prosecutors allege that two common schemes used to cook Livent's books were dubbed the "expense roll," and the "amortization roll," Both techniques were similar and involved Livent moving (or rolling) expenses from the time period in which they should have been booked to future periods. The "amortization roll" involved rolling assets into different areas of the company's balance sheet to stretch out the period that those assets had to be expensed or depreciated. It was Garth Drabinsky who came up with the name "expense roll," Eckstein testified. "When I asked (Drabinsky) `why would we do that? It will just make the next period that much harder?` (Drabinsky) said `We'll just keep rolling it forward,`" he told the court.

Those techniques were effective in helping to boost Livent's profitability. In the first nine months of 1995, for instance, the company's actual net income was about $5 million — much lower than the company had forecast for the period. In a series of documents circulated among top Livent managers, more than a dozen adjustments were made to the company's financials to boost net income to more than $11.3 million.

No amount of money was too small to be considered for "adjustment," Eckstein testified. "We were on the take all the time."

As the day wore on, most of the crown's time was spent introducing a plethora of documents presented that were allegedly circulated among senior Livent officials tracking the accounting adjustments. The documents are piled high in the courtroom, packed away in binders with tabs separating the individual memos, financial statements and other material. So many documents were introduced that defence lawyers had a hard time keeping up. And even the prosecution misspoke a few times when switching back and forth between the different binders. "It's hard to keep tabs," Hubbard remarked.

Those internal documents — and just how closely the prosecution can link them to the defendants — promise to be a subject of much contention later in the trial. However, in the meantime, Hubbard got some help in trying to show that Drabinsky saw many of the memos laying out how expenses were shuffled among different Livent shows or pushed into different time periods. Many of the documents contain handwritten notes and other material scrawled into the margins. And that handwriting belongs to Garth Drabinsky, Eckstein told the court.

Many of the documents that didn't have identifiable handwriting were written in "the same blue pen," Hubbard remarked as he was submitting the exhibits to the court. Defence lawyers couldn't let that stand and were quick to object. "My friend is in the habit of editorializing," Brian Greenspan told the court. "It is not necessarily the same blue pen. It is just a blue pen."

When it came to where those documents came from and whether or not his client, Garth Drabinsky, had anything to do with them, Eddie Greenspan's objection summed it up: "I don't admit anything in this regard."

But Kofman wasn't biting. He looked perplexed when Gottlieb's lawyer Brian Greenspan asked him if he was familiar with the phrase and was equally adamant when Drabinsky's lawyer Eddie Greenspan quizzed him on the same term. Eddie Greenspan seemed incredulous and pressed him on it since — after all — he had been intimately involved with Livent for years. But Kofman wouldn't budge. "It was not an expression I would have used or heard," he told the court. "I was not in the theatre business. I was in the construction business."

But Eddie Greenspan pressed on. Standing at the podium in the centre of the courtroom and clutching a copy of a book entitled "Creative Arts Marketing," he asked whether Kofman knew how to use a computer? If so, why hadn't he spent some time on the Internet looking up the term? Had he done so, within "two minutes" he would have found well-respected sources like Harvard University discussing how common and important the practice of giving away free tickets can be in the theatre business, Greenspan told the court.

The implication, of course, is that prosecutors got it all wrong when they allege that the free tickets given away to its Los Angeles production of Ragtime was a fraudulent means to prop up the profitability of the show. Had the crown spent some time on "the Google" they would have found that Livent was merely engaging in a time-honored tradition of giving away comp tickets to generate good word-of-mouth for the show. And he's got a point. After all, just about every company gives away some of its product for free or at a sizable discount in an effort to generate enough buzz to ultimately boost sales.

The problem comes with how the company accounts for that discounted and free product on its books and to its shareholders. I'm not sure Harvard University would approve of forcing suppliers to unwittingly buy thousands of theatre tickets and then demand they submit bogus invoices purporting to work on the company's capital projects in order to get paid.

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.

Kofman eventually agreed to buy the tickets and even make numerous other purchases when Livent tangled "the little carrot" of reimbursement in front of him, he said. Kofman didn't pay much attention to the ticket purchases since he was working full time in New York and was under incredible pressure to ensure that the rehabilitation of Livent's theatres in that city remained on schedule.

He soon came to regret the decision when Livent refused to reimburse him for thousands of dollars resulting from the exchange difference between the Canadian and American currency. That refusal led to a heated exchange with Livent's former senior vice-president of finance, Gordon Eckstein, Kofman testified. "That was the straw that broke the camel's back. I exploded," he told the court. "Gordon [Eckstein] refused to reimburse me. He said my accountant was an idiot and actually accused me of trying to do something untoward!"

Within a year of the last ticket purchase, Drabinsky and Gottlieb sold a controlling stake in the company to Hollywood powerbroker Michael Ovitz who pushed the men out after uncovering the alleged fraud. Soon thereafter Kofman attended a meeting with the duo at Gottlieb's house where the pair tried to assure him he had done nothing wrong and that all the money that had been funneled through Kofman’s company had ultimately gone into Livent’s theatre projects.

But those so-called phony invoices did come back to haunt Kofman. Once Drabinsky and Gottlieb left the company Kofman was frozen out of any additional work on Livent's theatres. Soon after the company collapsed into bankruptcy and Kofman became just another one of the company’s unsecured creditors. And it would only get worse. As details of the alleged accounting fraud emerged, Kofman found himself being named as a participant in the alleged elaborate plot to defraud shareholders. Those allegations made it impossible for him and many of his senior staff to find work. It would take another three years for Kofman to extricate himself from the Livent quagmire, he testified. "I can't bear to think about how much all of this cost me."

Kofman will face cross examination from Drabinsky and Gottlieb's lawyers: Eddie Greenspan and his brother Brian on Tuesday.