The magnifying glass was a replacement for reading glasses that Roebuck had misplaced, but it could have been a signal to courtroom observers about the level of detail he would delve into over the coming hours. That detail was so great, at least one defence lawyer appeared to briefly fall asleep during the lengthy presentation and even the judge appeared restless. At one point, Benotto was shuffling papers on her desk for so long that Roebuck stopped to ask if there was something he could help the judge find.

Unlike the brief and simple oral arguments made by prosecutors yesterday, Roebuck argued that the evidence in this case is far from simple and not as it may appear at first glance. “The documents in this case arise from a very complex factual matrix,” he told the court. “It is our position that these documents do not speak for themselves.”

In trying to prove their case, prosecutors relied on the six members of Livent’s accounting staff to explain what the documents meant. However, those witnesses were little more than biased accomplices in the fraud who engaged in what the defence says is perjury to put forward the most nefarious interpretation of the documents, Roebuck said. “In terms of trustworthiness, this is a very unique group of six,” he said. “The trustworthiness of these witnesses asked to give testimony is seriously under attack.”

Many of the documents contain what those witnesses said were Drabinsky’s own handwriting, but that doesn’t prove anything, argued Roebuck. After all, the crown did not call a handwriting expert to verify that the handwriting was, in fact, Drabinsky’s. Roebuck also reminded the judge that one witness even mistakenly identified Drabinsky’s handwriting on one document when in fact it was the handwriting of an RCMP officer. “In my submission, the evidence of handwriting could not be weaker,” said Roebuck.

And what Drabinsky wrote on those documents—what Drabinsky allegedly wrote on those documents—does not necessarily indicate that the he knew there was fraud at Livent, said Roebuck. “Many notations are very brief and need context,” Roebuck told the court. “Context could be given by individuals who knew the background—not by admitted accomplices.”

Throughout the trial, prosecutors have suggested that phrases in Livent’s internal financial statements suggested massive fraud. But phrases such as “roll forward,” “expense roll,” “show-to-show transfer,” “move to fixed assets” are either legitimate accounting terms or too ambiguous to be indicative of fraud, said Roebuck. “No expert witness was called to suggest some universal meaning, and even among Crown witnesses there was a lack of consistency attributable to the meaning of any terminology,” said Roebuck.

Even the words “reported” and “actual” were apparently too ambiguous to raise any red flags with Drabinsky and Gottlieb. According to the defence, the term “actual” doesn’t actually mean “actual.” As in those now notorious quarterly and year-end management financial summaries that seemed to clearly state that Livent was going to “report” millions in profits when it was “actually” losing tens of millions nearly every quarter. “There are many reasons why there could be discrepancies between actual and reported. In my submission it does not necessarily connote fraud,” said Roebuck.

Even the judge seemed a little stunned by that argument. The only questions Justice Benotto asked during Roebuck’s entire day-long presentation was: “So is it your submission that when the report says ‘net reported income’ and ‘net actual income’ those phrases are ambiguous?”

“Yes,” replied Roebuck.

Besides, Drabinsky did not have enough time to keep close track of his company’s accounting, Roebuck added. He was travelling extensively overseeing the creation of new Broadway shows, as well as tracking the progress of other shows travelling throughout North America, Roebuck argued. “It’s all very well for the Crown to imply that despite all these functions [Drabinsky] could still monitor the accounting affairs but that is simply too much for one individual,” Roebuck said. “He didn’t have the training, he didn’t have the time.”

Many of the documents prosecutors say show Drabinsky and Gottlieb were active participants in the alleged fraud can be ignored, argued Roebuck. Many of the documents related to financial projections or budgets and had nothing to do with the allegedly false financial statements that would eventually be submitted to investors and regulators. The documents that do relate to the company’s financial statements were often created early in the weeks-long and complex process Livent went through to create its final financial numbers and there is no proof that many of those alleged manipulations actually resulted in fraud on the company’s books, he said.

Defence lawyers Edward and Brian Greenspan will continue the defence argument tomorrow.

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

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

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

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

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

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

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

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

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

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

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

Thunder punctuated Messina’s answers as Greenspan — the lawyer representing Drabinsky — grilled her about differences between her testimony and that of Gordon Eckstein, Livent’s former senior vice-president of finance. The biggest clap came as Greenspan quizzed Messina about the differences between Eckstein and Drabinsky’s penchant for verbally abusing Livent employees.

“You hated (Eckstein),” Greenspan said. “No, I wouldn’t use that word. He was pretty nasty. They don’t come much worse in a professional environment,” Messina said as thunder rolled through the courtroom.

Greenspan went on to quote Messina’s earlier testimony to the RCMP where she called Drabinsky a “creative genius,” and therefore cut him more slack when it came to his abusive behavior. “You respected him for what he was,” Greenspan suggested. “Initially, I did, yes,” Messina replied. Thunder rocked the room again.

But through his questions, Greenspan is trying to convince Justice Mary Lou Benotto that Messina’s previous testimony that Garth Drabinsky and Myron Gottlieb are the real architects of the fraud that ultimately destroyed Livent is the real fallacy. Drabinsky and Gottlieb have both pleaded not guilty and maintain the fraud — if there even was one — was committed by Eckstein without their knowledge or approval. Whether Benotto is buying Greenspan’s contention that Messina’ss testimony is a fallacy, or whether she thinks the lawyer’s acussations are merely pathetic is anyone’s guess.

In an effort to discredit both Messina and Eckstein, Greenspan highlighted differences between the testimonies of the two former Livent accountants. Eckstein has been described as an arrogant and tyrannical bully whose wild mood swings led many in the office to describe him as “Sybil,” after the character in the film of the same name who suffered from multiple personalities disorder. In his earlier testimony, Eckstein was accused of attempting to woo Messina by sending her flowers, switching her tickets to Livent shows so that she sat next to him and in contrast, throwing a clock at Messina in one violent outburst. Eckstein denied all the allegations, while Messina maintains they occured. “Mr. Eckstein swore to tell the truth and he said the clock incident never happened. You swore to tell the truth and you said it did,” Greenspan said. “Between the two of you someone is making it up.”

“I know it happened sir,” Messina replied.

Greenspan went further, calling Eckstein a “nut bar” and portrayed Messina as a liar when she testified that she hoped Eckstein would help to stop the alleged fraud. “I’m going to suggest to you that you are an outright liar,” Greenspan said. “It doesn’t make sense you placed all your hope on Mr. Eckstein, a man you couldn’t trust at all.”

Messina also changed her story when speaking to different bodies investigating the collapse of the theatre company, in an effort to downplay her own guilt and play up the guilt of Drabinsky and Gottlieb, Greenspan suggested. “You managed to spin a story so you had officials of a public company keeping you on as CFO where no responsible public company would keep you on.”

“They knew what I did,” Messina replied.

Messina ultimately blew the whistle on the accounting fraud at Livent in August, 1998, when she told new management at the company about millions of dollars in improperly recorded expenses and liabilities buried on the company’s balance sheet. The disclosure led to the firing of Drabinsky and Gottlieb, while Messina was kept on by new management until the U.S. SEC demanded she be fired as part of settlement with the regulator. Since then, Messina has earned about $s325,000 per year working Ernst and Young, the receiver handling the Livent bankruptcy, and Stikeman Elliot, the Toronto law firm currently suing Drabinsky, Gottlieb and former Livent auditors Deloitte and Touche.

Greenspan suggested that Livent managers continued to support her since she was going to be their main witness in the lawsuits. Greenspan referred to letters of support written by Livent managers Robert Webster, Roy Furman, and Stikeman Elliot lawyers that were filed in 2000 with the Institute of Chartered Accountants of Ontario as part of the disciplinary hearings against Messina. “It’s quite remarkable how many friends you have in high places,” Mr. Greenspan noted after reading from the letter. “You weaved a story to the company who knew you were going to be its star witness.”

Greenspan spent a considerable amount of time quizzing Messina, who worked as Livent’s auditor at Deloitte and Touche before joining the company in 1996, about why she did not tell her former accounting firm colleagues about the alleged fraud at Livent. It would have been easy to do since Messina was friends with — and had even dated — Aaron Glassman, a Deloitte accountant and former lead client services partner on the Livent account while she worked at Livent. “You could have told him during pillow talk,” Greenspan said.

Glassman testified at the Livent preliminary hearing that he dated Messina until November 1997 — a period when she was fully aware of the alleged Livent fraud. However, Messina maintained that Glassman misspoke and that their romantic relationship ended in September 1996, long before she knew about the fraud. “It is so obvious that I was dating Mr. Glassman in 1996, it was not possible that I was dating him in 1997,” Messina shot back. “I could have told him (about the fraud) but I didn’t. I wish I had.”

We could have used some thunder after that answer.

Messina may seem like a victim of the alleged Livent fraud who lost her job, was convicted of a felony in the U.S., disciplined by the Ontario accountants institute and has had to spend the last 10 years testifying in various Livent actions. But according to Greenspan, Messina is actually a lying, manipulative opportunist who has made a career out of legal persecution of Drabinsky and Gottlieb — and gotten rich doing it.

At least one part of that accusation is not in dispute. Since the collapse of Livent, Messina has earned about $325,000 a year as a consultant on the Livent case for Ernst & Young, the accounting firm overseeing the bankruptcy liquidation of Livent's assets, and the Toronto law firm of Stikeman Elliot. Stikeman is currently representing Livent in a $100 million Livent lawsuit against Drabinsky and Gottlieb and a second $400 million suit against former Livent auditors (and Messina employer) Deloitte and Touche.

In a sarcasm-laden voice, Greenspan accused Messina of making millions trying to convict the Livent founders. "For lawsuits and testifying against Garth Drabinsky and Myron Gottlieb you got nearly $3 million," Greenspan said. "You are in the Stikeman Elliot witness-protection program. The highest-paid witness in the country, three million dollars for a former CFO who pleaded guilty to a criminal charge."

"I am not in the witness-protection plan," Messina replied. "Oh, we'll see what you are in," Mr. Greenspan retorted. Her work on the Livent case even got her an office with a north-facing view in Stikeman's Commerce Court office in downtown Toronto, Greenspan added.

In 1996 Messina left her job as an auditor at Deloitte and Touche overseeing Livent's books to join Livent. She testified that she discovered the fraud a year later. After several unsuccessful attempts to stop the fraud from the inside, Messina testified that in August 1998 she told the new U.S. managers of Livent about the alleged financial wrongdoing at the company. Drabinsky and Gottlieb were ousted from Livent and the company collapsed a few months later. Both Drabinsky and Gottlieb have pleaded not guilty.

Greenspan's cross-examination of Messina was delayed by more than a week after David Roebuck, Drabinsky's lawyer in civil actions served a subpoena on Messina demanding every document in her possession relating to her recollection of her time at Livent. The subpoena had to be reworked since most of those documents were actually in the hands of Ernst and Young. In the end more than 26 binders of documents were turned over to defence lawyers. Those binders — packed into six banker boxes — were dramatically stacked up in front of the podium where Greenspan stood during his interrogation of Messina.

And those binders didn't even include the lengthy statements Messina has given to the SEC, U.S. prosecutors, the Ontario Securities Commission, the RCMP, the Institute of Chartered Accountants of Ontario, as well as transcripts of her testimony in civil lawsuits and during the lengthy preliminary hearing into the Livent case. All told, Messina has testified in various venues for more than 130 hours resulting in 4,704 pages of documents, Greenspan told the court.

The cross examination is expected to last several days as Greenspan highlights differences in testimony Messina has given over the past decade. In one lengthy episode Greenspan focused on testimony Messina gave to SEC investigators in September 1998, less than two months after she finally disclosed to new Livent managers that Drabinsky and Gottlieb had allegedly been cooking the theatre company's books for years. "You were a bald-faced liar with the SEC!" Greenspan shouted at the witness.

In the interview Messina told SEC lawyers that she first learned of the alleged Livent fraud during a discussion with former Livent accountants Grant Malcolm and Diane Winkfein in June or July 1997. At that meeting, the accountants told Messina that $5 to $7 million in liabilities had not been properly recorded in Livent's books. After a short break in the SEC interview, Messina came back and told investigators that was not correct and asked that the interview be terminated. It did not resume until the next day when Messina said that she did not actually learn about the fraud until much later.

That original account given to the SEC contrasts with Messina's earlier testimony to Livent prosecutors, Greenspan charged. In her testimony Messina said she learned of the fraud in July 1997 when former Livent accountant Gordon Eckstein went on vacation and she saw a draft of Livent's second quarter financial statements showing a staggering $15 to $20 million loss. But financial statements Livent filed with regulators, showed not a huge loss, but a modest profit. When Messina asked Winkfein what had happened, Winkfein replied that she does what Eckstein tells her.

Messina tried to explain that she was in a fragile state during her meeting with the SEC and that she had a difficult time segregating what she knew then with what she knew at the time. That meeting with Winkfein and Malcolm that she spoke of with the SEC was not when she discovered evidence of the fraud, but rather was a general discussion she had with the accountants about Livent's penchant for aggressive accounting. That meeting didn't set off any warning flags, because — at the time — she had no reason to suspect Livent's executives of any wrongdoing. "You've had 10 years to consider the debacle at the SEC and that is the best could come up with," Greenspan scoffed.

"I didn't have to figure it out, I knew exactly what had happened at Livent," Messina replied.

That was one of the few complete answers Messina managed to utter on the stand. Many of Messina's attempts to answer Greenspan's questions were either interrupted or shouted down by the lawyer. At one point, Greenspan even turned his back on the witness when she was trying to speak. "Can I finish my answer… This is very important for me," a clearly frustrated Messina asked. "This is very important for the liberty of Mr. Gottlieb and Mr. Drabinsky," Greenspan retorted. "Let me ask the questions. You will have ample time to deal with it."

Greenspan went on to suggest that perhaps Messina's lawyers had conducted secret meetings with the SEC after the interview was halted. Messina nixed that suggestion when she told the court that no such meeting could have taken place since she was with her lawyers until late in the evening and joined them early the next morning.

Greenspan later highlighted the differences between testimony she gave at her plea agreement before Judge — and now U.S. Attorney General — Michael Mukasey and pleadings made by her lawyer before a disciplinary panel of the Institute of Chartered Accountants of Ontario (ICAO). Messina told the U.S. judge that she had not been threatened into making her plea. However, her lawyer later told a disciplinary panel of the ICAO that the plea had been "extorted" as part of a plea bargain. There was no contradiction in the answers, replied Messina. She was guilty of the crime she was charged with, but she was told by U.S. prosecutors that if she did not plead guilty she would be charged alongside Drabinsky and Gottlieb.

In her second day of testimony at Drabinsky and Gottlieb's criminal fraud trial, the former Livent chief financial officer offered gripping testimony of a series of tense meetings where Messina says she finally gained the courage to stop participating in the fraud and inform new company managers representing former Hollywood super-agent Michael Ovitz.

In April 1998, before Livent had announced the Ovitz transaction, Messina learned company managers were planning to implement more than $20 million in accounting manipulations to its first quarter results. Messina testified she met with Myron Gottlieb on Saturday April 25th and told him she knew about the proposed manipulations and urged him to meet with Garth Drabinsky and reconsider the move, she testified. Gottlieb replied that it was "just income smoothing," and she shouldn't worry. "[Gottlieb] really didn't respond directly to my concern, other than he didn't see anything wrong with continuing this," Messina told the court.

She was so concerned that she hired her own lawyer who suggested she put something in writing. She wrote that the accounting adjustments being considered were not in accordance with accounting rules and she would not support them to either the new Ovitz managers or Livent's audit committee. "In my professional capacity as a chartered accountant and as chief financial officer for Livent Inc., I cannot support the judgments made by management in the preparation of the 1998 Q1 financial statements," Messina wrote.

Nervousness about writing the memo caused Messina's hands to shake so badly that she had to call Livent controller Chris Craib to type the memo for her. She waited until Sunday night – when no one was in the office – before hand-delivering copies of the memo to Gottlieb, Drabinsky and Livent's in-house lawyer Jerald Banks. "I was terrified, I did not know what their response would be," she testified.

And she had good reason to be worried. Later in the day, Messina testified Drabinsky's management style was "dictatorial" and "bullying." He would often fly into a rage and abusively, profanely and personally attack anyone whose work he didn't like. "No one wanted to make a mistake that would trigger his anger," she testified. "There was no way I was going to go up against them… I was afraid of what they would do to me."

Messina nervously waited in her office all day to hear a response from Gottlieb or Drabinsky. Only Banks came into her office to ask her questions on an unrelated matter. Just as he was leaving — almost as an afterthought, she said — he turned back and said he read and agreed with her memo. It was not until after 5 p.m. that Gottlieb summoned her to Drabinsky's office for a meeting. If Messina was uncomfortable with the proposed manipulations, Drabinsky allegedly asked Messina, then what number was she comfortable with the company reporting, Messina told the court. "I said, `Garth, this is not a negotiation. The number is what it's supposed to be,`" she testified.

In the end, Gottlieb and Drabinsky agreed to write down some of the allegedly fraudulent transactions and take an additional writedown that was being proposed by the Ovitz group. However, it wasn't long before the topic of fraudulent manipulations of the company's financials was back again, Messina said.

On June 29, 1998 Messina was asked by new Livent executive vice president Robert Webster to give him updated company financial performance and projections. But before she could hand over the documents that would have showed Livent reporting a loss of more than $13.2 million, she was instructed by Livent senior vice president finance, Gordon Eckstein, to run the figures past Drabinsky.

At 8:15 the next morning Messina met with an annoyed Drabinsky who demanded she make changes to the financials. "When Mr. Drabinsky saw it, he said to me, `these numbers are all fucked up. You don't know what the fuck you are doing. You can't show these to anyone,`" Messina told the court. "He said that the new guys don't understand the business, I have to teach them."

Drabinsky then proceeded to shave millions of expenses and add millions in revenue to the projections. In the end, the projected $13.2 million loss was cut in half to just $7 million. One of the adjustments was the addition of several million in sponsorship revenue — even though no revenue was expected for the period. When Messina warned Drabinsky she would have to tell the new managers about the changes, he told her that would cost at least one Livent employee his job and he threatened her. "Mr. Drabinsky said that if I knew what was good for me, I wouldn't discuss sponsorship with new management," she said.

And Drabinsky wasn't done making changes to the document. Before she could hand over the document to Webster, Drabinsky made even more changes to the financial projections that cut the now $7 million loss to just $200,000.

But Messina didn't heed Drabinsky's warnings and told her new bosses about the changes. The managers told her to pass financial data onto them directly and not to let Drabinsky vet any more financial data.

Webster asked Messina to put together what she felt were accurate financial data for Livent. She did, but still kept quiet about the how pervasive the alleged fraud at the company had become. "I didn't know how to handle it," she told the court. "I was waiting for a good time to tell them and there never was a good time."

But Messina testified she could no longer live with herself while keeping the fraud a secret. "How do you tell somebody that, when you are a chartered accountant?" she said. "I was also obviously going to be destroying my own life. And it affected a number of other people in the accounting department. It just took me several weeks to find the courage to do it."

That day was Aug. 6, 1998, a little more than a week after the new managers terminated the employment of Gordon Eckstein. Since Eckstein had been in charge of the company's fixed asset accounting, Webster asked Messina to give him an update on the company's Chicago theatre construction accounts — accounts where millions in improper expenses had been dumped over the years.

Messina and former Livent controller Tony Fiorino assembled a schedule that disclosed the allegedly fraudulent transactions in the accounts and waited to present them to Webster. Late in the afternoon, Messina called Webster to ask if she could talk to him about the accounts, but he said he was too busy. Messina told him this was important and he should make time. Minutes later, he was in Messina's office and the fraud was blown. "Needless to say Mr. Webster was quite shocked, quite taken aback," she said. "He asked if there is anything else he needed to know."

Messina and Fiorino told him there were millions more in fraudulent transactions riddled throughout the company's books but other people were involved and she would have to speak with them before involving them. Messina had a brief meeting with others from the accounting department who all agreed to come forward and speak with Webster. The group met in Webster's office where they spent the next several hours disclosing the millions in fraud the group had spent the past five years burying deep in Livent's books.

The next day, the group returned to the office not knowing what to expect, Messina testified. Livent's new managers asked them to give statements to lawyers brought in from the Toronto firm of Stikeman Elliot. Ominously, the managers asked if any of the accountants wanted to bring in their own lawyers. Messina testified that she called the lawyer she consulted with previously, but decided to proceed without one — as did the rest of the accounting staff. Three days later Drabinsky and Gottlieb were suspended by Livent.

Back on Aug. 7, just before Messina and the other Livent accounts made their statements about the alleged fraud, Webster spoke privately with Messina and warned her: "You know there are going to be ramifications to you personally," Messina told the court. He was right. Soon, Messina was facing criminal charges brought by the New York district attorney and securities regulation charges brought by the U.S. Securities and Exchange Commission. Messina has pled guilty to one count of filing false securities documents but has yet to be sentenced. The SEC complaints have been stayed. In 2000 she pled guilty to professional misconduct before the Institute of Chartered Accountants of Ontario and was fined $7,500 and had her licence suspended for two years.

Livent filed for bankruptcy protection in November 1998, but Messina remained employed as its chief financial officer until Dec. 14, 1998 when she was terminated as part of settlement deal with the SEC. In January 1999, she began working as a consultant with Stikeman Elliot in connection with the numerous lawsuits and bankruptcy filings associated with the case. She continues to work on the Livent case to this day.

In her first day of testimony in the criminal fraud trial of her former bosses and Livent founders, Garth Drabinsky and Myron Gottlieb, Messina testified about the day in July of 1997 when she first became aware of the widespread alleged manipulation of the company's financials.

Messina was not directly involved with preparing the company's financial statements until June 1997 when Gordon Eckstein, the company's senior vice president of finance, went on vacation. In compiling the company's second quarter financial report, Messina was "shocked" to learn that the company had suffered a substantial loss of between $15—20 million for the first six months of the year — a loss that was not reflected in the company's current public financial statements. "I was surprised by the magnitude of the loss," Messina told the court.

When Messina confronted Livent controller Diane Winkfein about the report: "She just kept her head down low and said, `We do whatever Gord tells us,`" Messina testified.

By the time Livent publicly reported its second quarter financials, that multi-million dollar loss had somehow transformed into a profit of between $7 and 8 million, Messina said. When she confronted Eckstein about the manipulations, he calmly told her not to worry, that the company was merely engaging in "income smoothing" — a common practice among publicly traded companies, Eckstein claimed. "He was very calm. He sat back in his chair, put his arms behind his head and his feet on the desk, and he said, `Maria, it's just income smoothing. Everybody does it,`" Messina testified.

When Ms. Messina asked him if Livent co-founders Garth Drabinsky and Myron Gottlieb were aware of the financial manipulations, Eckstein replied: "Where do you think this comes from?" Messina told the court.

The revelation that the company's books were full of falsehoods and manipulations paralyzed the chartered accountant, Messina testified. "I was completely numb. It was complete shock and disbelief," she told the court. "I panicked, and I was completely immobilized by fear."

Messina testified she did not know how to get out of the situation and did not have the courage to confront Drabinsky and Gottlieb and blow the whistle on the fraud. "I did not have the strength to go up against Mr. Drabinsky and Mr. Gottlieb," she testified. "They were men of money, power and influence. I was a nobody."

By August, Messina said she refused to present the company's financial to the company's board and audit committee. A refusal that did not sit well with Eckstein, who insisted she attend the meeting. "You're going to go," Eckstein told Messina. "You shut the fuck up and you let Myron [Gottlieb] and [Livent chief operating officer] Rob [Topol] do all the talking."

By the time it came to prepare the company's third quarter financials, it became clear that all of Livent's senior managers were intimately involved in the fraud. At one meeting with Gord Eckstein and the company's accounting staff, Eckstein dictated changes to the financial statements to transform the company's mounting financial losses into profits. None of the accounting changes were justified, she said. "They were baseless and completely arbitrary," Messina testified. It would not be the last time she used that phrase to describe the seemingly endless manipulations that company managers were making to the books.

Messina joined Livent in 1996 after working as an auditor on its books for the past four years. Messina testified Myron Gottlieb asked her to join the company on three other occasions before she finally accepted his job offer. Joining the company was a great opportunity to join a unique and glamorous company that would give her the opportunity to expand her skills in business, she testified. "It was a very exciting industry," she said.

But soon, Messina found herself consumed by the company's massive fraud. Shortly after leaning of Livent's allegedly cooked books, Eckstein told Messina to prepare financial statements for a meeting with Drabinsky, Gottlieb and Robert Topol that showed the company's real financial situation, the proposed accounting manipulations and the final fraudulent numbers Livent would report to investors. Eckstein became angry with her when she produced the report on two separate sheets — one with the company's real numbers and another with the alleged fraudulent numbers. "[Eckstein] said he wanted to make sure that Mr. Drabinsky saw everything so he couldn't turn around and say he didn't know what was going on."

When Eckstein presented Messina's report to Drabinsky, Gottlieb and Topol at the quarterly financial meeting, Drabinsky asked: "What's this?" Messina testified. "`It's the fucking real numbers,` Eckstein replied. [Drabinsky] just put his hand on the paper and slid it across the desk to the other side and went to the other statement."

How to best manipulate the financials of the company was openly discussed among the senior Livent officials, Messina testified. At one point, the executives debated how to explain the high pre-production costs that had been elevated above analysts expectations because they contained millions of dollars in inappropriate accounting adjustments. Allegedly Gottlieb suggested he could concoct a story that the analysts would believe, Messina testified. An argument arose when Drabinsky asked Topol if the analysts would buy the story. Topol said they wouldn't, but eventually agreed to adopt the fictional account into his own talking points with analysts.

But there appeared to be light at the end of the tunnel, Messina told the court. As the meeting progressed, Topol explained that the fraud had grown too large and could not continue, Messina said. The company would need to start recording the proper expenses and take a major writedown to account for the millions in misidentified expenses, she said. Drabinsky, however, said that he "couldn't worry about that now," there was no way he was going to consider such a massive writeoff — not since Livent had just sold investors US$125 million in bonds the previous week.

At subsequent meetings accounting manipulations were openly discussed by all members of senior management, Messina testified. Sometimes, Drabinsky didn't like the accounting manipulations suggested by Eckstein and would demand different financial engineering, she told the court. For instance, Drabinsky didn't want additional expenses buried in the accounts of Ragtime New York, for instance, and instead demanded they be put into a show like Fosse, that was not scheduled to open for some time.

Tensions at the theatre company began running extremely high and the workplace became increasingly abusive, Messina said. Not just because of the alleged fraud, but also because the company was burning through money at an alarming rate and had trouble paying their suppliers, creditors and other expenses, she told the court. "It was a very difficult time," she said. "There's nothing I can say to help anyone in this room understand the intensity of that experience. It was that extreme."

Messina, Eckstein and Topol began working on a plan to issue the writeoff in the fourth quarter. "I placed all my hope that they could make this happen and the fraud would be ended and taken care of once and for all," Messina testified.

And while the company did report a $27.5 million writedown in 1998, it had little to do with cleaning up Livent's books and more to do with making the company more attractive to former Hollywood super-agent Michael Ovitz who eventually bought a controlling stake in the company. When Myron Gottlieb proposed the writedown to board members, he wanted to make it contingent on the Ovitz investment. If the investment failed to come through, he wanted to reverse the writedown, a request that was rejected outright by Livent audit committee chairman Garfield Emerson.

Messina confirmed the notion, presented by Brian Greenspan — the defence lawyer representing Myron Gottlieb — that Gottlieb had a more "macro" understanding of Livent's affairs. However, she maintained that both Gottlieb and Drabinsky were well versed with everything that was happening at Livent and that both men had a sophisticated understanding of the company's books and the fraud that was used to manipulate the company's earnings.

And it would only get worst, testified Messina. In early 1998, the chartered accountant realized the alleged fraud was not limited to pushing expenses that should have been reported in the past into future periods, improper transfers between shows and just deleting expenses outright. Soon she learned that expenses were being buried into the company's fixed assets that would improperly inflate the value of the company's theatres and other assets. "For me it was very de-motivating, demoralizing," she said.

"The whole thing was a nightmare," she told the court.

Over the past week lawyers representing former Livent auditors Douglas Barrington, Claudio Russo and Anthony Power have been arguing before the Institute of Chartered Accountants of Ontario Appeals Committee that a ruling by the ICAO disciplinary panel last February erred in finding their clients guilty of professional misconduct.

The panel ruled that the accountants failed to exercise the required professional skepticism when they continued to rely on the representations of the company's senior managers even after company officials lied to them. "The auditors said that their skepticism was `sky high,`" the panel ruled last year. "However, with respect to the impugned conduct, the evidence disclosed that the auditors failed to exercise the professional skepticism required."

The panel could have thrown the men out of the accounting profession, but instead ordered the three receive written reprimands and pay fines and penalties of more than $1.25 million — the highest fine ever meted out by the Institute that oversees the professional conduct of Ontario's chartered accountants. Two of the Deloitte auditors — Douglas Barrington and Anthony Power — have retired. Only Claudio Russo remains employed with Deloitte.

The accountants were never charged with failing to detect the alleged massive fraud that ultimately destroyed the once high-flying theatre company. However, the appeal touches on some of the most contentious and important issues regarding how auditors deal with company managers, namely: just how much trust should accountants place in the representations of managements and how should auditors react once it has been proven that managers have lied to their auditors?

Besides a host of legal and procedural grounds, the appeal of the accountants essentially boils down to three main issues: first, the accountants were found guilty of conduct for misbehaviour that was not included in the original charges; second, that the panel ignored the evidence of experts who testified that the accountants did act appropriately and lastly, that the panel's finding that the auditors reach "a correct conclusion" in their audit work is incompatible with the legal definition of professional misconduct. The accountants are asking the panel to set aside the decision, as well as to strike down the fines levied against them.

Much of the evidence in the original disciplinary panel ruling, as well as the appeal, centres on how the Deloitte accountants dealt with the issue of a secret "Put Agreement" between Livent and Dundee Realty regarding redevelopment of the Pantages Theatre in Toronto that allowed Dundee to pull out of the project ahead of other investors. Livent managers told Deloitte the agreement had been cancelled since the agreement would disqualify Livent from booking any revenue associated with the project until a later time. However, Deloitte accountants auditing Dundee"s books learned the agreement had not been cancelled and was, in fact, still in place.

The accountants demanded letters of explanation from Livent co-founder Myron Gottlieb (who was also a member of the audit committee of Dundee Realty's parent company), and Dundee and Livent's outside lawyers. All three provided letters that said the agreement had already been cancelled. However, explanations as to when and how the agreement was dropped differed significantly. Those inconsistencies should have cast doubt on all of the assertions of Livent's managers and caused Deloitte to increase its scrutiny of the company, the panel ruled. "The auditors failed to consider the broader implications of the admitted deception, including the representations made by management throughout the audit," the panel said in their original ruling.

But considerations about the Dundee agreement should not have been used to determine professional misconduct since the original charges made no mention of it, lawyers for the accountants argue. "By making the Put Agreement, an aspect of the fraud and a matter that was not a subject of the Charges, `fundamentally important` to its decision the Panel materially changed the case against [the accountants] and unjustly denied them a fair hearing," lawyers for the accountants argue.

And even if the panel does choose to consider the impact of the Put Agreement, there is not enough evidence to prove that the agreement was still in effect at the time of the audit, the lawyers contend. After all, there was no evidence that Livent managers were lying about the cancellation of the put and even a re-audit of Livent's books after the massive alleged fraud was uncovered, failed to determine once and for all whether the agreement was still in force or not.

Lawyers representing the ICAO's professional standards committee argue just the opposite. There was not enough evidence for the auditors to conclude the put was cancelled in the first place. The fact that accountants who re-audited the books after the fraud was discovered could not determine whether the Put Agreement was in force or not proves the original auditors did not have enough evidence to allow Livent to recognize the revenue in the first place. "The appellants did not have sufficient appropriate audit evidence to conclude that the representations of management were true," committee lawyers write (wrote?) in their response to the accountants' appeal. "Notwithstanding the lack of audit evidence they released their audit opinion based upon the representations of management."

The fact that managers lied should have caused a reasonable accountant to re-assess every decision made in the audit that was based on representations of management, professional committee lawyers say. "(They) did not revisit the representations of management as required by generally accepted standards of practice of the profession."

The put agreement was not included in the original charges because the accused accountants themselves introduced most of the evidence relating to the agreement hoping it would bolster their case that they were innocently duped by Livent's managers. However, the disciplinary committee saw it as evidence that the accountants failed to live up to their professional obligation and are entitled to consider the evidence in their decision, the professional standards committee says.

That failure to question management occurs again and again during the Livent audit when auditors accepted the verbal assurances of the company's senior managers regarding invoices that were booked to the company's fixed assets with no supporting documentation to a whopping $27.5 million write-off of pre-production costs that Livent managers insisted upon after the accountants had completed their work. "All of these facts should have heightened the level of concern of the auditors with respect to the veracity of management representations," the professional committee states.

It is interesting to note that while the Dundee Put Agreement is the mainstay of the ICAO's case against Deloitte, it is not mentioned once in the crown's criminal fraud charges against Drabinsky and Gottlieb. It appears, when it comes to Livent, there is enough alleged fraud to go around for everyone.

It could be several months before the ICAO appeal committee delivers its decision. Who knows, by then there may be a decision in the Livent criminal trial as well.

(Note: A previous blog post suggested that ICAO fines could only be collected from current members of the Institute. This is not the case. In fact, fines may be filed and collected through the Ontario court. The post has been corrected.)

Greenspan made the comments during his first day of cross-examination of Gordon Eckstein, Livent's former senior vice president of finance and administration. Eckstein has been on the stand for the past three weeks painstakingly recounting how he — at Gottlieb and Drabinsky's insistence — cooked Livent's books to bury the company's mounting losses and make it appear profitable.

Gottlieb would often fall asleep during meetings, Greenspan suggested. "He was notorious around Livent that half the time that Mr. Gottlieb would be in a meeting, he'd be asleep." Eckstein testified that was an "exaggeration" but conceded there were times when Gottlieb appeared to fall asleep during meetings.

Gottlieb had only a "macro" understanding of the company's operations, insisted Greenspan. And when issues of accounting or finance came up, it was his practice to seek outside opinions for the best ways to deal with them, Greenspan suggested.

Eckstein disagreed with Greenspan's portrait of Gottlieb as a hapless member of Livent's senior management team. While Gottlieb did not have detailed day-to-day knowledge of the intricate workings of the company's theatre productions, he did indeed have a sophisticated knowledge of accounting, understood the company's affairs and was an active participant at Livent's quarterly financial meetings where the myriad of alleged accounting manipulations were discussed. "I had daily interactions with Mr. Gottlieb" Eckstein testified. "He had far more understanding than just at a macro level."

Greenspan showed numerous key company documents in which more than a dozen Livent executives received copies, but Gottlieb was not included in the circulation list. As well, he introduced a memo from former company chief operating officer Robert Topol and copied to Eckstein asking for answers to questions posed from a financial analyst who covered Livent's stock. Despite the fact that keeping contact with stock analysts was part of Gottlieb's job description, he was not asked for input on the questions, Greenspan pointed out. "He could have answered some of those questions," Eckstein replied.

Greenspan also cited testimony from former Livent controller Tony Fiorino who told investigators that he had never received any direct accounting instructions from Drabinsky or Gottlieb and said neither men could book an accounting entry "if their lives depended on it."

Greenspan confronted Eckstein with comments made by Fiorino to investigators in which he said that Eckstein said he was the real "financial brains of the company," and acted as if he was "omnipotent and untouchable." Eckstein often shut down any discussion about how to properly account for items, telling Fiorino: "don't think, just fucking do it."

Eckstein denied ever saying he was the real brains of the company, but agreed he did often shut down debates about the accounting treatment of items. "As the fraud got larger and larger, discussion as to how to deal with some of these things became less significant," he testified. "Discussion about how to do accounting became a moot point."

Eckstein's character continued to come under attack from Greenspan as he cited testimony from other Livent employees who described Eckstein as abusive to staff and often told staff that it was only because of "his financial genius" that the company remained afloat. He also often referred to Drabinsky and Gottlieb as "fuckheads, shitheads or idiots." Eckstein replied that he didn't recall using those words and only denigrated senior Livent managers in connection to the fraud. "Anybody could have done what I did. There wasn't any financial genius to it," Eckstein testified. "I was just relating what management wanted to the (accounting) staff. Anybody could have committed the fraud I did — any accountant."

His abusive behavior came from increasing frustration over the fraud and with the company's fragile financial situation where an increasing amount of money was being spent on private airplanes, corporate apartments and company cars, Eckstein insisted. "It was a mess and I knew it was going to explode," he testified.

Eckstein spent nearly four days on the witness stand telling prosecutors about how Livent founders Garth Drabinsky and Myron Gottlieb were the masterminds of an alleged massive accounting scam that stretched back to the theatre company's earliest days. But Greenspan has spent much of the past week picking at inconsistencies in Eckstein's testimony in an effort to suggest that Eckstein is the real architect of the fraud that eventually destroyed the company.

Greenspan has focused his attack on one specific period — four days in April of 1997 — when Livent was finalizing its first quarter financial results. During that period, the company transformed more than $13 million in losses into $5 million in profits through a serious of inappropriate accounting adjustments, Eckstein testified.

In earlier testimony, Eckstein told the court that he was instructed to put together proposed accounting adjustments to bring the company's financial results as close to budget as possible and then review those proposed manipulations with Drabinsky and Gottlieb during the company's quarterly financial meetings. Only after the senior executives approved the allegedly inappropriate adjustments would Eckstein instruct his staff to go about cooking the company's books.

Greenspan got Eckstein to concede that the meeting must have taken place sometime between April 24, when a document with Eckstein's handwriting outlining potential accounting manipulations was produced, and April 27 when those improper financial manipulations were entered into the company's computerized accounting program.

There's just one problem: neither Drabinsky nor Gottlieb were in Toronto to attend a meeting during a period when Eckstein says the men approved the manipulation of the company's books. "I’m going to suggest to you that you never met at all in connection with this," Greenspan said. "You inputted all of the manipulations and there was no meeting."

"That's not true, we always met," Eckstein testified. "We always met at the quarterlies."

Greenspan acted with incredulity when Eckstein suggested that — since it was impossible for the meeting to have taken place at Livent's offices in Toronto — he may have flown down to New York for the meeting. "I suggest to you that you just made that up," he said.

Now, were Eckstein's answers untruthful when it came to the details of the meeting, or is it even reasonable to expect someone to remember the details of a single meeting held more than a decade ago? Your opinion and $1.79 will get you a cup of coffee from the Starbucks down the street from the University Avenue courthouse where the trial is being held. Ultimately, that is what the Madam Justice Mary Lou Benotto will have to decide.

The confrontation was similar to one Greenspan made on Wednesday regarding the preparation of Livent's first quarter 1998 financial statements. Drabinsky could not attended a meeting to approve accounting manipulations during that period since he (and his "mistress") were in Washington at the time having their picture taken with then president Bill Clinton.

Eckstein insisted that the meetings did indeed take place and refused to budge when Greenspan suggested that Drabinsky's absence suggested that Eckstein had done the manipulations without the approval of Livent's senior managers.

Greenspan also questioned Eckstein about why Drabinsky and Gottlieb would have allowed accountants from KPMG representing former Hollywood super-agent Michael Ovitz to pore over Livent's books if he was aware of the widespread accounting fraud. "This should have been his worst nightmare?" Greenspan said. "I suggest to you that Mr. Drabinsky wasn't worried because he had no idea where you were booking these things… You were on a frolic of your own."

"That's totally incorrect," Eckstein replied. Drabinsky and Gottlieb weren't worried about auditors — after all, they had been fooling Deloitte and Touche for years, he said.

If Livent was the criminal enterprise that Eckstein suggested it was certainly a strange one, Greenspan suggested. After all, they didn't tip Eckstein off about the pending Ovitz transaction that could have given him time to prepare to hide the company's losses and they even fired one of their alleged co-conspirators — Robert Topol — after they discovered he was stealing from the company. "It's got to be a strange way to run a conspiracy," Greenspan said.

Strange indeed. But whether or not the inconsistencies and questions raised by Greenspan are enough to convince Madam Justice Mary Lou Benotto to disregard Eckstein's previous testimony has yet to be seen. Edward Greenspan told the court he will wrap up his cross-examination on Monday and turn the witness over to Brian Greenspan.

But the photo prompted some other information that Greenspan was clearly not expecting. When he asked Eckstein about the woman in the photo, Eckstein blurted out: "That's Mr. Drabinsky's mistress." You could have heard a pin drop in the courtroom — or rather you could have heard the loud scratching of pens as reporters started furiously taking notes.

"Why would you say that?" Greenspan asked.

"He was married at the time," Eckstein said.

Drabinsky was separated, Greenspan told the court, to which Eckstein replied: "Not at the time he started seeing her." He went on to say that the woman had been the cause of much discussion at Livent. Drabinsky allegedly met the woman in Hawaii and eventually moved her into one of the three corporate apartments Livent maintained. Furthermore, Eckstein added, Drabinsky insisted that the company pay to have the room where she was staying renovated.

"Do you enjoy the opportunity to take a shot at Mr. Drabinsky?" Greenspan asked.

"You asked me a question, I'm just speaking the truth," Eckstein replied.

Greenspan, apparently, had the good sense to quickly move on.

The photo in question was taken April 24, 1998, during a period in which Eckstein had previously testified he had met with Drabinsky to go over proposed accounting manipulations in the company's first quarter financials.

Those alleged manipulations were outlined in a simplified spreadsheet of the company's financials printed on April 23rd and scrawled with notes in Eckstein's handwriting. Eckstein had previously testified that at least some of those handwritten notes appeared to have been made during that face-to-face meeting with Drabinsky. He also agreed with Greenspan in testimony earlier today that the meeting must have occurred sometime on the afternoon of April 23rd.

But Greenspan confronted Eckstein with a bill showing that Drabinsky had chartered a private plane on that day to fly to New York for a meeting with Michael Ovitz and Roy Furman — the men who would ultimately purchase a controlling stake in Livent and uncover what prosecutors allege was a massive fraud at the theatre company. When Eckstein volunteered that perhaps Drabinsky was not on the plane, Greenspan shot back: "There's another alternative, which is that he did leave and you are a liar," he told the court.

The meeting could also not have taken place on April 24th, since Drabinsky was in Washington attending that Democratic Party luncheon with Bill Clinton in which Ragtime was the theme.

Greenspan is trying to counter Eckstein's earlier assertions that financial manipulations at Livent were made under the explicit direction of Garth Drabinsky and Myron Gottlieb and instead suggest the Eckstein alone was the mastermind of the alleged fraud. Both Drabinsky and Gottlieb have pleaded not guilty to two counts of fraud and one count of forgery in connection with the collapse of the company. "I'd suggest to you that in every quarter, you directed the staff to manipulate the results before you showed an income statement to Garth Drabinsky, Myron Gottlieb or Robert Topol (Livent's former chief operating officer)," Mr. Greenspan said.

"That's incorrect," Mr. Eckstein repeated.

Eckstein suggested that perhaps the meeting occurred on another day and that he had always testified that he did not know the actual date of the meeting. When shown previous testimony where he agreed that the meeting took place on April 24, Eckstein noted that his questioners suggested that date and it "seemed reasonable at the time."

And while Greenspan's confrontation with Eckstein was certainly dramatic, it's unclear how much damage was done to his credibility. After all, Eckstein testified, none of his handwritten notes on the spreadsheet in question indicate accounting manipulations, but rather legitimate questions about the company’s finances.

And that alleged meeting with Drabinsky, it was also attended by former Livent controller Chris Craib, who is scheduled to testify later in the trial.

Sparks flew on the second day of tense cross examination as Edward Greenspan — the lawyer representing Garth Drabinsky — confronted Eckstein with the preliminary hearing testimony of former Livent controller Tony Fiorino who told the court in 2005: "I am going to use the Nuremberg defence: They made me do it. I have a wife and a child and a mortgage."

Eckstein denied saying the remarks and countered that he was telling the truth — that he had been instructed by Livent founders Garth Drabinsky and Myron Gottlieb to bury the company's mounting losses. But Greenspan persisted and accused Eckstein of being the man behind the alleged fraud at the company who planned all along to blame the company's senior executives. "No, I was always going to tell the truth," Eckstein testified. "And the documents will back me up."

Both Drabinsky and Gottlieb have pleaded not guilty to two counts of fraud and one count of forgery in connection with the fraud and maintained that others at were responsible for the alleged accounting fraud at the theatre company.

Eckstein blamed Drabinsky and Gottlieb as a means of securing a preferential plea bargain from U.S. authorities, Greenspan told the court. "The U.S. was so eager to blame Mr. Drabinsky and Mr. Gottlieb that when you said `I was following orders,` you got your deal."

In December, 1998 Eckstein pled guilty to one count of conspiracy to commit securities fraud in the U.S. A month later, in January, Eckstein pled guilty to civil charges brought by the U.S. Securities and Exchange Commission. That was a mere five months after Drabinsky and Gottlieb were ousted from their positions at Livent after the alleged accounting fraud was uncovered by new management brought in after the sale of a controlling stake in the company to former Hollywood super-agent Michael Ovitz.

Eckstein has yet to be sentenced in the U.S. case, but he could face a jail sentence of up to five years, and a fine of US$250,000 or twice the amount of any illicit gains or shareholder losses. However, Eckstein acknowledged that neither he, nor his lawyers, has been in touch with U.S. authorities in quite some time to deal with the U.S. sentencing.

Eckstein's defence that he was merely following orders was not as persuasive to the Institute of Chartered Accountants of Ontario, which rejected his efforts to reduce the fine imposed on the accountant on the grounds that Gottlieb and Drabinsky were ultimately in charge of the company's books, Greenspan told the court. Eckstein was stripped of his chartered accountants designation after pleading guilty to charges of professional misconduct before the ICAO in 2000.

Greenspan acted incredulous when Eckstein finally told him he "took exception" with his repeated us of the "Nuremberg Defence" phrase. "Why, I thought you defined the `Nuremberg defence` as merely following orders — isn't that what you did?" Greenspan said.

(Here's a hint as to why someone might find it offensive. Ask yourself, who used the Nuremberg Defence? Could it be… the Nazis?)

Last February — more than eight years after settling the charges in the US and six years after Canadian criminal charges were laid — Eckstein pled guilty to a single count of fraud and received a conditional sentence. Under the terms of that sentence, Eckstein serves no jail time, but can only leave his Scarborough home to go to work and for a limited number of approved activities. He must also be home between the hours of 7 pm and 7 am — a restriction that expired yesterday, Greenspan noted.

When Greenspan tried to grill Eckstein about why it took him so long to settle the charges in Canada, Eckstein told the court he was merely following the advice of his lawyer. When Greenspan attempted to force him to elaborate on his answer, Eckstein invoked lawyer-client privilege and refused to answer.

Greenspan promised to revisit the issue of privilege today and warned Eckstein that he may want to have his lawyer handy during his cross examination.

And on the first day of what is expected to be a long and brutal cross examination of Livent's former senior vice president of finance and administration, Edward Greenspan — the lawyer representing Garth Drabinsky — was pulling out all the stops to portray Eckstein as an abusive, foul-mouthed-manager.

Eckstein allegedly made anti-gay remarks about one employee, sexually harassed another and bullied or threatened his staff into participating in Livent's alleged accounting manipulations, the court heard. "You are, by nature, a pretty horrible human being," Greenspan told Eckstein in court earlier today.

Demolishing Eckstein is crucial since he has testified repeatedly about how — on orders from Livent founders Drabinsky and Gottlieb — he fraudulently manipulated Livent's financial statements to hide mounting company-wide losses. Drabinsky and Gottlieb have both pled not guilty to two counts of fraud and one count of forgery and have maintained that any fraud that occurred at the company happened without their knowledge or approval.

Last year, Eckstein pled guilty to one charge of fraud in Canada and was given a conditional sentence of two years less a day. In 1998, Eckstein pled guilty to one charge of conspiracy to commit fraud in the U.S. He has yet to be sentenced in that case.

Eckstein repeatedly refused to agree with the statements of other Livent employees who described him as so abusive and volatile that he was often referred to as "Sybil," because of his ability to instantly switch personalities. "No one really knew which personality would come out at any particular point in time," former Livent CFO Maria Messina told the RCMP during an interview in August 1998, shortly after the collapse of the theatre company. "He could be the nicest, gentlest person one minute and just a vile human being within 30 seconds. I had terrible run-ins with him. The verbal abuse was just unimaginable."

Greenspan confronted Eckstein with later testimony Messina gave to investigators in which she accused the married Eckstein of making amorous advances towards her. While she admitted that he never touched her or asked her out, he sent her flowers on Valentine's Day, arranged her to be seated near him at special Livent events and appeared jealous when she had lunch with male colleagues. It wasn't all flowers and good seats though: Messina once complained that Eckstein threw a desk clock at her.

But if none of Eckstein's alleged temper was on display in the courtroom as he calmly explained that he merely sent her flowers as a friend, since she had recently separated from her husband. He moved her seats at special events to be near him to ensure she had good seats after she had complained about having lousy seats and both Drabinsky and Gottlieb had instructed him to "keep her happy, and on-side." He did admit to yelling at her for taking a long lunch, but it wasn't out of jealousy; it was because she had left the office on the day when she was required to sign cheques for production employees to distribute to the company's theatre employees. And, for the record, he never threw a clock at anyone, he testified.

Greenspan showed Eckstein a memo from Messina written in April 1, 1998 in which she threatened to quit the company because she could no longer tolerate Eckstein's verbal abuse. Eckstein denied ever seeing the memo or talking about it with either Drabinsky or Gottlieb. "I admit I was abusive and I had a temper, but it wasn't constant," he testified. "If it was that terrible and caustic they were free to leave, they were free to go and talk to Mr. Drabinsky or Gottlieb… No one was chaining them."

It wasn't just Messina who complained about Eckstein's volatile temper. Grant Malcolm, the company's former production controller, told investigators that Eckstein often berated employees for being "fucking idiots" who were "paid to do what they were told and not to think." Chris Craib, Livent's former controller, accused Eckstein of making fun of his homosexuality and threatening his job. Eckstein denied threatening Craib's job but said anti-gay remarks were often bandied around at meetings with Drabinsky and Gottlieb.

The alleged abusive tenor of management at Livent might provide an insight into why so many accountants turned their back on their professional training and participated in the "widespread accounting fraud" that prosecutors allege occurred at the theatre company. In an interview with the RCMP in 1991 Craib described Eckstein as "Jekyll and Hyde" and when Mr. Hyde appeared: "This side comes out and… it scares you to death and you end up doing things you shouldn't be doing."

Messina told RCMP investigators that she was shocked, and confronted Eckstein when she saw that Livent accountants had transformed a $20 million loss into a $5.6 million profit. "And he made very light of it and he started to laugh," according to the RCMP transcript Edward Greenspan showed the court. "He said, Maria, everybody does this … It's nothing. We used to do it at Loblaws… Everyone plays around with the quarters, smooth income a little bit. It's nothing,"

But on the stand, Eckstein said he never witnessed any illegal accounting at Loblaws, only that he considered the grocery company's treatment of some accounting items as "aggressive." And as for the conversation with Messina, he merely made up the references to Loblaws and others engaging in the same practices. "I was just trying to calm her down, to placate her," he told the court.

Tony Fiorino, Livent's former theatre controller, had another name for Eckstein: Teflon man. Fiorino told investigators that nothing stuck to Eckstein. He would blame underlings for mistakes in the company's books and blame senior managers for the fraud that was occurring at the company. "Nothing that happened at this company was your fault," Edward Greenspan told Eckstein. "That's not what I said," Eckstein shot back. "It was clear to everyone that the manipulation was coming down from Mr. Drabinsky, Mr. Gottlieb and Topol… It was my fault for following that."

Accountants from KPMG were scouring Livent's books at the time in anticipation of a sale of a controlling stake in the once high-flying theatre company to former Hollywood super agent Michael Ovitz. The sale, which saw Ovitz and his partner Roy Furman buy a 20 percent stake in the company for about US$20 million, went ahead as planned in April 1998. Four months later Drabinsky and Gottlieb were fired from the company amid allegations of widespread accounting fraud. Both men have pleaded not guilty to charges of fraud and forgery in connection with the case.

At the time of the sale, Livent was having serious cash flow problems and was routinely unable to make regular payments to suppliers, Eckstein told the court. Not that shareholders would have known that from Livent's rosy financials, which painted a false picture of the company's profitability, Eckstein testified.

From the earliest days of the company, Livent was allegedly improperly burying losses by either pushing expenses to future periods, moving them between Livent theatrical productions, improperly classifying them as assets on the balance sheet or merely deleting them from the company's books, Eckstein told the court.

Drabinsky was intimately involved in the alleged accounting manipulations, Eckstein said. At first, Drabinsky specifically directed Eckstein which expenses to move around to improve the company's bottom line, Eckstein told the court. However, later he merely provided budget targets that accounting staff were expected to meet using a variety of accounting schemes, Eckstein testified.

But the company's severe cash flow problems didn't stop Livent from spending lavishly on company cars, limousines, drivers and even a US$3.9 million corporate jet purchased in April 1998, Eckstein testified. The jet was used almost exclusively by Drabinsky, Eckstein testified. Eckstein told the court that he used the jet once to fly to Houston in 1998 to meet with representatives from Pace Theatre Group Inc., a Texas.-based theatre company that Livent had been considered merging with. "That was always part of my frustration with the company," he told the court. "The company paid for vehicles and chauffeurs and this jet and meanwhile we had extreme difficulty making payments."

The letter was contained in a memo Drabinsky sent to members of Livent's board of directors in October 1997 informing the directors of his intention to fire Friendly within the week. In the letter, Friendly complains of Drabinsky's behaviour during a meeting the previous month where Drabinsky exploded in an expletive-laden tirade against the former executive. "You responded by screaming at me and using the word `fuck` repeatedly, telling me (amongst other insults) that I don't know `what the fuck I was talking about,`" she wrote in the letter.

The other Livent executives present at the meeting left in disgust, Friendly said in the letter, one of them uttering "I can't take this." But Gottlieb continued to lay into Friendly adding: "Who the fuck do you think you are to tell me how to address you in my office? I'll do what I want. I run this company."

Friendly threatened to take her concerns to the company's board and said her only regret was allowing the situation to continue as long as it had. A week later, Drabinsky made good on his word and Friendly was terminated. Gottlieb wrote in a letter presented in court that Friendly's services were being terminated because "your work relationship with senior management has progressively deteriorated," the court heard.

Drabinsky and Myron Gottlieb have pleaded not guilty to two counts of fraud and one count of forgery.

It wasn't clear from either Drabinsky's or Gottlieb's letters what concerns prompted such an angry reaction. Questions about the Friendly letter were cut short when Eddie Greenspan, the defence lawyer representing Drabinsky, objected to the presentation of the letter during his examination of Gordon Eckstein, Livent's former senior vice president of finance and administration.

Chief Livent prosecutor Robert Hubbard argued that the letter illustrated the tense atmosphere that existed at Livent and the fact that Drabinsky had total control over the company. At the urging of Madame Justice Mary Lou Benotto, the judge overseeing the case, prosecutors moved on.

But that was not the only time Friendly complained about problems at Livent. Hubbard showed the court an earlier letter written in March 1996 by Gottlieb to Friendly in which he appears to be replying to a letter of complaint from the executive. The letter does not reveal the source of Friendly's concerns, but Gottlieb wrote that there is much in her letter that he does not agree with and warns her not to take any action that would cause "disruption or discord amongst Livent employees or jeopardize the Livent financing efforts." At the time Livent was engaged in a large — and ultimately successful — equity financing in the U.S., Eckstein testified.

This is not the first time the court has heard of Drabinsky's allegedly abusive behavior toward employees. Quarterly financial meetings where company executives would gather to review the company's flagging financial performance and discuss accounting schemes to improve its reported results were often loud and tumultuous affairs, Eckstein testified earlier in the day. During particularly acrimonious meetings Drabinsky would instruct Eckstein to sit in a chair in front of his desk: "That way it would be easier for him to strangle me," Eckstein told the court.

The letter, dated March 11, 1992, complains that booking pre-production costs differently from other capital expenses was "not appropriate." The letter, which was addressed to Myron Gottlieb, went on to complain about the lack of disclosure the company was giving the bank.

At the time Livent had a "very strained" relationship with the bank, testified Gordon Eckstein, Livent's former senior vice president of finance and administration. The bank had loaned the company about $45 million and had expressed concern about how much money Drabinsky and Gottlieb were taking out of the company, Eckstein told the court.

Prosecutors allege that the allegedly fake invoice scheme involving former Livent engineer Peter Kofman was a means by which Gottlieb and Drabinsky could circumvent bank covenants that restricted how much money they could pay themselves each month.

Eckstein testified that Livent's deteriorating relationship with the bank was one of the main reasons the company went public in 1993. "(The bank) was forcing the company to go public to pay them back," he told the court. Livent eventually ended its banking relationship with RBC and moved to the Canadian Imperial Bank of Commerce.

For nearly every one of Livent's financial statements, company accounts would turn losses into profits by "improperly" moving expenses to future dates, shifting costs between Livent's different theatre productions, bury those costs deep in the company's balance sheets or merely delete the expenses altogether, testified Gordon Eckstein, Livent's former senior vice president of finance and administration. "That's the way it was every quarter," he told the court. "We would start off with a loss and make certain adjustments to end up with a profit."

Eckstein compared Livent's reported financial statements to internal company documents — many of which contained handwriting that Eckstein identified as belonging to Garth Drabinsky — that detailed the various accounting techniques Livent would use to improve its bottom line. For instance, in the first quarter of 1996, the company reported to shareholders that it made a profit of US$1.67 million. In actual fact, the company had losses of more than US$5.8 million during that period but only reported profits after Livent accountants shifted millions of dollars in expenses between shows or into the future.

The same pattern occurred a year later when Livent reported a profit of US$4.3 million in the first quarter of 1997. According to internal company documents, the company had really lost more than US$8 million during that period and those losses continued to mount throughout the year. By the third quarter of 1997, Livent had lost more than US$41 million for the year. However, after a flurry of what prosecutors allege are improper accounting adjustments, the company managed to report a profit of more than US$14 million.

Eckstein kept detailed records of the transfers, expense eliminations and other so-called "adjustments" to show Drabinsky and Gottlieb the scale of the accounting changes, Eckstein testified. "I wanted to ensure that they realized what was going on… the size of the numbers," he told the court. Eckstein has already pled guilty to one count of fraud in Canada and been given a conditional sentence. He also pled guilty to fraud in the U.S. in relation to his activities at Livent. He has yet to be sentenced in that case. Drabinsky and Gottlieb have both pleaded not guilty to charges of fraud and forgery related to the case.

The company continued to make the allegedly improper accounting adjustments in 1998 when Drabinsky and Gottlieb were negotiating the sale of a controlling stake in the company to former Hollywood super-agent Michael Ovitz. Prior to the sale, the company took a US$27 million write down of some of those allegedly-bogus assets on its balance sheet. However, the motive behind that big bath was not to clean up the company’s books for good, but rather to "clean up the books so that, post-transaction, the company could look fore profitable," Eckstein told the court.

But while transferring and eliminating costs of the company's financial statements may have made Livent look more attractive to investors, it did little to help ease the company's increasingly perilous financial situation, Eckstein testified. "We were deeply cash flow negative," he told the court. With more money going out of the company than was coming in, Livent often failed to pay suppliers all the money that was owed them. Livent engineer Peter Kofman has already testified that Livent was often delinquent paying his bills — sometimes taking up to a year to pay for work he had done for the company.

Eckstein has been testifying about Livent's tortured accounting for the past three days. He will return tomorrow to continue his testimony before facing what is expected to be a long and brutal cross examination by defence lawyers.

Conrad Black’s criminal fraud trail was dubbed “The Trial of the Century,” by many of the reporters who covered it. So what can we make of the trail of Garth Drabinsky and his longtime partner Myron Gottlieb whose fraud trial begins on Monday? The pair face three fraud charges that stem from the collapse of Livent Inc., the live theatre company that — at the time — was known for musical productions like Phantom of the Opera and Ragtime. Today, those that remember Livent, associate the name with allegations of fraud and financial chicanery.

The company imploded nearly 10 years ago, wiping out more than $250 million in shareholder value. Drabinsky and Gottlieb are accused of cooking Livent’s books by using allegedly bogus transactions to hide losses and create phantom profits; using kickback schemes to divert company revenues into their own pockets and even using secret accounting software to fool company auditors, stock analysts, shareholders and regulators.

Both men have maintained their innocence from the start. Their defence: Livent’s accounting staff committed the alleged fraud without their knowledge or consent. Drabinsky and Gottlieb’s lawyers — Eddie Greenspan represents the former and his brother Brian represents the latter — will get a chance to make their case soon enough when four of Livent’s senior accountants testify in the case. All four have already pled guilty to either criminal or regulatory violations in either Canada or the U.S.

Those courtroom confrontations may end up looking a lot like the highly publicized cross examination of David Radler, Conrad Black’s longtime partner who agreed to testify against Black as part of a plea bargain with U.S. prosecutors and securities regulators. That’s not the only connection between Black and Drabinsky. Black was a member of Livent’s board of directors and an outspoken defender of Drabinsky when the original fraud allegations surfaced.

Ultimately, the Black trial gave investors some insight into the inner workings of Hollinger and an understanding of how the once-mighty Conrad Black could have fallen so far into disgrace. Livent investors have already had to wait nearly a decade for some sort of similar understanding, and they will have to wait until the trial wraps up to see if Drabinsky and Gottlieb will suffer the same fate as Black. Canadian investors will have to wait to see if the trial does anything to alter our lackluster international reputation as a place where financial fraud goes largely unpunished.

I hope you’ll join me as I cover the trial and post my observations and opinions regularly on this, my Livent trial blog, and in longer pieces appearing in Canadian Business magazine.