Nearly 10 months after their trial for criminal fraud began, Livent founders Garth Drabinsky and Myron Gottlieb will finally learn their fate this Wednesday. The pair will return to a Toronto courtroom to hear if Justice Mary Lou Benotto thinks prosecutors proved the two men oversaw a massive accounting scheme that defrauded investors and creditors of nearly $500 million.

Drabinsky and Gottlieb are alleged to have masterminded what may be the most meticulously documented accounting fraud in Canadian history. The pair allegedly kept two sets of books – one set for investors and regulators and another that was shown only to the most senior Livent executives. To investors, Livent reported that it was making million from its Broadway shows such as Phantom of the Opera, Ragtime and Showboat, while the second secret set of books showed the company was losing buckets of money and burying those losses in the company’s fixed assets and other financial accounts.

If past corporate fraud cases are any indication, the defence has a steep hill to climb. Executives at Enron, WorldCom, Adelphia, Tyco and Hollinger all failed to convince courts of their innocence. But Drabinsky and Gottlieb are arguing something different—not only are they claiming that they did not do it, but that a vast and shadowy conspiracy has spun a complex web of lies and created and planted damning documents as part of an elaborate plan to frame them for crimes they did not commit.

The old frame job. You don’t often hear that argument in high-profile cases of accounting fraud. It’s a claim most often used by from low-level street thugs who – when caught red-handed with drugs, guns, stolen goods or DNA on a bloody glove – complain that the incriminating evidence was planted by the cops. But there is a recent high profile case where the conspiracy theory worked and a high-profile defendant walked away free: the acquittal last year of American R&B singer Robert Kelly on child pornography charges.

As in the Kelly case, Drabinsky and Gottlieb insist that the evidence against them has been confabulated by a web of former employees and disgruntled business associates. The alleged Livent schemers include the company’s former senior accountant, chief financial officer, a group of junior accountants, new Livent managers working with former Hollywood mogul Michael Ovitz and lawyers at the prominent Toronto law firm of Stikeman Elliott LLP.

The defence conspiracy theory has three components. First, in an attempt to divert attention from their own complicity in the alleged accounting fraud, prosecution witnesses Gordon Eckstein, Livent’s former senior accountant, Maria Messina, its chief financial officer, and Chris Craib, a controller, lied to investigators, securities regulators, lawyers and in their sworn testimony when they said they attended meetings where Drabinsky or Gottlieb openly discussed manipulating the company’s financials, the defence argues. (Click here for a more comprehensive examination of the Livent defence.)

Secondly, to back up their perjured testimony, the witnesses met in secret to coordinate their stories and create fraudulent notes, memos and other documents that indicated Drabinsky and Gottlieb knew about the alleged fraud. Lawyers working for Stikeman Elliott then planted many of the most damaging documents in Drabinsky’s office.

Finally, the witnesses took ambiguous company documents and spun wild tales of fraud that made the innocent documents seem damning or suspicious. For instance, the prosecution’s most damaging documents were a series of “Executive Summaries” produced for senior Livent managers every financial quarter. Witnesses explained how the summaries laid out in excruciating detail how Livent managers were burying millions of dollars in expenses in the company’s fixed assets and other financial accounts in an attempt to improperly boost the company’s bottom line.  Each summary contained two line items: the company’s “actual net income” – which was almost always a substantial loss – and “reported net income,” which almost always showed a healthy profit.

Some of those summaries contain handwritten notes that witnesses identified as Drabinsky’s, allegedly instructing accountants to “roll” or “move” millions of dollars in expenses and amortization to future periods or to parts of Livent’s balance sheet where they would improperly boost the company’s bottom line. The accounting manipulations are clearly laid out and “would be obvious even to the most indolent CEO,” the prosecutors argued during the trial. “It is inconceivable that these major reallocations could have escaped the attention of the senior executives.”

Not so fast, argues the defence. Those summaries – and many other documents presented during the trial – are part of an elaborate plan by former Livent chief accountant Gordon Eckstein to hoodwink Drabinsky and Gottlieb, the defence argues. Eckstein is the real mastermind of the fraud and he kept a “Nuremburg file” of fake and ambiguous documents that he claimed proved that he was “only following orders,” the defence insists.

Many of the documents in the prosecution’s case are ambiguous and only seem suspicious after witnesses give them some nefarious meaning, the defence argues. “There are many reasons why there could be discrepancies between actual and reported. In my submission it does not necessarily connote fraud,” said Roebuck during final arguments.

The judge didn’t seem to be buying it. “So is it your submission that when the report says ‘net reported income’ and ‘net actual income,’ those phrases are ambiguous?” Justice Benotto asked Roebuck. “Yes,” he replied.

None of the prosecution witnesses emerged unscathed from the weeks of withering cross-examination by defence lawyers Edward and Brian Greenspan. Gordon Eckstein has already pled guilty to fraud in both Canada and the U.S. and was evasive on the stand. Maria Messina took more than a year to blow the whistle on the fraud and has worked for Stikeman Elliott as a consultant on the case for the past 10 years. And Chris Craib, well, he told investigators about attending a meeting where Drabinsky talked about manipulating the company’s finances. There’s just one problem, Drabinsky wasn’t in the country at the time Craib said the meeting took place. And while Drabinsky was back in the office later that day, defence lawyers insist that the contradiction is proof Craib is lying.

Prosecutors dismiss the conspiracy theory as “preposterous.” Rather than a complex web of shadowy players who have conspired to frame Drabinsky and Gottlieb for a variety of dubious and complicated reasons, there is a much simpler and logical explanation, argued crown lawyer Amanda Rubaszek. “The accused did it,” she told the court. “There is no conspiracy. The evidence is what it is.”

The case may look like a slam-dunk for the prosecution, right? After all, prosecutors have eyewitnesses who testified they saw Drabinksy and Gottlieb openly discussing how to manipulate the company’s financials, they have reams of documents that indicate the pair knew about the fraud, and many of those documents have Drabinsky’s handwriting on them. But prosecutors in the R. Kelly case had even more evidence and the singer walked free.

The child pornography case against R. Kelly hinged on a videotape of the award-winning R&B singer best known for inspirational songs like “I Believe I Can Fly,” and “Sex Me” having sex with a clearly underage girl. In the tape, a man who happens to look exactly like R. Kelly is having sex with a the girl in question in a log-cabin-themed rec room that happened to look exactly like the log cabin-themed rec room in Kelly’s Chicago mansion. Seems like an open and shut case right? Well, it wasn’t.

In a defence that can be best summed up as “Who you gonna believe? Me or your lyin’ eyes?” Kelly’s defence lawyers (which included Edward Gensen – the lawyer who unsuccessfully defended Conrad Black) argued that the tape was a fake. Despite numerous experts who assured the jury the tape was authentic, defence lawyers argued that a shadowy conspiracy of disgruntled former business associates (including the young girl’s aunt) and employees (most notably, a woman who Kelly hired to simulate sex with him on stage during his concerts) produced the tape using high-tech special effects in an attempt to blackmail the singer.

And just like in the Livent case, the witnesses in the R. Kelly case were not completely pure. For instance, Lisa Van Allen – the woman who did the bump-and-grind at Kelly’s concerts testified that she had stolen Kelly’s gold Rolex watch, as well as another Kelly sex tape that she ransomed for $40,000 and had dated two different men who had both been accused of fraud. That’s pretty tawdry, but were these people really capable of producing a high-tech blackmail sex-tape? Is that even possible?

Defence lawyers thought so and even cited the distinctly unfunny 2006 Wayans brothers’ comedy Little Man as an example. In the Razzie-nominated film, digital special effects are used to superimpose the head of Marlon Wayans onto the body of a little person to make the actor look like the freakish baby referred to in the movie’s title. “They put the head of Marlon Wayans on a midget and it looked real, didn’t it?” Adams asked one witness, the Chicago Sun Times reported. You can judge for yourself by clicking on the following video clip.

At the end of the R. Kelly trial, the Chicago Sun-Times reported that not one of the more than 20 reporters who covered the case thought Kelly would be acquitted. But after just a few hours of deliberation, the jury found the singer not guilty on all 14 pornography related charges.

It appears that elaborate efforts by the R. Kelly defence team to discredit the evidence and witnesses in the case were enough to make jurors look past the infamous sex tape. That’s good news for members of the Livent defence team who have spent the last 10 months highlighting every conceivable discrepancy in the testimony, as well as every shred of evidence that does not completely conform to the prosecution’s theory of the alleged crime. If R. Kelly’s defence lawyers could make the jurors forget that tape, then it’s certainly possible Drabinsky and Gottlieb’s lawyers could cast doubt on the prosecution’s sometimes tainted witnesses and the often arcane details of Livent’s accounting policies.

However, there is another explanation for the Kelly acquittal that may not be such good news for the Livent lawyers: the Kelly jury may well have been just plain nuts. I mean, Little Man, really?  And there are signs that this may not have been the most diligent jury. Despite deliberating for only a few hours, one juror was dragged before the judge after having a tantrum in the jury room when the hamburger he ordered for lunch was late in arriving. Hours later another member of the jury begged the judge to be excused. The request was denied.

There is no jury in the Livent trial. Justice Mary Lou Benotto is overseeing the case alone and will ultimately decide the verdict. If the Livent defence succeeds as well as Kelly’s, Drabinsky may be able to restart his career as a musical impresario. Could a musical based on the life of R. Kelly be coming to a theatre stage soon? We’ll find out soon enough.

The court did not release reasons for the decision, but awarded costs to lawyers representing investors who bought about US$125 million in Livent debt in the fall of 1997. The notes were made virtually worthless after the company collapsed into bankruptcy in 1998 amid allegations Drabinsky and Gottlieb had manipulated the company’s financials. Drabinsky and Gottlieb’s criminal fraud trial wrapped up in Toronto last month and a verdict in the case will be handed down on March 24th.

The fact the Supreme Court refused to hear the case will not have any impact the criminal case or any outstanding lawsuit relating to the collapse of Livent, said David Roebuck, a lawyer with Toronto-based Heenan Blaikie, who is representing Drabinsky in several civil lawsuits as well as the criminal case. “The Court declines to take cases for many reasons that are unrelated to the merits of the particular case,” he said. *

The Supreme Court decision represents the end of the road for a case that has been winding through courts in the U.S. and Canada for more than five years. Back in 2004, a New York judge sided with plaintiffs in the case and found that Drabinsky and Gottlieb had failed to perform the due diligence required. A U.S. appeal court upheld the ruling a year later and then things get tricky.

Exactly a year after the appeal, Drabinsky and Gottlieb filed a motion to vary the judgment citing evidence gathered during the lengthy preliminary into criminal fraud charges that the two men currently face in Canada. In that appeal, Drabinsky and Gottlieb blamed the alleged manipulation on other senior members of Livent’s accounting staff. The judge in the case remained unimpressed and dismissed the motion.

The case was unsuccessfully appealed again last year after U.S. lawyers successfully moved to have the judgment filed in Ontario so they could begin to collect their award. In that case, the court of appeal disagreed with Drabinsky and Gottlieb’s argument that their ability to mount a defence in the U.S. civil lawsuit was unduly hampered by the criminal charges they were also fighting in Canada.

Interest and costs continue to build on the original judgment—which now stands at more than $40 million, says Akbarali. Drabinsky and Gottlieb will soon be forced to undergo a “debtor examination” where lawyers will question the executives under oath about any income or assets they hold. Lawyers will then move to either garnish those wages or seize assets in Canada or abroad, says Akbarali.

The loss is just the latest in a series of legal setbacks for the former Livent executives. Last month, the Ontario Court of Appeal upheld the dismissal of a  lawsuit Gottlieb filed against Stikeman Elliot—a prominent Toronto law firm representing Livent in numerous other civil cases. In his lawsuit, Gottlieb had accused the firm of conspiring to frame him for accounting crimes he says he did not commit.

In the meantime, other civil actions related to the collapse of Livent are moving along. Late last month the Ontario Superior Court ordered several Deloitte and Touche accountants who worked on the books of the theatre company to order questions and produce documents relating to a $450-million civil case brought by the receiver handling the Livent bankruptcy. Livent alleges Deloitte and Touche was negligent in failing to detect the alleged manipulations on Livent’s books.

Deloitte and Touche is currently appealing a 2007 ruling by the Institute of Chartered Accountants of Ontario that found three senior Deloitte accountants who worked on the Livent account had violated the Institute’s professional standards. A decision on the appeal is expected by the end of this month.**

* This post was updated to include comments from Drabinsky’s lawyer David Roebuck.

** This post was updated to include comments from the ICAO.

Drabinsky and Gottlieb have both pled not guilty to two counts of fraud and one count of uttering forged documents relating to a massive accounting fraud at the theatre company that produced such massive Broadway hits as Phantom of the Opera and Kiss of the Spider Woman.

The judge has her work cut out for her. Her decision will have to address the complex conspiracy theory put forward by defence lawyers Eddie Greenpan, who is representing Drabinsky, and Brian Greenspan who represents Gottlieb. Both defence lawyers submitted hefty written final arguments that allege their clients were framed by a cabal of Livent accountants, new company managers, lawyers and outside accounting firms that represented Michael Ovitz, the former Hollywood superagent and Livent investor.

Prosecutors, on the other hand, argue the evidence against the two executives is “overwhelming.” Not only did Drabinsky and Gottlieb know about the fraud at the company, but they directed a pattern of accounting manipulations that routinely transformed millions of dollars in losses into profits, prosecutors allege.

Drabinsky and Gottlieb each face a prison sentence of up to 10 years if found guilty. A guilty verdict would also have a major impact on the hundreds of millions of dollars in outstanding civil lawsuits related to the alleged fraud. Livent has filed a lawsuit against Drabinsky and Gottlieb seeking as much as $100 million and a separate $450 million lawsuit against Deloitte and Touche, the company’s former auditing firm.

A panel of Ontario Court of Appeal judges upheld an earlier dismissal of Gottlieb’s lawsuit in a brief, but unanimous, oral decision delivered on Monday. “It is difficult to see how such a claim could be dealt with prior to the determination of the criminal proceedings,” Justice Robert Sharpe wrote on behalf of the three-member panel which also included Justices Robert Blair and Paul Rouleau. “It would be impossible to know what, if any, damages the appellant had suffered until he has been acquitted or convicted.” .

Gottlieb and Drabinsky have been charged with two counts of fraud and one count of uttering forged documents relating to a massive alleged accounting fraud that occurred at the theatre company. During the lengthy criminal trial that wrapped up earlier this month, Drabinsky and Gottlieb claimed a cabal of lawyers, accountants, former Livent accounting employees and investors framed them. A verdict is expected in the coming months.

In his lawsuit, Gottlieb sought more than $60 million from Stikeman Elliot, the law firm currently representing the now-bankrupt live theatre company; KPMG, the accounting firm that conducted the initial investigation into the alleged accounting fraud; Michael Ovitz, the former Hollywood mogul who bought a controlling stake in the company and eventually forced the two executives out, as well as a handful of former Livent employees who have now testified in the criminal trial. In the suit, Gottlieb claimed that Stikeman “carried out a concerted and planned scheme to manipulate documents and information” to wrongfully demonstrate Gottlieb attended a Livent management meeting in April 1998 where company executives openly discussed plans to manipulate the company’s financial results.

Stikeman Elliot called Gottlieb’s accusations “highly implausible,” and argued they can’t be sued for framing him for a crime before he is actually acquitted of that crime. An Ontario judge agreed and dismissed the suit in November 2007. The court eventually ordered Gottlieb to pay $30,000 in costs to Stikeman. With the dismissal of the case by the Ontario Court of Appeal added another $19,000 in costs to that claim, said Ben Zarnett, the veteran Toronto litigator who represented Stikeman in the case. “The judge basically said this was a malicious prosecution case and you can’t sue for that unless you are acquitted of those charges,” he told Canadian Business magazine.

Calls to Gottlieb’s lawyer in the case, Melvyn Solomon, were not returned.

Claims made by Gottlieb in the civil case were repeated during the recent Livent criminal trial that wrapped up earlier this month. Eddie and Brian Greenspan, the lawyers representing Drabinsky and Gottlieb in the criminal trial, repeatedly accused Stikeman Elliot lawyers of manipulating information, suborning perjury, tampering with evidence and planting incriminating documents in an effort to shore up charges of accounting fraud against their clients.

In one dramatic courtroom confrontation, Brian Greenspan compared a transcript of an interview of former Livent controller Chris Craib conducted by Stikeman Elliot lawyers with an audio recording of the same interview. In the audio recording, Craib tells the lawyers that Gottlieb did not attend a controversial April 1998 management meeting where accounting manipulations were allegedly discussed. The answer was not transcribed leaving the impression that Gottlieb was at the meeting, Greenspan said.

Drabinsky and Gottlieb will return to court on Feb. 2 to hear when Justice Mary Lou Benotto will deliver her verdict in the criminal case.

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.

The defence explanation – what a surprise – it was all Eckstein’s fault. He’s the one who improperly booked those fruadulent invoices.

Forget the testimony that Drabinsky’s longterm partner Myron Gottlieb came up with the scheme, signed the cheques and thus saw the bogus invoices that indicated where those inflated invoices would be booked. Forget the testimony of Peter Kofman, one of participants in the scheme, who actually wrote a memo to Drabinsky laying out how much he had been paid for legitimate construction work and how many millions went to Drabinsky and Gottlieb for bogus business service.

As for the second fraud count and the charge of uttering forged documents – the company’s financial statements – the Crown has not proven its case, the defence argues. Eckstein provided Drabinsky and Gottlieb with “reasonable rationales” for Livent’s accounting practices – even though those practices were often not implemented or even appropriately used.

Of course, if Drabinsky and Gottlieb knew about the accounting moves, Ecksstein was making, but had been convinced they were both legal and appropriate, why is there no evidence that they discussed those moves with the company’s auditors about their practice or “rolling” expenses forward? These were executives who were not afraid to confront their auditors when they did not agree on how to book a transaction.

The defence also argues that hiring Maria Messina as the company CFO is “completely irrational”  if the executives knew about the fraud. Messina was the company’s former auditor and maintained strong ties with Deloitte and Touche, the company’s accounting firm. But was it irrational? Just ask executives at Enron who recruited many of their accountants from Arthur Anderson – the company’s auditing firm. Legislation enacted in Canada and the U.S. following the Enron debacle now mandates a cooling period of at least a year before a company hires a former auditor.

Messina – and other members of the accounting five – never thought they were engaged in fraud, the defence argues. They accepted Eckstein’s rationalizations. Had they thought they were involved in fraud, they would have walked away, Greenspan says. “Messina did not walk away from her position at Livent because she, with the assistance of Eckstein, rationalized the accounting treatments being employed there. The same is true for the other accounting five.”

But if that’s the case, why did they not talk about those rationalizations with Drabinsky, Gottlieb, the auditors or anyone else? Somehow, the accounting five realized that those accounting rationales would not be accepted by new management and sprung into action, the defence argues. Their plan: conspire to frame Drabinsky and Gottlieb for the fraud using a conspiracy that would have put Machiavelli to shame.

In the end, it’s still up to Justice Mary Lou Benotto whose argument she finds more compelling.

Yesterday Edward Greenspan and David Roebuck, the lawyers representing Drabinsky answered the prosecution’s charges.  Neither Drabinsky nor Gottlieb testified or called any witnesses in their own defence so this 276 page summation represents the first time Drabinsky’s lawyers have laid out their own theory about what happened at Livent.

The following is a live-blogging experiment. I will post comments as I read the document.

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.

The documents had not been referred to by any of the fourteen witnesses who have testified in the trial. Last week, prosecutors and defence lawyers spent several hours removing other documents from the binders and submitting other documents that had been referenced during the trial.

After the prosecution closed its case, defence lawyers told the court they would not be calling any of their own witnesses. “Your honour, we are prepared to move to final submissions without the calling of any further evidence in this trial,” said Edward Greenspan, the defence lawyer acting on behalf of Drabinsky.

Both sides will now file written final submissions over the next month and return on December 15^th to make final oral arguments in the case. Arguments in the case are expected to be completed by December 19^th.

Benotto may be thankful there are no more witnesses to hear from in this trial. After all, before she makes her final decision she will have to review the thousands of documents that make up the prosecution’s case; examine 237 different exhibits and read through 6,788 pages of trial transcripts.

Hopes that the case would be completed by Tuesday were dashed when prosecutors and defence lawyers could not come to a timely agreement on the inclusion of dozens of minor documents related to the case against Myron Gottlieb. Those documents – and reams of other documents – were filed as exhibits in a whirlwind court session earlier today. The documents ranged from bland Livent memos Gottlieb signed to dozens of documents defence lawyers have referred to during cross examination of the 14 witnesses who have testified over the past five months.

It was hard not to feel nostalgic as the defence filed documents such as former Livent CFO Maria Messina’s plea agreement with U.S. prosecutors; the indemnity agreement signed by Livent’s accounting staff and a memo from Garth Drabinsky going over details of Robert Topol’s sudden and mysterious termination from the company. Most of the documents were not that dramatic though and included things like pictures of bankers’ boxes that once contained Livent documents, floor plans of Livent’s fifth and sixth floors and a long list of critical dates associated with the company’s different theatre productions.

The defence also returned the handwritten notes former Livent controller Chris Craib made after the now infamous April 24, 1998 meeting where Craib claimed he witnessed Drabinsky giving instructions to manipulate the company’s financial results. Defence lawyers had asked to remove the document to have it tested by a forensic document examiner to determine if the notes had been altered. There’s no word on whether the results of those tests will be revealed.

And there is no indication whether the defence plans to call any witnesses of their own. We may finally learn that on Monday when court resumes and lawyers file the remaining documents associated with the case against Drabinsky. Then again, after nearly six months, I wouldn’t bet on it.

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.

Earlier today, defence lawyers wrapped up their cross examination of John Beer, one of the KPMG investigators, who searched the offices of Drabinsky and Gottlieb and seized documents prosecutors maintain show that the Livent founders masterminded the alleged accounting fraud at the once successful theatre company. Prosecutors will not call any more witnesses. But that is not the end of the trial.

Court will resume tomorrow so prosecutors can introduce several documents relating to Gottlieb. The trial will pause again on Wednesday to allow lawyers to attend funeral services for former Ontario Chief Justice Charles Dubbin.

But with the prosecution case all but completed, there is still no indication whether the defence will call any witnesses of its own or whether Drabinsky and Gottlieb will testify in their own defence. Perhaps defence lawyers are waiting to see if they can get a read on how the normally inscrutable Madame Justice Mary Lou Benotto has reacted to their questioning of Beer and his fellow KPMG investigator Gary Gill regarding their efforts to secure the documents that now make up the bulk of the prosecution’s case.

After a week of testimony about the KPMG investigation, it is clear that if new Livent managers, or the much-maligned lawyers from Stikeman Elliott LLP, had wanted to plant the damning documents found in Drabinsky’s office, they certainly had the opportunity. After all, as was pointed out by Edward Greenspan, the defence lawyer representing Drabinsky, the KPMG search was far from perfect.

Gill and Beer testified that they searched Drabinsky and Gottlieb’s offices on August 11^th. Gill finished the search of Gottlieb’s office without Beer on August 12^th since Beer had to travel to British Columbia for another unrelated assignment that day. As a result, the search was rushed, Greenspan suggested.

“If this was a police search, I would agree with you 100%,” Beer replied. “But this was not a police search. We didn’t have the opportunity to do that at the time, we just didn’t have the time.”

“There was no gun to your head,” Greenspan replied. “The only time constraints were your own in that you had to leave for British Columbia the next day.”

“I don’t disagree with that,” Beer replied.

Beer and Gill initialed some of the documents they discovered in the offices. However, other documents were not initialed, Beer told the court. Sometimes Beer or Gill merely initialed the folder where the documents were found. Ideally, it would have been more prudent for investigators to have initialed every page of every document they found and placed them in sealed boxes to be catalogued as evidence, Greenspan suggested.

“Initialing the back page of a multiple page document does not prevent someone from adding or replacing pages to that document, does it?” Greenspan asked.

“No, it does not,” Beer replied.

“And initialing the front of a file folder does not prevent someone from adding or subtracting documents to that folder, does it?” Greenspan continued.

“No sir,” Beer replied.

Greenspan went on to suggest that documents could have been added or subtracted to Drabinsky’s office even before KPMG began their investigation. “You are in no position to state that a document that you signed on August 11^th was actually in the office on August seventh, eighth, ninth or 10^th,” Greenspan stated.

“That’s correct,” Beer replied.

Those documents were eventually moved to a locked storage room on the second floor of Livent’s offices. Unlike the sixth floor executive offices, there was no guard stationed at the door, and access to the room was only monitored by a log book that people in the room were supposed to sign. Greenspan noted that several people had keys to the room and the “honour system” was used with the log book with people choosing to sign it or not.

“Tell me, through your years of experience in law enforcement, and I know you have a lot of years of experience, was it customary for the RCMP to grant access to the evidence room using an honor system?”

“The answer to that is no,” Beer replied.

But Greenspan was less successful in his attempts to get Beer to concede that it was a Stikeman Elliott lawyer who discovered a document listing more than $21 million in accounting “problems” from 1997 that had been “moved” into 1998. Gill testified that he found the document in one of the two brown leather briefcases next to Drabinsky’s desk. In previous testimony, former Livent controller Chris Craib testified that he saw Drabinsky take the document from his briefcase and wave it at Gordon Eckstein, Livent’s former senior vice president of finance and administration, during an argument.

Greenspan suggested to both Gill and Beer that it must have been Stikeman Elliott lawyer Patrick O’Kelly who found the document. In his testimony last week, Beer asserted that O’Kelly had nothing to do with the discovery of the document. Today, he said he was “absolutely certain” that O’Kelly did not find the document.

Neither Brian Greenspan, the lawyer representing Gottlieb, nor the judge had any questions for Beer. With the testimony of the last of the prosecution witnesses now completed the trial may soon be over and the judge may soon render her verdict. More than 10 years after the alleged accounting fraud at Livent and nearly six months after this trial began this case is beginning to look like another fantasy movie: The Never Ending Story.

Over the course of the trial, defence lawyers have pulled out all the stops to try to convince Madam Justice Mary Lou Benotto, the judge overseeing the trial without a jury, that she should not trust those witnesses. Defence lawyers highlighted differences in the myriad statements they have given to cops and regulators, as well as the army of civil lawyers who have worked on the numerous Livent-related lawsuits over the past decade. They pointed out the differences between what one witness has said as opposed to another, and finally suggested that just about all of the witnesses have conspired to frame Drabinsky and Gottlieb.

But what about all those documents? Many of them covered with notes and instructions in Drabinsky or Gottlieb’s own handwriting? Today, defence lawyers tried to convince Justice Benotto that she can’t trust either those documents or the men who allegedly found those documents in Drabinsky’s and Gottlieb’s own offices.

Earlier today Edward Greenspan, the defence lawyer representing Drabinsky, began his cross-examination of Gary Gill, a forensic investigator with KPMG LLP, who was came to Livent in August 1998, to investigate the allegations of accounting irregularities at the company. Gill and his colleague John Beer previously testified about how they systematically searched and catalogued Drabinsky’s and Gottlieb’s offices, removing documents that could be relevant to their investigation.

But neither man should have been there in the first place, argued Greenspan. Since KPMG conducted the due diligence that led to Michael Ovitz investing in the company and bringing in new management, it was a conflict of interest that should have disqualified it from investigating allegations of fraud at the company, Greenspan suggested. In fact, KPMG’s investigations unit was hired by Robert Webster, Livent’s new vice president and a former KPMG partner who worked on the due diligence report.

Gill testified while he was aware that KPMG had done the original due diligence report, he did not think it was a conflict of interest.

“Wouldn’t it be awkward for you if you found out during your investigation that KPMG should have been alerted to the financial irregularities during its due diligence report?” Greenspan asked Gill.

“We were not focusing on the due diligence, we were asked to investigate allegations of financial irregularities,” Gill replied.

But soon after Gill began his investigation, another real conflict of interest arose. While Gill, Beer and a lawyer hired by Livent were searching Drabinsky’s office, the men discovered a letter to Drabinsky from KPMG accountant Shelley Levine indicating that Drabinsky had hired KPMG to work on his personal taxes. Gill testified he called a senior KPMG official who instructed the men to continue the investigation but establish a so-called “Chinese wall.” To ensure the independence of the investigation and protect Drabinsky’s personal information, information about the Livent case was sealed off from the North York KPMG office where Levine worked and KPMG investigators were told to ignore any personal information relating to Drabinsky’s personal dealings with KPMG, Gill told the court.

But that Chinese wall was breached, Greenspan suggested. One of the KPMG accountants hired to help Livent restate its financial results was based in the same North York office as Drabinsky’s personal tax accountant, Greenspan said. Gill told the court that he was unaware of what the accountant was doing and only saw him at Livent once.

But those assurances were not enough for Drabinsky. Two months after he was ousted from Livent, he won a court injunction barring KPMG from conducting the investigation. Under the terms of the court order. KPMG was allowed to deliver their report to Livent’s management and board of directors, but not release it to the public. The report has never been released to the public.

Gill and other KPMG accountants filed affidavits during the brief court battle with Drabinsky, but they did not mention that KPMG accountants were also working on a restatement of Livent’s financials, Greenspan said.

“Do you feel that KPMG was being candid to Mr. Drabinsky and the court when they did not disclose to the court that KPMG was involved in the restatement?” Greenspan asked.

“I wasn’t involved in the restatement,” Gill replied. “I can comment on my affidavit. I can’t comment on the statements of others or what they may or may not have disclosed.”

Greenspan also questioned Gill as to why KPMG only chose to search and catalogue the contents of Drabinsky and Gottlieb’s offices and not the offices of the accountants who came forward and alleged that Drabinsky and Gottlieb were behind the alleged fraud. “You must have considered that these individuals could attempt to shift responsibility to others to mitigate their circumstances?” Greenspan suggested.

“We considered that,” Gill replied, but said that they did not feel a search was necessary.

Gill disagreed with Greenspan’s suggestion that Livent and its law firm Stikeman Elliott had instructed KPMG to limit their investigation to Drabinsky and Gottlieb.

“You would not treat individuals who have admitted their involvement in financial irregularities with kid gloves,” Greenspan said.

“We had discussions with the individuals and they appeared to be candid and transparent,” Gill replied. “They provided everything that we asked them for.”

“You didn’t know anything about these people. You didn’t know if there were any documents in their offices that would help Garth Drabinsky or Myron Gottlieb because you never looked in there,” Greenspan said.

“No, we didn’t,” Gill replied.

“This wasn’t a truly independent investigation,” Greenspan suggested.

“We obtained the information we requested and thought that was sufficient,” Gill replied.

For the next hour, Greenspan grilled Gill about a log book maintained by security guards posted outside of Livent’s sixth floor executive offices. Livent employees needed permission from senior company executives to enter the area and suspended executives Drabinsky, Gottlieb, Gordon Eckstein and Robert Topol – as well as the assistants assigned to those executives ­- were explicitly barred from entering the area.

However, the log is riddled with omissions and errors, suggested Greenspan. Entry times are clearly inaccurate, exit times are missing and many people who are known to have gone into the area are not listed in the log book, Greenspan suggested. For instance, Gill and Beer came to the secure area on the morning of Aug. 11, 1998, to assess how long it would take to secure the documents in Drabinsky and Gottlieb’s offices; however, that visit is not reflected in the log book. Even Drabinsky lawyer David Roebuck signed the log book, but failed to write down when he left the secure area.

“The log book is a joke,” Greenspan said.

“It is clearly not complete,” Gill replied.

Greenspan also suggested that the log book had been tampered with regarding the time Gill and Beer entered Drabinsky’s office to conduct their search. In an interview with the RCMP in 2006, Gill told police that they searched the office sometime after 2 p.m. However, the time stamp on the videotape of the search shows that the search occurred at 4 p.m. However, the first time written in the log book has been written over and replaced with the time 15:40 or about 3:40 p.m.

Gill rejected Greenspan’s suggestion that the original time in the book was 13:40 – or 1:40 p.m. – leaving the pair more than two hours of unaccounted time in Drabinsky’s office. “It looks like someone has written 3:40 and someone else has changed it to 15:40,” Gill told the court.

The allegation does seems pretty far-fetched considering the two previous entries in the log book above Gill’s signature state the entry time of 14:20 pm – or 2:20 pm. Greenspan still entered the original log book as an exhibit for the judge to look examine.

Gill is expected to complete his cross-examination Friday. On Monday, Beer will return to the stand and complete his cross-examination. At that point the prosecution will have completed its case. The defence has yet to indicate whether it will call Drabinsky or Gottlieb to the stand or whether they will call any witnesses at all.

]]> http://blog.canadianbusiness.com/livent-investigation-not-truly-independent-defence-charges/feed/ 3 http://blog.canadianbusiness.com/prosecutors-complete-testimony-of-final-livent-witness/ http://blog.canadianbusiness.com/prosecutors-complete-testimony-of-final-livent-witness/#comments Thu, 23 Oct 2008 01:45:51 +0000 John Gray http://blog.canadianbusiness.com/?p=375

More than five months after it began, prosecutors in the criminal fraud trial of Garth Drabinsky and Myron
Gottlieb completed questioning of their fourteenth and final witness earlier today.

In an abbreviated session, prosecutors questioned forensic investigator Gary Gill about his efforts to
secure and catalogue the thousands of documents seized from the offices of Drabinsky and Gottlieb in the days after the Livent founders were suspended amid allegations that they had overseen a massive fraud at the company.

Gill, a chartered accountant who flew from his home in Sydney, Australia to testify, told the court that even 10 years later he still remembers finding a damning and controversial document in Drabinsky’s office.

In August 1998, Gill was working as a forensic investigator at KPMG’s investigation unit when he was hired by new Livent managers to investigate allegations of accounting manipulations at the theatre company. On Aug. 11, 1998. Gill, John Beer – a former RCMP officer who also worked at KPMG and testified yesterday – and Patrick O’Kelly, a lawyer hired by Livent, searched the offices of Drabinsky and Gottlieb.

While the three men catalogued and removed hundreds of business files from Drabinsky’s office, Gill says he still remembers finding one specific document: a one page summary of “problem” expenses and other items totaling $21.22 million that had been “moved into 1998.” Gill says he discovered the document in one of two brown leather briefcases that were placed near Drabinsky’s desk.

“This is probably the document that sticks uppermost in my mind,” Gill told the court.

When lead crown prosecutor Robert Hubbard asked why he remembered this document specifically Gill replied that the document seemed particularly important.

“We were dealing with allegations of financial statement manipulation, and as an accountant, this particular
document looked to me as something that may be particularly relevant to the investigation,” Gill said.

Yesterday, defence lawyer Edward Greenpan suggested to Beer that it must have been O’Kelly who discovered the document since O’Kelly was sitting at Drabinsky’s desk right next to the briefcases during office search. Who discovered the document is important to the defence since lawyers have all but accused O’Kelly’s law firm, Stikeman Elliott LLP, of participating in an elaborate conspiracy to frame Drabinsky and
Gottlieb.

The document has been the subject of previous testimony by former Livent accountant Chris Craib. He told the court that he helped his former boss, Gordon Eckstein, create the document and witnessed Drabinsky take it out of his briefcase and wave it at Eckstein during an argument between the two men. Defence lawyers will cross-examine Gill tomorrow and are expected to complete their cross-examination of Beer by the end of the week. Beer’s cross examination was interrupted to accommodate Gill’s who needs to return to Australia by Friday.

So far, defence lawyers have given no indication whether they intend to call Drabinsky or Gottlieb to testify on their own behalf or if they will call any witnesses at all.

The trial continues tomorrow.

Defence lawyers, on the other hand, have spent most of their time raising questions about the credibility of the witnesses who testified about those documents. Today, as the trial enters its final phase, defence lawyers tried to raise questions about the investigators who found those documents.

John Beer, a former RCMP officer who now works as a forensic investigator for KPMG LLP, is the penultimate witness scheduled to appear at the trial. Beer testified that on Aug. 11, 1998 he went to Livent’s Yorkville offices to secure and inventory documents from Drabinsky and Gottlieb’s offices. Beer and his colleague Gary Gill (who will testify tomorrow) systematically labeled every section of Drabinsky and Gottlieb’s office with post-it notes to identify where the documents were found. They even videotaped the rooms.

In the short video played for the court, Beer points out the locations of documents in the offices of the Livent founders. Drabinsky’s large office is tastefully decorated with abstract art on the walls, hardwood floors covered with colourful area rugs and solid hardwood furniture. Drabinsky’s office contained a small library with walls lined with hundreds of books. In the video, Beer points to a bar area in Drabinsky’s office complete with glasses in a cupboard, before moving to the bathroom complete with shower.

Gottlieb’s office is smaller with more modern furniture. It’s cluttered with documents. with files resting on the floor and on a window ledge overlooking Avenue Road, as well as on a suede chair in the office. Drabinsky and Gottlieb had been suspended from the company the day before the videotape was made. An indication of the haste in which the men exited the company: Gottlieb’s reading glasses are resting on a pile of papers in the middle of his desk.

The actual cataloguing of the documents was not videotaped. But Beer testified that he, or his colleague, Gary Gill, wrote where they were found on the back of the documents, along with the date and their initials. For instance, one major document – a summary of financial manipulations in 1997 – was located in section B-2 of Drabinsky’s office. Beer is seen on the videotape indicating that B-2 relates to the second of two brown leather briefcases found behind Drabinsky’s desk.

Lead prosecutor Robert Hubbard took Beer through dozens of documents seized from the office. In most cases, Beer’s initials and the location where the documents were found are on the back of the document, but in several cases, there are no initials. Beer testified that sometimes, he only put the initials on the file folders where the document was found or the boxes where the file was stored.

At one point Hubbard offered to enter the entire beat-up banker box as an exhibit, prompting Edward Greenspan, the defence lawyer representing Drabinsky to comment: “If my friend wants to put in boxes [as evidence], or if he wants to put in The Toronto Sun, that’s all fine with me,” Greenspan said. “I don’t accept any of what’s being led.” After some discussion, Madam Justice Mary Lou Benotto suggested that entering a digital photo of the box in question would be sufficient.

The documents were turned over to the RCMP in Dec. 1998, shortly after the police launched their own investigation into the alleged accounting fraud at the theatre company. They have remained in police custody ever since.

Over the course of the trial, defence lawyers have questioned the provenance of the many of the documents prosecutors have submitted, arguing there is no evidence that either Drabinsky or Gottlieb had the documents in their possession or even saw them.

But that’s not the case for all the documents. That document seized from Drabinsky’s briefcase, for instance, contains Beer’s initials as well as a notation of where it was seized. The document has been the subject of previous testimony from Chris Craib. The former Livent controller testified that he helped Gordon Eckstein – Livent’s former senior vice president of finance and administration – to prepare the document that listed more than $21 million in accounting “problems” from 1997 that had been pushed into 1998.

One document Mr. Beer identified contained the investigator’s initials and also had a location code for Mr. Drabinsky’s briefcase beside his desk. It was a report detailing $21-million of “problems” that were omitted from the financial statements in 1997 and were instead “rolled” to 1998. Craib also testified that during an argument between Drabinsky and Eckstein, he witnessed Drabinsky pull the document from the briefcase.

Just who found that document quickly became a hot topic as Greenspan began his cross examination of Beer. In his testimony Beer made a point of stating that Patrick O’Kelly, a lawyer from the Toronto law firm of Stikeman Elliott LLP, who helped catalogue documents in Drabinsky’s office, had nothing to do with finding the briefcase document.

But those assurances were not good enough for Greenspan who suggested that O’Kelly must have been the one to find the document. After all, according to Beer, O’Kelly was sitting behind Drabinsky’s desk right next to the briefcases while Beer and Gill sat in front of the desk, Greenspan suggested. Greenspan even replayed the video to emphasis that he was sitting right next to the briefcases.

But Beer disagreed. “It was certainly not Mr. O’Kelly who found [the document],” Beer said. “I looked in one of the briefcases and Mr. Gill looked in the other. I don’t recall Mr. O’Kelly looking into the briefcases.”

Stikemen Elliott lawyers have been at the centre of the investigation into alleged accounting fraud at Livent and defence lawyers have alleged that the law firm is part of a massive conspiracy with other Livent accounting staff to frame Drabinsky and Gottlieb.

Greenspan suggested that KPMG may have had motive to work against Drabinsky as well. After all, it was KPMG who had done the initial due diligence on Livent for Michael Ovitz and failed to detect the alleged accounting fraud at the company, Greenspan said. “KPMG was involved in an effort to protect its reputation as well as its pocketbook,” Greenspan suggested. “Wouldn’t they have an interest in suggesting that they were misled by the fraudulent misrepresentation of others?”

“I can’t agree with your speculation Mr. Greenspan,” Beer replied.

“It’s not speculation, it’s common sense,” Greenspan replied. KPMG certainly had a strained relationship with Drabinsky. At the time of the Livent investigation Drabinsky was actually a KPMG client, employing one of their accountants for his personal finances. That relationship should have prohibited the accounting firm from investigating Drabinsky. Even after becoming aware of the conflict, KPMG continued to work on the Livent investigation. Drabinsky eventually won a court injunction that permanently banned KPMG from acting against Drabinsky.

The trial continues tomorrow.

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.

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

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

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

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

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

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

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

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

“No,” Coort replied.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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