The other “lie,” relates to whether or not Malcolm asked for any extra benefit to participate in the fraudulent scheme. He told lawyers in one of the Livent civil cases that he never had, but it turns out that the in Feb 1998, Malcolm had in fact sent Eckstein a letter asking for a better job and a raise.

There is no discussion of Malcolm’s testimony that Gottlieb had told him that he shouldn’t worry about Livent’s accounting “baggage” when day-to-day managment of the company was turned over the new managers brought in by Michael Ovitz.

Fiorino used the words to describe a plan to transfer more than US$10 million in pre-production expenses and running costs into accounts associated with the construction of Livent’s theatre in New York in 1998. Fiorino, a chartered accountant who also holds an MBA degree from York University, testified that the transfers were improper and had the immediate effect of reducing Livent’s expenses and thus boosting its bottom line.

Fiorino testified that he first learned about the transfers in 1997 when he compared the construction budget for what would eventually be called the Ford Theatre in New York with the actual expenses incurred in the construction of the theatre. Those expenses were much higher than Fiorino expected and a little digging soon uncovered about $2 million in production expenses that had been transferred into the construction accounts by Grant Malcolm – another Livent accountant.

Fiorino confronted Malcolm who told him he was acting on instructions from Gordon Eckstein, Livent’s senior vice president of finance and administration. When Fiorino demanded an explanation from Eckstein he was told that pre-production costs for the musical Ragtime were getting too high and “they” wanted to offload the costs. When prosecutor Amanda Rubaszek asked Fiorino who “they” were, Fiorino replied Livent’s senior management – Garth Drabinsky and Myron Gottlieb.

Not surprising, the defence objected strenuously to the hearsay evidence. In later testimony Fiorino said that Eckstein did not mention any specific names to him and that he merely understood “they” to be Drabinsky and Gottlieb.

Many of the costs transferred were from a company called F&D Scene – a company that constructed sets and staging for Ragtime. (It’s also a company in which Livent owned a minority ownership stake – although prosecutors did not ask Fiorino about that. * see note below)

The next instance occurred in the February of 1998 when Malcolm told Fiorino that he was going to transfer another US$10 million in production costs and expenses into theatre construction accounts. “I was dumbfounded,” Fiorino told the court. “I just looked at Grant and said, ‘You’ve got to be kidding.’”

He wasn’t. Malcolm told Fiorino a large portion of the expenses would be related to advertising and that it would be up to Fiorino to figure out where best to hide them. “[Grant] came up with the detailed list of invoices and he would transfer it into the theatre construction program,” Fiorino said. “It was up to me then to distribute those costs into the theatre construction accounts.”

A day or two later, Fiorino testified that he confronted Eckstein about the plan – a meeting that quickly turned into a yelling match, Fiorino testified. “Usually Gordon Eckstein did most of the yelling,” Fiorino testified. “This time I was yelling back, which was not usual.”

Fiorino complained that the transfers were “totally ridiculous and absurd,” he told the court. “It wouldn’t pass audit scrutiny,” he said. “Advertising costs have nothing to do with bricks and mortar.”

But the look on Eckstein’s face showed he was “resigned” to the manipulations and ordered Fiorino to go through with the plan. “From the expression on his face, he knew this transaction was absurd,” Fiorino said. “He said, ‘It is what it is. If the auditors find it, it will be up to Garth and Myron to justify it.’” But the auditors never did catch on to the transfers.
Later, in the first quarter of 1998, Eckstein ordered another $3-$4 million in transfers, Fiorino testified.

Rubaszek showed Fiorino dozens of pages from Livent’s general ledger that broke down the individual expenses that eventually comprised those millions of dollars buried in the company’s construction accounts. There were hundreds – if not thousands – of expenditures, some for hundreds of thousands of dollars, some – like the $25,000 for Livent’s corporate jet – were for less, while many others were for as little as a few hundred dollars.

The expenditures were allegedly transferred to theatre construction in New York, Chicago and in Toronto. In the case of Toronto, there was no actual construction going on at the time of the transfer, Fiorino said.

Fiorino processed the allegedly improper transfers by putting the transferred amounts into a series of “dummy accounts” with names like “specialty electrical” or “dressing rooms” or “orchestra pit” so he could keep allegedly illegitimate transferred amounts separate from the legitimate construction expenses, he told the court.

For his participation in the scheme, Fiorino was ultimately disciplined by the Institute of Chartered Accountants of Ontario and suspended for two years. He was also barred by the U.S. Securities and Exchange Commission from acting as an accountant with any SEC registered company for three years.

Fiorino also testified extensively about a scheme Livent used to boost sagging ticket sales at its Los Angeles production of Ragtime in 1997. The company funneled nearly $1.1 million in ticket purchases through its construction vendors Kofman Engineering and Execway – another construction firm employed by Livent. More than $381,000 in tickets was purchased by Peter Kofman, the founder of Kofman Engineering, while an additional $688,000 in tickets were purchased by Execway. Kofman has already testified that many of the purchases were made (sometimes without his knowledge or approval) with his personal American Express credit card.

At the beginning of the scheme, Fiorino was instructed by Eckstein to hide more than $432,000 in ticket purchases in Livent’s construction accounts. Both Execway and Kofman submitted bogus invoices for work that was never done in order to get reimbursed for the tickets. Those invoices were paid within 24 to 48 hours while other legitimate construction expenses were paid typically paid within 30 to 90 days, he testified.

To ensure that Kofman was paid quickly for the tickets, Fiorino testified that he often hand-delivered the cheques to Eckstein and Gottlieb for their signatures. When he delivered the cheques to Gottlieb, Fiorino testified that he told the Livent exeutive that they had to be signed quickly because they were “for Kofman’s ticket purchases.” Fiorino testified that he never talked to Gottlieb about how the expenses were ultimately booked, but when he started to make a point about the cheques and Gottlieb’s knowledge of the scheme he was quickly cut off when defence lawyers objected.

Brian Greenspan, the lawyer representing Gottlieb, has insisted that Gottlieb knew nothing of the scheme and signed hundreds of Livent cheques every week as a matter of course. When Gottlieb eventually found out about the ticket scheme, he insisted that the ticket sales be properly accounted on the company’s books, Greenspan suggested earlier in the trial.

And sure enough, the later cheques that Kofman and Execway received as compensation came from Livent’s Ragtime account (heck there was even a Ragtime logo on the cheques). And more than US$688,000 in ticket sales were booked legitimately through the theatre’s box office.

But when Fiorino delivered the earlier cheques to Gottlieb – the ones that were allegedly improperly buried on Livent’s construction accounts – they were clearly not for ticket purchases. Attached to each of the cheques was the phony invoice for construction work as well as a description of the invoice attached to the cheque. Anyone even glancing at the cheques would see that they were not for ticket purchases at all. Was Fiorino going to point out that just by looking at the cheques, Gottlieb would have known there was something “ridiculous” or “absurd” going on? Maybe we will find out tomorrow when defence lawyers start their cross examination.

* Note: In the original blog post I mentioned that F&D Scene was a company in which Garth Drabinsky owned a minority ownership stake. This is not the case. Livent, not Drabinsky personally, held a minority interest in the set design and construction company. The post has been corrected.

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

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

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

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

“That’s right,” Malcolm replied.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“No, I didn’t,” Malcolm replied.

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

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

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

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

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

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

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

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

“I don’t think so,” Malcolm replied.

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

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

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

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

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

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

“No, he didn’t,” replied Malcolm.

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

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

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

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

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

“That’s correct.”

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

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

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

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

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

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

“No we did not.”

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

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

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

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

The trial continues on Monday.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“That’s right, yes,” Malcolm replied.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“They were big,” Malcolm replied.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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