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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

“No,” Coort replied.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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