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.

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.