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?

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

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

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

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

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

“I know it happened sir,” Messina replied.

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

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

“They knew what I did,” Messina replied.

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

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

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

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

We could have used some thunder after that answer.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Why would you say that?" Greenspan asked.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Drabinsky and Gottlieb are charged with two counts of fraud and one count of forgery in connection with the alleged massive accounting fraud that occurred at the company. Both men have pled not guilty.

At times, a clearly angry and agitated Kofman described how he felt he had no choice but to go along with one scheme that saw his company — Kofman Engineering Services Ltd. — pay Drabinsky and Gottlieb millions of dollars for "introductions" and other allegedly bogus business development work between 1990 and 1993. The second scheme involved Livent's purchase of hundreds of thousands of dollars of tickets to its production of Ragtime in Los Angeles in Kofman’s name in 1997 and 1998. Prosecutors allege that those purchases were made not only to fraudulently make the production seem more profitable than it actually was, but that those payments were improperly recorded on Livent's books as assets, thus improperly boosting the value of the company.