Jul

Here’s an interesting legal question for you: If you allegedly committed a fraud, but there was a legal way for you to achieve the same ends, did you still commit a crime? I don’t know the answer, but the question is something defence lawyers representing Livent founders Garth Drabinsky and Myron Gottlieb seem to want the judge overseeing the case to ponder.

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

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

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

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

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

“No, he didn’t,” replied Malcolm.

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

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

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

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

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

“That’s correct.”

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

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

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

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

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

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

“No we did not.”

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

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

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

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

The trial continues on Monday.

John Gray