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Diane Winkfein: Witness for the Prosecution

Diane Winkfein worked with Garth Drabinsky for more than 23 years. In 1975, she joined Drabinskys old law firm as a bookkeeper and followed the charismatic entrepreneur through just about all of his endeavours. In 1982, she moved with Drabinsky to Cineplex Odeon, and also worked with him at his real estate venture, his foray into film production and even his attempt at opening a film studio. Finally in 1990, Winkfein followed him to Livent where she became a controller for the theatre company.
But earlier today she added another line in the work history section of her Drabinsky resume: witness for the prosecution. While Winkfein had plenty to say about the alleged accounting fraud that occurred at the theatre company Drabinsky and his partner Myron Gottlieb founded, ironically, her testimony may be more damaging to Gottlieb.
Winkfein testified about meetings she had with Gordon Eckstein, Livents former senior vice president of finance and administration, and Gottlieb shortly after the announcement that new managers would be arriving at Livent following the sale of a controlling stake in the company to former Hollywood mogul Michael Ovitz. She testified that she told Eckstein she would no longer participate in the accounting manipulations unless new managers were made aware of what was going on. Eckstein told her that everybody does it and not to worry. Soon after, Winkfein was called to a meeting in Gottliebs office.
Gottlieb acknowledged that Livent had had some difficulties, but he had been a director at Corona Corp. a company that he said had accounting issues and they had been handled in an orderly fashion with no damage to the share price, Winkfein testified. New management was going to be too busy in New York and Gottlieb, Drabinsky and Eckstein would continue to oversee Livents financials for the second quarter, despite the fact new managers would be on the scene by then. I said, do you want me to lie to new management? Winkfein told the court. He didnt answer, he smirked, looked away and basically that ended the conversation.
Winkfein also testified that Gottlieb was involved in hiding the alleged accounting manipulations from the companys auditors. During the 1997 year-end audit, company auditors uncovered six invoices for transactions that had been allegedly and improperly booked to the companys fixed assets. Winkfein testified that she kept the auditors at bay for as long as she could, but eventually they insisted on seeing the back-up documentation for the transactions. Eckstein suggested she get Maria Messina, Livents former chief financial officer, to deal with the problem, but Messina refused to mislead the auditors, she told the court. Gord told me to send the schedule up to Myron and let Myron handle it, she said.
Winkfein also testified that Messina was purposely kept in the dark about the alleged accounting fraud at the company. At the time, Livent accountants were concerned about her joining the company since Messina was a former auditor who had overseen the companys books as part of her job at Deloitte & Touche, Winkfein said. I told Gord, isnt this a problem? Winkfein told the court. She is from the auditing firm and we have been lying to her.
Eckstein said he had spoken with Drabinsky and it was not going to be a problem although they should not tell her about the alleged manipulations, Winkfein said. Eckstein said that because she was from the auditing firm it would be too black and white. Keep her out of it. Once she is hooked we would slowly let her in, she told the court.
Messina became aware of the fraud in 1997 when Eckstein went on vacation and left her in charge of preparing the financial statements, Winkfein said. Eckstein told Winkfein that she and former Livent controller Grant Malcolm should sit down with Messina and tell her what was going on. They brought her into an office, closed the door and briefly explained that they had been manipulating the companys financial statements, Winkfein testified. [Messina] said Oh my God. Oh my God. Oh my God. She was clearly distressed.
Drabinsky also came under fire in Winkfeins testimony but not without a few objections from Edward Greenspan, the defence lawyer representing the former Livent CEO. The first objection came fairly early in her testimony when she testified: Garth ran the company. There was very little that happened without his knowledge or approval.
Greenspan quickly objected. Im very concerned about the way this is coming out. The questions are being put to her in a way that we are getting hearsay, double hearsay, triple hearsay, Greenspan told the court. Winkfein who has no official training as an accountant, is not qualified to offer an opinion about accounting, Greenspan continued.
After being cautioned by the judge to limit the questions strictly to what she saw and did, prosecutors continued.
Winkfein testified that she had several meetings with Drabinsky in which he demonstrated a good grasp of accounting. Mr. Drabinsky asked very intuitive questions and caught some mistakes that had been made, she said.
At another meeting around the time Livent had gone public, Drabinsky called Winkfein to return to the office and explain a number on the companys balance sheet he thought was incorrect. Drabinsky soon realized what the number was, Winkfein testified. It was a number we had moved, I think it was from for the Pantages South Development for which there was very little backup.
In 1995, Drabinsky actually conducted interviews for the job of production controller at the company. Before bringing the interviewee into Drabinskys office, Winkfein asked him if he was worried the accountant might have a problem with what we were doing with the numbers, Winkfein told the court. Drabinsky replied: Dont worry about that, she wont be involved with that.
Drabinsky also told Livent accountants he wanted the auditors out of the building as fast as possible, Winkfein said. Gord [Eckstein] said that Garth wanted them out of there in two weeks. No one was going to tell him how to run his company, Winkfein said.
Every quarter Livent accountants would spend up to six weeks preparing the companys financials, Winkfein testified. The process would begin with accountants ensuring that the companys books were up-to-date. They would forward the financials on to Eckstein for review who would direct the accountants to make any changes to the books. When Gord was satisfied with the numbers, he’d prepare management statements and review them with the executives. And then eventually he’d come back to us with certain adjustments that were required, Winkfein said.
Prosecutors took Winkfein through dozens of examples of the alleged manipulations in the companys books. Printouts from the companys general ledgers showed the scope of the alleged manipulations as the companys net income swung from a loss of more than $8 million in the first quarter of 1997 before the alleged manipulations, to a reported profit of $4 million after the accounts had been adjusted. In the second quarter of 1997, Livents income went from a net loss of $21 million, pre-adjustment to a reported $8 million in profits. Livents general ledger showed a loss as large as $41 million in the third quarter that eventually was allegedly adjusted to show a loss of just $2 million.
Many of the manipulations were for relatively small amounts of money including $44,129 in directors fees paid to Livents board members that were reversed on the companys books and moved to a later time period. There were also alleged manipulations of $150,000 in interest payments owed to Thomas H. Lee, a noted U.S. investor who had a stake in Livent and was a member of the companys board of directors.
Livent accountants also manipulated expenses related to the companys corporate jet, Winkfein testified. For instance, a $25,500 bill for a round trip flight between Toronto and Burbank, Calif. including a $233 bill for phone charges on the flight was moved from 1996 to 1997, Winkfein said.
By the time the alleged fraud was uncovered at Livent, Winkfein was earning $86,500 per year although she received a $10,000 bonus the last year she was at the company. But when the alleged fraud was uncovered she was disciplined by the U.S. Securities and Exchange Commission and forced to personally pay $8,000 in fines and penalties about the same amount of money she earned by exercising Livent stock options, she told the court.
The trial continues tomorrow with Winkfein facing cross examination from Edward Greenspan.