Livent’s founder Garth Drabinsky allegedly ordered his staff to conceal accounting manipulations from accountants doing due diligence work ahead of a planned sale of the company, an Ontario court heard today. “Garth said `make sure they don’t find anything,`” Gordon Eckstein, Livent’s former senior vice president of finance and administration, told the court during his third day on the witness stand. “I said `Garth, I can’t control 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.”