Blogs & Comment

Livent controller: Accounting was "Absurd"

Over the last few months of testimony at the criminal fraud trial of Garth Drabinsky and Myron Gottlieb a lot of words have been used to describe Livent accounting. One witness called the practice of allegedly burying millions of dollars in expenses on the companys balance sheet baseless and arbitrary. Another witness described the transactions as bullshit. Today, after a two-week summer break in the trial, some more words were added to the sad lexicon of Livents accounting glossary when former Livent controller Tony Fiorino described the transactions as absurd and ridiculous.
Fiorino used the words to describe a plan to transfer more than US$10 million in pre-production expenses and running costs into accounts associated with the construction of Livents theatre in New York in 1998. Fiorino, a chartered accountant who also holds an MBA degree from York University, testified that the transfers were improper and had the immediate effect of reducing Livents expenses and thus boosting its bottom line.
Fiorino testified that he first learned about the transfers in 1997 when he compared the construction budget for what would eventually be called the Ford Theatre in New York with the actual expenses incurred in the construction of the theatre. Those expenses were much higher than Fiorino expected and a little digging soon uncovered about $2 million in production expenses that had been transferred into the construction accounts by Grant Malcolm another Livent accountant.
Fiorino confronted Malcolm who told him he was acting on instructions from Gordon Eckstein, Livents senior vice president of finance and administration. When Fiorino demanded an explanation from Eckstein he was told that pre-production costs for the musical Ragtimewere getting too high and they wanted to offload the costs. When prosecutor Amanda Rubaszek asked Fiorino who they were, Fiorino replied Livents senior management Garth Drabinsky and Myron Gottlieb.
Not surprising, the defence objected strenuously to the hearsay evidence. In later testimony Fiorino said that Eckstein did not mention any specific names to him and that he merely understood they to be Drabinsky and Gottlieb.
Many of the costs transferred were from a company called F&D Scene a company that constructed sets and staging for Ragtime. (Its also a company in which Livent owned a minority ownership stake although prosecutors did not ask Fiorino about that. * see note below)
The next instance occurred in the February of 1998 when Malcolm told Fiorino that he was going to transfer another US$10 million in production costs and expenses into theatre construction accounts. I was dumbfounded, Fiorino told the court. I just looked at Grant and said, You’ve got to be kidding.’
He wasnt. Malcolm told Fiorino a large portion of the expenses would be related to advertising and that it would be up to Fiorino to figure out where best to hide them. [Grant] came up with the detailed list of invoices and he would transfer it into the theatre construction program, Fiorino said. It was up to me then to distribute those costs into the theatre construction accounts.
A day or two later, Fiorino testified that he confronted Eckstein about the plan a meeting that quickly turned into a yelling match, Fiorino testified. Usually Gordon Eckstein did most of the yelling, Fiorino testified. This time I was yelling back, which was not usual.
Fiorino complained that the transfers were totally ridiculous and absurd, he told the court. It wouldn’t pass audit scrutiny, he said. Advertising costs have nothing to do with bricks and mortar.
But the look on Ecksteins face showed he was resigned to the manipulations and ordered Fiorino to go through with the plan. From the expression on his face, he knew this transaction was absurd, Fiorino said. He said, It is what it is. If the auditors find it, it will be up to Garth and Myron to justify it.’ But the auditors never did catch on to the transfers. Later, in the first quarter of 1998, Eckstein ordered another $3-$4 million in transfers, Fiorino testified.
Rubaszek showed Fiorino dozens of pages from Livents general ledger that broke down the individual expenses that eventually comprised those millions of dollars buried in the companys construction accounts. There were hundreds if not thousands of expenditures, some for hundreds of thousands of dollars, some like the $25,000 for Livents corporate jet were for less, while many others were for as little as a few hundred dollars.
The expenditures were allegedly transferred to theatre construction in New York, Chicago and in Toronto. In the case of Toronto, there was no actual construction going on at the time of the transfer, Fiorino said.
Fiorino processed the allegedly improper transfers by putting the transferred amounts into a series of dummy accounts with names like specialty electrical or dressing rooms or orchestra pit so he could keep allegedly illegitimate transferred amounts separate from the legitimate construction expenses, he told the court.
For his participation in the scheme, Fiorino was ultimately disciplined by the Institute of Chartered Accountants of Ontario and suspended for two years. He was also barred by the U.S. Securities and Exchange Commission from acting as an accountant with any SEC registered company for three years.
Fiorino also testified extensively about a scheme Livent used to boost sagging ticket sales at its Los Angeles production of Ragtimein 1997. The company funneled nearly $1.1 million in ticket purchases through its construction vendors Kofman Engineering and Execway another construction firm employed by Livent. More than $381,000 in tickets was purchased by Peter Kofman, the founder of Kofman Engineering, while an additional $688,000 in tickets were purchased by Execway. Kofman has already testified that many of the purchases were made (sometimes without his knowledge or approval) with his personal American Express credit card.
At the beginning of the scheme, Fiorino was instructed by Eckstein to hide more than $432,000 in ticket purchases in Livents construction accounts. Both Execway and Kofman submitted bogus invoices for work that was never done in order to get reimbursed for the tickets. Those invoices were paid within 24 to 48 hours while other legitimate construction expenses were paid typically paid within 30 to 90 days, he testified.
To ensure that Kofman was paid quickly for the tickets, Fiorino testified that he often hand-delivered the cheques to Eckstein and Gottlieb for their signatures. When he delivered the cheques to Gottlieb, Fiorino testified that he told the Livent exeutive that they had to be signed quickly because they were for Kofmans ticket purchases. Fiorino testified that he never talked to Gottlieb about how the expenses were ultimately booked, but when he started to make a point about the cheques and Gottliebs knowledge of the scheme he was quickly cut off when defence lawyers objected.
Brian Greenspan, the lawyer representing Gottlieb, has insisted that Gottlieb knew nothing of the scheme and signed hundreds of Livent cheques every week as a matter of course. When Gottlieb eventually found out about the ticket scheme, he insisted that the ticket sales be properly accounted on the companys books, Greenspan suggested earlier in the trial.
And sure enough, the later cheques that Kofman and Execway received as compensation came from Livents Ragtimeaccount (heck there was even a Ragtimelogo on the cheques). And more than US$688,000 in ticket sales were booked legitimately through the theatres box office.
But when Fiorino delivered the earlier cheques to Gottlieb the ones that were allegedly improperly buried on Livents construction accounts they were clearly not for ticket purchases. Attached to each of the cheques was the phony invoice for construction work as well as a description of the invoice attached to the cheque. Anyone even glancing at the cheques would see that they were not for ticket purchases at all. Was Fiorino going to point out that just by looking at the cheques, Gottlieb would have known there was something “ridiculous” or “absurd” going on? Maybe we will find out tomorrow when defence lawyers start their cross examination.
* Note: In the original blog post I mentioned that F&D Scene was a company in which Garth Drabinsky owned a minority ownership stake. This is not the case. Livent, not Drabinsky personally, held a minority interest in the set design and construction company. The post has been corrected.