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Livent: Fake records kept on file

At the height of its success, Livent founders Garth Drabinsky and Myron Gottlieb would brag about how their company was unique in the annals of the entertainment business. They were right. There were no other publicly-traded companies producing the kind of spectacular live theatre events that Livent was known for. Now, as an Ontario court hears about how alleged accounting fraud destroyed that company, it appears it was unique for another reason: the perpetrators of that alleged fraud kept meticulous records of just about every allegedly improper accounting trick they used to cook the books.

One of the motivations for keeping such detailed records was to ensure that — if the alleged fraud was ever exposed — Garth Drabinsky and Myron Gottlieb would not be able to claim they had no knowledge of it, testified Gordon Eckstein, Livent’s former senior vice president of finance. “If anything went on, I knew Drabinsky and Gottlieb would say they had nothing to do with it,” Eckstein told the court.

Eckstein ordered his staff to keep records of the allegedly-improper adjustments as back-up for meetings with senior Livent officials who constantly questioned why the company was not more profitable, Eckstein testified. In those executive meetings Garth Drabinsky would often challenge Eckstein as to the accuracy of the company’s books and claim that they had not spent so much on advertising and other costs. “In those meetings, he would always state the numbers were double-accounted, it was incorrect,” he told the court. “(There was always) a myriad of excuses as to why he had overspent.”

Eckstein took chief Livent prosecutor Robert Hubbard through numerous internal company documents that clearly laid out how much the company had forecast for a given financial period, how much the company actually made — or lost — and what adjustments needed to be made to bring the company’s reported financial picture more in line with those forecasts. Advertising expenses were often moved to future dates; costs that should have been expensed were moved onto the balance sheet or buried in other parts of Livents financials to help boost profitability.

Neither Gottlieb nor Drabinsky are trained accountants, but both men had a sophisticated understanding of accounting, Eckstein told the court. Gottlieb was on Livent’s audit committee and was the chairman of the audit committee of Dundee Bancorp. “On many occasions (Drabinsky) told me he is smarter than any accountant in the world,” Eckstein told the court.

Prosecutors allege that two common schemes used to cook Livent’s books were dubbed the “expense roll,” and the “amortization roll,” Both techniques were similar and involved Livent moving (or rolling) expenses from the time period in which they should have been booked to future periods. The “amortization roll” involved rolling assets into different areas of the company’s balance sheet to stretch out the period that those assets had to be expensed or depreciated. It was Garth Drabinsky who came up with the name “expense roll,” Eckstein testified. “When I asked (Drabinsky) `why would we do that? It will just make the next period that much harder?` (Drabinsky) said `We’ll just keep rolling it forward,`” he told the court.

Those techniques were effective in helping to boost Livent’s profitability. In the first nine months of 1995, for instance, the company’s actual net income was about $5 million — much lower than the company had forecast for the period. In a series of documents circulated among top Livent managers, more than a dozen adjustments were made to the company’s financials to boost net income to more than $11.3 million.

No amount of money was too small to be considered for “adjustment,” Eckstein testified. “We were on the take all the time.”

As the day wore on, most of the crown’s time was spent introducing a plethora of documents presented that were allegedly circulated among senior Livent officials tracking the accounting adjustments. The documents are piled high in the courtroom, packed away in binders with tabs separating the individual memos, financial statements and other material. So many documents were introduced that defence lawyers had a hard time keeping up. And even the prosecution misspoke a few times when switching back and forth between the different binders. “It’s hard to keep tabs,” Hubbard remarked.

Those internal documents — and just how closely the prosecution can link them to the defendants — promise to be a subject of much contention later in the trial. However, in the meantime, Hubbard got some help in trying to show that Drabinsky saw many of the memos laying out how expenses were shuffled among different Livent shows or pushed into different time periods. Many of the documents contain handwritten notes and other material scrawled into the margins. And that handwriting belongs to Garth Drabinsky, Eckstein told the court.

Many of the documents that didn’t have identifiable handwriting were written in “the same blue pen,” Hubbard remarked as he was submitting the exhibits to the court. Defence lawyers couldn’t let that stand and were quick to object. “My friend is in the habit of editorializing,” Brian Greenspan told the court. “It is not necessarily the same blue pen. It is just a blue pen.”

When it came to where those documents came from and whether or not his client, Garth Drabinsky, had anything to do with them, Eddie Greenspan’s objection summed it up: “I don’t admit anything in this regard.”