Blogs & Comment

Livent Investigation "Not Truly Independent," Defence Charges

The case against Garth Drabinsky and Myron Gottlieb consists basically of two parts: first, there are the witnesses who have some personal knowledge of the alleged fraud that occurred at the once successful live theatre company; and then there are the thousands of documents that painstakingly lay out how Livent systematically told its investors, regulators and others that it was making millions in profits when in reality it was awash in red ink.

Over the course of the trial, defence lawyers have pulled out all the stops to try to convince Madam Justice Mary Lou Benotto, the judge overseeing the trial without a jury, that she should not trust those witnesses. Defence lawyers highlighted differences in the myriad statements they have given to cops and regulators, as well as the army of civil lawyers who have worked on the numerous Livent-related lawsuits over the past decade. They pointed out the differences between what one witness has said as opposed to another, and finally suggested that just about all of the witnesses have conspired to frame Drabinsky and Gottlieb.

But what about all those documents? Many of them covered with notes and instructions in Drabinsky or Gottliebs own handwriting? Today, defence lawyers tried to convince Justice Benotto that she cant trust either those documents or the men who allegedly found those documents in Drabinskys and Gottliebs own offices.

Earlier today Edward Greenspan, the defence lawyer representing Drabinsky, began his cross-examination of Gary Gill, a forensic investigator with KPMG LLP, who was came to Livent in August 1998, to investigate the allegations of accounting irregularities at the company. Gill and his colleague John Beer previously testified about how they systematically searched and catalogued Drabinskys and Gottliebs offices, removing documents that could be relevant to their investigation.

But neither man should have been there in the first place, argued Greenspan. Since KPMG conducted the due diligence that led to Michael Ovitz investing in the company and bringing in new management, it was a conflict of interest that should have disqualified it from investigating allegations of fraud at the company, Greenspan suggested. In fact, KPMGs investigations unit was hired by Robert Webster, Livents new vice president and a former KPMG partner who worked on the due diligence report.

Gill testified while he was aware that KPMG had done the original due diligence report, he did not think it was a conflict of interest.

Wouldnt it be awkward for you if you found out during your investigation that KPMG should have been alerted to the financial irregularities during its due diligence report? Greenspan asked Gill.

We were not focusing on the due diligence, we were asked to investigate allegations of financial irregularities, Gill replied.

But soon after Gill began his investigation, another real conflict of interest arose. While Gill, Beer and a lawyer hired by Livent were searching Drabinskys office, the men discovered a letter to Drabinsky from KPMG accountant Shelley Levine indicating that Drabinsky had hired KPMG to work on his personal taxes. Gill testified he called a senior KPMG official who instructed the men to continue the investigation but establish a so-called Chinese wall. To ensure the independence of the investigation and protect Drabinskys personal information, information about the Livent case was sealed off from the North York KPMG office where Levine worked and KPMG investigators were told to ignore any personal information relating to Drabinskys personal dealings with KPMG, Gill told the court.

But that Chinese wall was breached, Greenspan suggested. One of the KPMG accountants hired to help Livent restate its financial results was based in the same North York office as Drabinskys personal tax accountant, Greenspan said. Gill told the court that he was unaware of what the accountant was doing and only saw him at Livent once.

But those assurances were not enough for Drabinsky. Two months after he was ousted from Livent, he won a court injunction barring KPMG from conducting the investigation. Under the terms of the court order. KPMG was allowed to deliver their report to Livents management and board of directors, but not release it to the public. The report has never been released to the public.

Gill and other KPMG accountants filed affidavits during the brief court battle with Drabinsky, but they did not mention that KPMG accountants were also working on a restatement of Livents financials, Greenspan said.

Do you feel that KPMG was being candid to Mr. Drabinsky and the court when they did not disclose to the court that KPMG was involved in the restatement? Greenspan asked.

I wasnt involved in the restatement, Gill replied. I can comment on my affidavit. I cant comment on the statements of others or what they may or may not have disclosed.

Greenspan also questioned Gill as to why KPMG only chose to search and catalogue the contents of Drabinsky and Gottliebs offices and not the offices of the accountants who came forward and alleged that Drabinsky and Gottlieb were behind the alleged fraud. You must have considered that these individuals could attempt to shift responsibility to others to mitigate their circumstances? Greenspan suggested.

We considered that, Gill replied, but said that they did not feel a search was necessary.

Gill disagreed with Greenspans suggestion that Livent and its law firm Stikeman Elliott had instructed KPMG to limit their investigation to Drabinsky and Gottlieb.

You would not treat individuals who have admitted their involvement in financial irregularities with kid gloves, Greenspan said.

We had discussions with the individuals and they appeared to be candid and transparent, Gill replied. They provided everything that we asked them for.

You didnt know anything about these people. You didnt know if there were any documents in their offices that would help Garth Drabinsky or Myron Gottlieb because you never looked in there, Greenspan said.

No, we didnt, Gill replied.

This wasnt a truly independent investigation, Greenspan suggested.

We obtained the information we requested and thought that was sufficient, Gill replied.

For the next hour, Greenspan grilled Gill about a log book maintained by security guards posted outside of Livents sixth floor executive offices. Livent employees needed permission from senior company executives to enter the area and suspended executives Drabinsky, Gottlieb, Gordon Eckstein and Robert Topol as well as the assistants assigned to those executives ?- were explicitly barred from entering the area.

However, the log is riddled with omissions and errors, suggested Greenspan. Entry times are clearly inaccurate, exit times are missing and many people who are known to have gone into the area are not listed in the log book, Greenspan suggested. For instance, Gill and Beer came to the secure area on the morning of Aug. 11, 1998, to assess how long it would take to secure the documents in Drabinsky and Gottliebs offices; however, that visit is not reflected in the log book. Even Drabinsky lawyer David Roebuck signed the log book, but failed to write down when he left the secure area.

The log book is a joke, Greenspan said.

It is clearly not complete, Gill replied.

Greenspan also suggested that the log book had been tampered with regarding the time Gill and Beer entered Drabinskys office to conduct their search. In an interview with the RCMP in 2006, Gill told police that they searched the office sometime after 2 p.m. However, the time stamp on the videotape of the search shows that the search occurred at 4 p.m. However, the first time written in the log book has been written over and replaced with the time 15:40 or about 3:40 p.m.

Gill rejected Greenspans suggestion that the original time in the book was 13:40 or 1:40 p.m. – leaving the pair more than two hours of unaccounted time in Drabinskys office. It looks like someone has written 3:40 and someone else has changed it to 15:40, Gill told the court.

The allegation does seems pretty far-fetched considering the two previous entries in the log book above Gills signature state the entry time of 14:20 pm or 2:20 pm. Greenspan still entered the original log book as an exhibit for the judge to look examine.

Gill is expected to complete his cross-examination Friday. On Monday, Beer will return to the stand and complete his cross-examination. At that point the prosecution will have completed its case. The defence has yet to indicate whether it will call Drabinsky or Gottlieb to the stand or whether they will call any witnesses at all.