Why R. Kelly may be playing on Garth Drabinsky’s iPod.
Nearly 10 months after their trial for criminal fraud began, Livent founders Garth Drabinsky and Myron Gottlieb will finally learn their fate this Wednesday. The pair will return to a Toronto courtroom to hear if Justice Mary Lou Benotto thinks prosecutors proved the two men oversaw a massive accounting scheme that defrauded investors and creditors of nearly $500 million.
Drabinsky and Gottlieb are alleged to have masterminded what may be the most meticulously documented accounting fraud in Canadian history. The pair allegedly kept two sets of books one set for investors and regulators and another that was shown only to the most senior Livent executives. To investors, Livent reported that it was making million from its Broadway shows such as Phantom of the Opera, Ragtimeand Showboat, while the second secret set of books showed the company was losing buckets of money and burying those losses in the companys fixed assets and other financial accounts.
If past corporate fraud cases are any indication, the defence has a steep hill to climb. Executives at Enron, WorldCom, Adelphia, Tyco and Hollinger all failed to convince courts of their innocence. But Drabinsky and Gottlieb are arguing something differentnot only are they claiming that they did not do it, but that a vast and shadowy conspiracy has spun a complex web of lies and created and planted damning documents as part of an elaborate plan to frame them for crimes they did not commit.
The old frame job. You dont often hear that argument in high-profile cases of accounting fraud. Its a claim most often used by from low-level street thugs who when caught red-handed with drugs, guns, stolen goods or DNA on a bloody glove complain that the incriminating evidence was planted by the cops. But there is a recent high profile case where the conspiracy theory worked and a high-profile defendant walked away free: the acquittal last year of American R&B singer Robert Kelly on child pornography charges.
As in the Kelly case, Drabinsky and Gottlieb insist that the evidence against them has been confabulated by a web of former employees and disgruntled business associates. The alleged Livent schemers include the companys former senior accountant, chief financial officer, a group of junior accountants, new Livent managers working with former Hollywood mogul Michael Ovitz and lawyers at the prominent Toronto law firm of Stikeman Elliott LLP.
The defence conspiracy theory has three components. First, in an attempt to divert attention from their own complicity in the alleged accounting fraud, prosecution witnesses Gordon Eckstein, Livents former senior accountant, Maria Messina, its chief financial officer, and Chris Craib, a controller, lied to investigators, securities regulators, lawyers and in their sworn testimony when they said they attended meetings where Drabinsky or Gottlieb openly discussed manipulating the companys financials, the defence argues. (Click here for a more comprehensive examination of the Livent defence.)
Secondly, to back up their perjured testimony, the witnesses met in secret to coordinate their stories and create fraudulent notes, memos and other documents that indicated Drabinsky and Gottlieb knew about the alleged fraud. Lawyers working for Stikeman Elliott then planted many of the most damaging documents in Drabinskys office.
Finally, the witnesses took ambiguous company documents and spun wild tales of fraud that made the innocent documents seem damning or suspicious. For instance, the prosecutions most damaging documents were a series of Executive Summaries produced for senior Livent managers every financial quarter. Witnesses explained how the summaries laid out in excruciating detail how Livent managers were burying millions of dollars in expenses in the companys fixed assets and other financial accounts in an attempt to improperly boost the companys bottom line. Each summary contained two line items: the companys actual net income which was almost always a substantial loss and reported net income, which almost always showed a healthy profit.
Some of those summaries contain handwritten notes that witnesses identified as Drabinskys, allegedly instructing accountants to roll or move millions of dollars in expenses and amortization to future periods or to parts of Livents balance sheet where they would improperly boost the companys bottom line. The accounting manipulations are clearly laid out and would be obvious even to the most indolent CEO,” the prosecutors argued during the trial. “It is inconceivable that these major reallocations could have escaped the attention of the senior executives.”
Not so fast, argues the defence. Those summaries and many other documents presented during the trial are part of an elaborate plan by former Livent chief accountant Gordon Eckstein to hoodwink Drabinsky and Gottlieb, the defence argues. Eckstein is the real mastermind of the fraud and he kept a Nuremburg file of fake and ambiguous documents that he claimed proved that he was only following orders, the defence insists.
Many of the documents in the prosecutions case are ambiguous and only seem suspicious after witnesses give them some nefarious meaning, the defence argues. There are many reasons why there could be discrepancies between actual and reported. In my submission it does not necessarily connote fraud, said Roebuck during final arguments.
The judge didnt seem to be buying it. So is it your submission that when the report says net reported income and net actual income, those phrases are ambiguous? Justice Benotto asked Roebuck. Yes, he replied.
None of the prosecution witnesses emerged unscathed from the weeks of withering cross-examination by defence lawyers Edward and Brian Greenspan. Gordon Eckstein has already pled guilty to fraud in both Canada and the U.S. and was evasive on the stand. Maria Messina took more than a year to blow the whistle on the fraud and has worked for Stikeman Elliott as a consultant on the case for the past 10 years. And Chris Craib, well, he told investigators about attending a meeting where Drabinsky talked about manipulating the companys finances. Theres just one problem, Drabinsky wasnt in the country at the time Craib said the meeting took place. And while Drabinsky was back in the office later that day, defence lawyers insist that the contradiction is proof Craib is lying.
Prosecutors dismiss the conspiracy theory as preposterous. Rather than a complex web of shadowy players who have conspired to frame Drabinsky and Gottlieb for a variety of dubious and complicated reasons, there is a much simpler and logical explanation, argued crown lawyer Amanda Rubaszek. The accused did it, she told the court. There is no conspiracy. The evidence is what it is.
The case may look like a slam-dunk for the prosecution, right? After all, prosecutors have eyewitnesses who testified they saw Drabinksy and Gottlieb openly discussing how to manipulate the companys financials, they have reams of documents that indicate the pair knew about the fraud, and many of those documents have Drabinskys handwriting on them. But prosecutors in the R. Kelly case had even more evidence and the singer walked free.
The child pornography case against R. Kelly hinged on a videotape of the award-winning R&B singer best known for inspirational songs like “I Believe I Can Fly,” and “Sex Me” having sex with a clearly underage girl. In the tape, a man who happens to look exactly like R. Kelly is having sex with a the girl in question in a log-cabin-themed rec room that happened to look exactly like the log cabin-themed rec room in Kellys Chicago mansion. Seems like an open and shut case right? Well, it wasn’t.
In a defence that can be best summed up as Who you gonna believe? Me or your lyin eyes? Kellys defence lawyers (which included Edward Gensen the lawyer who unsuccessfully defended Conrad Black) argued that the tape was a fake. Despite numerous experts who assured the jury the tape was authentic, defence lawyers argued that a shadowy conspiracy of disgruntled former business associates (including the young girls aunt) and employees (most notably, a woman who Kelly hired to simulate sex with him on stage during his concerts) produced the tape using high-tech special effects in an attempt to blackmail the singer.
And just like in the Livent case, the witnesses in the R. Kelly case were not completely pure. For instance, Lisa Van Allen the woman who did the bump-and-grind at Kellys concerts testified that she had stolen Kellys gold Rolex watch, as well as another Kelly sex tape that she ransomed for $40,000 and had dated two different men who had both been accused of fraud. Thats pretty tawdry, but were these people really capable of producing a high-tech blackmail sex-tape? Is that even possible?
Defence lawyers thought so and even cited the distinctly unfunny 2006 Wayans brothers comedy Little Manas an example. In the Razzie-nominated film, digital special effects are used to superimpose the head of Marlon Wayans onto the body of a little person to make the actor look like the freakish baby referred to in the movies title. “They put the head of Marlon Wayans on a midget and it looked real, didn’t it?” Adams asked one witness, the Chicago Sun Timesreported. You can judge for yourself by clicking on the following video clip.
At the end of the R. Kelly trial, the Chicago Sun-Times reportedthat not one of the more than 20 reporters who covered the case thought Kelly would be acquitted. But after just a few hours of deliberation, the jury found the singer not guilty on all 14 pornography related charges.
It appears that elaborate efforts by the R. Kelly defence team to discredit the evidence and witnesses in the case were enough to make jurors look past the infamous sex tape. Thats good news for members of the Livent defence team who have spent the last 10 months highlighting every conceivable discrepancy in the testimony, as well as every shred of evidence that does not completely conform to the prosecutions theory of the alleged crime. If R. Kellys defence lawyers could make the jurors forget that tape, then its certainly possible Drabinsky and Gottliebs lawyers could cast doubt on the prosecutions sometimes tainted witnesses and the often arcane details of Livents accounting policies.
However, there is another explanation for the Kelly acquittal that may not be such good news for the Livent lawyers: the Kelly jury may well have been just plain nuts. I mean, Little Man, really? And there are signs that this may not have been the most diligent jury. Despite deliberating for only a few hours, one juror was dragged before the judge after having a tantrum in the jury room when the hamburger he ordered for lunch was late in arriving. Hours later another member of the jury begged the judge to be excused. The request was denied.
There is no jury in the Livent trial. Justice Mary Lou Benotto is overseeing the case alone and will ultimately decide the verdict. If the Livent defence succeeds as well as Kellys, Drabinsky may be able to restart his career as a musical impresario. Could a musical based on the life of R. Kelly be coming to a theatre stage soon? Well find out soon enough.