As if there werent already enough documents in the criminal fraud trial of Livent founders Garth Drabinsky and Myron Gottlieb, earlier today defence lawyers produced one that they created themselves. You cant really blame them. The document was meant to help speed up the cross examination of former Livent controller Grant Malcolm, who wrapped up his fourth and final day on the witness.
The document was a list of production reports created by Malcolm that mentioned transferred amounts along with a list of Livents senior managers who received those reports. That mention of transferred amounts is important because Malcolm has testified that since most of the transfers of costs between various Livent productions referred to in the reports had no accounting justification the term was essentially a short
hand for fraud.
But the term itself would not be enough to tip off a reader that the amounts were illegitimate, suggested David Roebuck, the defence lawyer acting for Drabinsky. It was a notion that Malcolm agreed with. It was meant to be ambiguous, yes, Malcolm told the court.
The reports typically went to top Livent executives such as Drabinsky, Robert Topol and Gordon Eckstein all men who prosecutors allege had knowledge of the fraud. However, in May of 1997 the reports were also being distributed to former Livent chief financial officer, Maria Messina a full two months before she said she first learned about the alleged fraud.
Gerry Blair, a Livent employee who joined the company from Andrew Lloyd Webbers Really Useful Group Theatre company in England, also received the reports. Before joining Livent, Blair had been involved in monitoring royalty payments from Livent to Webber and had actually been involved in an audit of Livents financials to ensure the company was making accurate payments, Roebuck suggested. “You knew that just having a schedule referring to transfers doesn’t indicate to Mr. Gerry Blair that there was a fraud going on at Livent,” he suggested.
Thats right, Malcolm replied.
But Malcolm disputed Roebucks suggestion that another Livent executive Frank Scardino, the companys general manager also received the reports and did not understand the hidden meaning of the term transferred amounts.
He never referred to them as fraud, but he did have a way of characterizing them. He referred to them as the bullshit transactions, Malcolm told the court.
Roebuck seemed taken aback for a moment, but quickly went back to that document he had, noting that Blair had received 17 of the 24 reports that mentioned transferred amounts. But by then, the cat was out of the bag and chief crown prosecutors shouted out: How many reports did Mr. Drabinsky get?
Brian Greenspan, the defence lawyer representing Gottlieb, quickly piped up: How many times is Mr. Gottliebs name on the list?
Excuse me, Your Honour, Mr. Roebuck said. I seem to be losing control of my cross examination.
Hubbard would get a chance to ask the question officially during his brief re-examination of Malcolm at the end of the day. The answer, of course, was that Drabinsky received every one of the reports. Oh, and as for Gottlieb, his name didnt appear on any of the distribution lists for the reports.
As an aside, Drabinksy wasnt in the courtroom to hear the outbursts. Late last week the Madam Justice Mary Lou Benotto granted him leave to be absent from court from the day because of an important engagement that could not be rescheduled, explained his lawyer Edward Greenspan. And while Drabinsky did not provide an explanation for his absence, co-incidentally Andrew Lloyd Webber is in Toronto to appear for a taping of the final episodes of the Canadian version of the CBC reality show The Trouble with M a ri a, which is searching for the lead to appear in an upcoming production of The Sound of Music. That’s the same network that broadcast Drabinsky’s own musical reality show Triple Sensation.Now, back to the accounting.
Many of the transferred amounts, listed in Malcolms reports were actually legitimate accounting adjustments, Roebuck suggested. The topic of show-to-show transfers had even been addressed by Livents audit committee, the defence lawyer said. You knew there could be proper allocation of costs between shows, Roebuck said.
As I said, it was meant to be an ambiguous term, Malcolm replied.
Roebuck went on to suggest that even though Drabinsky was receiving the reports, Malcolm had no idea how closely he was reading them. After all, the reports could run between 150 to 200 pages long and Drabinsky was a perfectionist who was an active producer of Livents productions. It’s reasonable to conclude a perfectionist with 10 or more shows running at any time has got a pretty full day with respect to the actual production side of the business, Roebuck said. Mr. Eckstein had 100% of his time to deal with accounting issues, but Mr. Drabinsky was a personal and hands-on producer of Livents shows.
But Malcolm wasnt biting when Roebuck asked him to comment on some advertising adjustments relating to ad campaigns under contract in New York, or for advertising in cities that were close together. Malcolm agreed that some transfers could be legitimate, but added: In most cases, thats not what we were doing.
Malcolm disagreed when Roebuck suggested that transfers between the account of Show Bo a tToronto and its touring production were legitimate. Ten years later, that sounds like a reasonable assumption, Malcolm said. But at the time, these were costs that legitimately belonged to the productions listed, and in fact they were inappropriately adjusted.
Roebuck persisted and pointed to explanations in Livents financial statements. The reader would not be aware of any financial irregularities. The footnote does not say these were all baseless and arbitrary, Roebuck said.
No, it doesn’t. Did you expect it would? Malcolm snapped back.
I’m here to ask the questions, Mr. Roebuck responded.
Roebuck also took issue with Malcolms testimony regarding the production reports he sent to new Livent managers who arrived after former Hollywood mogul Michael Ovitz bought a controlling stake in the company. Malcolm told the court that while new Livent managers were on the distribution list for his reports that listed the allegedly fraudulent transfers, in fact, Malcolm had been instructed to send them reports with all mention of those transfers removed. Im going to suggest to you that your testimony makes zero sense, Roebuck said.
That may well be, but Im just telling you what happened at the time, Malcolm said.
Roebuck also confronted Malcolm about his testimony about his one and only private encounter with Drabinsky. Malcolm told the court that Drabinsky had summoned him to his office in June 1998 and asked him to explain the amounts that had been allegedly transferred to the accounts for Show Bo a t. Malcolm told Drabinsky that the transfers were affecting Show Bo a tand the other productions and produced a memo showing the allegedly improper transfers to the account.
But Roebuck spent a considerable amount of time presenting numerous documents that outlined extensive stage expenditures for Show Bo a ts three touring productions that could have been legitimately charged to the different Show Bo a tcity accounts. One of the expenditures included nearly $1 million for the construction of a jump set a fourth set for the show that could be moved to a new venue when the three Show Bo a tshows were being used. Malcolm disagreed.
When you reported to Mr. Drabinsky, you didnt say anything about ‘problems [with the transfers],’ You just say here are the numbers, Roebuck said.
No, I didnt, Malcolm replied.
But the documentation that could show that Drabinsky was only interested in the expenses associated with that jump set, are also rife with other information related to the alleged fraud, Hubbard pointed out in his re-examination of Malcolm. The same documents contain reference to millions of dollars in rolled costs and rolled amortization, Hubbard pointed out.
Greenspan also challenged Malcolm on his testimony about his one private encounter with Gottlieb. Malcolm testified that shortly after the Ovitz transaction was announced, Gottlieb called him into his office to talk about Livents accounting baggage. He assured Malcolm that Drabinsky and Gottlieb were committed to cleaning up the alleged accounting manipulations over the next two quarters, and that both Gottlieb and Drabinsky would remain in charge of the company. Its a story that makes no sense, says Greenspan.
Malcolm didnt even remember the term baggage until Greenspan suggested it to during his testimony at the preliminary hearing, Greenspan suggested. And Livents founders would have no opportunity to clean up the alleged accounting manipulations over the next two quarters, Greenspan said, since new managers were already very much involved with the finances of the company.
Greenspan presented Malcolm with memos from Gottlieb to new management that accompanied drafts of Livents first quarter financial statements for their review. Isnt it apparent from this document that new management were going to be in control not just for the second quarter, but the first quarter as well?
It is apparent from this document, Malcolm replied, but Im not arguing that.
A more likely scenario was that the context for the meeting between Gottlieb and Malcolm was not to allay his concerns over alleged accounting fraud, but rather to assure him that Livent’s head office would not be moving to New York following the takeover by the Ovitz group, Greenspan suggested. Those fears were fueled by an article that appeared in the Toronto Starnewspaper speculating on such a move. But Malcolm would not budge. “That’s all well and good, but my context is my context,” Malcolm said. “What I recall of the meeting is my recollection.”
Greenspan also took his own shot at arguing that the alleged manipulations Malcolm was involved with were actually legitimate. Greenspan pointed out the invoices from Dec. 1994 that Malcolm had reversed and convinced Echo to re-issue in 1995 in an effort to boost the companys profits for 1994. But there is a flaw in that plan, Greenspan pointed out.
While the invoices were cancelled and identical invoices were issued in 1995, the invoices clearly state that the ads ran in Dec. 1994. This would be legitimate if the ads were clearly linked to revenue being earned in 1995, Greenspan said. Whether or not the invoice is dated in 1994 or not, the dates [for the ads] clearly shows that they ran in 1994 the auditors are going to say this isnt a 1995 expense, its a 1994 expense, he said. Unless, they took the position that based on the matching principle, it could be a 1995 expense.
I dont think so, Malcolm replied.
The trial continues tomorrow with a new witness longtime Livent accountant Diane Winkfein.