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Livent's objectionable accounting

A loud crash rang out in the courtroom during one of the many objections lawyers for Garth Drabinsky and Myron Gottlieb made during prosecutor’s opening examination of Livent’s former senior vice president of finance, Gordon Eckstein. The noise came as Eddie Greenspan — who is acting on behalf of Drabinsky — accidentally leaned a little too hard on his chair, loudly pushing its adjustable armrest out of position. “My apologies your honour, I got so upset I appear to have broken my chair,” he told the court.

“That’s alright,” replied chief Livent prosecutor Robert Hubbard. “By the time this is over, you might need a couple more chairs.”

The number and intensity of the defence objections should come as no surprise to anyone familiar with Livent or Eckstein’s central role in the fraud case. As Livent’s chief accountant for most of its turbulent eight year history — and the witness who worked most closely with Drabinsky and Gottlieb — Eckstein is perhaps the prosecution’s most important witness. Prosecutors will be relying heavily on Eckstein to closely link Livent’s founders to the accounting crimes with which they are charged.

For its part, the defence is hoping to convince Madame Justice Mary Lou Benotto of exactly the opposite: that it was Eckstein who was actually responsible for the wide-spread accounting fraud that allegedly occurred at the theatre company. And the defence has done a yeoman’s job of demonizing Eckstein. Defence lawyers got former Livent engineer Peter Kofman to admit that while Gottlieb always treated him in a professional and gentlemanly way, Eckstein was arrogant, tyrannical and so abusive to his staff that he had a hard time getting them to stay with him. He was even known to use racial slurs, Kofman told the court.

None of that alleged temper came out today. And so far, Eckstein’s testimony has not disappointed prosecutors. Less than 15 minutes into his examination, Eckstein was asked to review the routine assurance company managers include in all their financial filings, stating that the reports represent a fair and accurate representation of the company’s financial health. “Were Livent’s financial statements accurate?” asked Hubbard. Eckstein leaned into the microphone screwed into the witness stand and firmly stated: “No.”

When asked if Drabinsky and Gottlieb knew that the financial statements were inaccurate, Eckstein replied: “They absolutely knew it was false.”

Eckstein went on to explain how Drabinsky and Gottlieb ordered him and his accounting staff to fake the company’s financial statements in order to hide losses and increase profits. Meetings were held at the end of every financial quarter to go over the company’s financial results and compare them to company budgets and financial projections. At each of those meetings, company executives learned that Livent was never as profitable as it had projected. “The actual results were always far lower than the projected results,” he told the court. “I was directed by Mr. Drabinsky, Mr. Gottlieb and (former Livent chief operating officer) Mr. Topol to make changes to the financial statements to bring them closer to the budget and to be more profitable.”

Losses were turned into profits by inflating pre-production costs for shows such as Phantom of the Opera, Showboatand Ragtime; improperly transferring expenses between shows; moving expenses from one time period to another and inflating company assets.

Eckstein also went so far as to hire an outside computer consultant to alter the company’s accounting software to allow company accountants to make changes to Livent’s financial records without leaving an audit trail.

Drabinsky and Gottlieb have pled not guilty. Eckstein, on the other hand, pled guilty to one count of fraud last year and was given a conditional sentence of two years, less a day. He also pled guilty to fraud charges laid by the U.S. Securities and Exchange Commission in connection with the collapse of Livent in 1998. He has yet to be sentenced in that case.

And while Eckstein pled guilty for his part in the Livent fraud, he told the court of trying to rectify Livent’s accounts — or at least pointing out how the alleged fraudulent accounting would not work. When Drabinsky allegedly told him to move advertising expenses into future years, Eckstein testified that he said the plan wouldn’t work because the company’s outside auditors — Deloitte and Touche — would call Livent’s ad agency to ensure the accounts of the two companies matched. Drabinsky then allegedly instructed Robert Topol to ensure the agencies would confirm the fraudulent accounts to the auditors. The companies agreed.

Eckstein also told the court that prior to Livent’s initial public offering in 1993 he uncovered more than $6 million in fraudulent transactions buried in the company’s balance sheet. Much of those overstated assets related to money that had improperly flowed to Drabinsky and Gottlieb as part of a false-invoice scheme involving Peter Kofman. Eckstein testified that he told Gottlieb that those assets should be written off to ensure the company could enter the public realm with a clean balance sheet. And while Gottlieb allegedly agreed initially, he backed down when he realized that the large write-off would not make the company’s books look good to potential investors.

During his testimony, Eckstein frequently looked over at Drabinsky and Gottlieb. At one point he looked out into the court’s public gallery and saw another familiar face: Robert Topol. Charges against Topol were dropped last year after a judge determined that the excessive delays in the proceedings had denied him his right to a speedy trial. Topol didn’t stay long. Once his presence was noted, he was told not to come back on the off chance either prosecutors or defence lawyers call him as a witness.

Eckstein’s testimony is expected to continue through tomorrow. But who knows, given the number of defence objections, it could go longer than that. Let’s hope Greenspan’s assistant got his chair fixed.