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Millions in "Bogus Invoices" Went to Company Expenses: Greenspan

There has been plenty of dramatic testimony over the past five months atthe criminal fraud trial of Garth Drabinsky and Myron Gottlieb. As if testimony about the widespread fraud that eventually destroyed the high-profile theatre company wasnt exciting enough, there has been testimony about volatile, and profanity laced, management meetings, a senior executive who liked to throw things at underlings, meetings with then U.S. President Bill Clinton and many allegations from defence lawyers about a how most of the witnesses at the trial are involved in a massive conspiracy to frame the Livent founders.
But stripped of all that drama, the prosecutions case is relatively simple: When Livent was still a private company, Drabinsky and Gottlieb funneled millions of dollars out of the company using a fake invoice scheme with two of the companys suppliers.
Those bogus invoices, where improperly booked onto the companys balance sheet, made the company seem more valuable. As a public company, Livent continued to improperly book expenses onto its balance sheet as part of a larger scheme that involved shifting or outright eliminating expenses from its books to make the company appear more profitable.
Each of those alleged schemes were laid out yesterday by Paul Coort, the forensic accountant hired by the RCMP to help them understand Livents tangled books. Today the defence got its chance to answer those charges.
Lets take those bogus invoices first. In his earlier testimony, Coort detailed how Drabinsky and Gottlieb collected $8.1 million in payments from Kofman Engineering and Execway Construction as part of the fake invoicing scheme. About $6.8 million of that was improperly booked to the companys fixed assets, Coort said.
But during the same period between 1990 and 1993, Drabinsky and Gottlieb spent about $9.8 million of their own money to repay loans and cover other expenses related to the acquisition of the company from Cineplex Odeon, said Brian Greenspan, the lawyer representing Myron Gottlieb.
You’ve got $8.1-million going one way, but you know and I know that during the same period, $9.8-million went from Mr. Drabinsky and Mr. Gottlieb back into company-related expenses, Mr. Greenspan said.
Coort replied that the much of the money was not company-related but rather were personal loans to the executives.
But those loans were related to the start-up of the company, insisted Greenspan. The loans were associated with efforts by Drabinsky and Gottlieb to acquire the live theatre division that would eventually become Livent from Cineplex Odeon Drabinsky and Gottliebs former employer.
As part of their deal to buy the theatre division, Drabinsky and Gottlieb borrowed $60 million from the Royal Bank, but as part of the deal MyGar, the private company owned by the two executives, was required to come up with $5 million of their own funds to complete the sale. But they were $2.5 million short.
The pair turned to Roy-L, a private company run by Joseph Rotman, the prominent Toronto businessman and philanthropist, who eventually became a member of Livents board of directors. Roy-L loaned the pair $2.5 million to help them start the company but the loan climbed to $4.1 million once interest and penalties associated with a default of the loan were included, the court heard.
Drabinsky and Gottlieb also took out another loan for $250,000 from the Canadian Imperial Bank of Commerce to cover expenses associated with the transaction, as well as $100,000 in professional fees paid to noted architect Moishe Safdi for work on the Pantages Theatre, Greenspan said. That loan climbed to $300,000 once interest payments were included.
Another $2.9 million was paid to Pen West Development Corp. as part of a deal to acquire a parking lot at Dundas and Bond Street. The land was included in a land swap deal with the City of Toronto as part of the expansion of the Pantages Theatre, Greenspan said.
Another $2.3 million was spent on fees to lawyers, bankers, accountants and other professionals involved in the failed attempt by Drabinsky and Gottlieb to completely take over control of Cineplex Odeon in the late 1980s, Greenspan said.
So between this timeframe of January 1990, and May 1993, what we have in total is about $9.8-million of money going from Drabinsky and Gottlieb with respect to these expenses that I’ve outlined, Mr. Greenspan concluded.
In his earlier testimony, Coort had suggested that the bogus invoicing scheme may have been an attempt by Drabinsky and Gottlieb to circumvent restrictions in the companys loan agreement with the Royal Bank that limited the amount of money the pair could take out of the company.
In 1990 and 1991 those bank covenants restricted the executives to an annual draw of $400,000 plus expenses. But Greenspan disputed that theory, pointing out that MyGars financial statements for those years report that Drabinsky and Gottlieb took a total of $1.042 million out of the company in 1990 and $1.8 million in 1992.
Greenspan did not ask Coort any questions that suggest the defence disputes that the bogus Kofman and Execway invoices were improperly booked to the companys balance sheet. Instead, he suggested that neither Drabinsky nor Gottlieb could have known where the transactions were booked without the assistance of their accountants. A notion that seemed to puzzle Coort.
“Are you telling me they didn’t know how to read their own general ledger?” Coort asked.
“Yes,” Greenspan replied. In fact, former Livent controller Tony Fiorino told investigators that Drabinsky and Gottlieb could not book a transaction on the general ledger if their lives depended on it.
“I guess you didn’t ask Mr. Fiorino about that did you?” Greenspan said.
“No,” Coort replied.
And while those Kofman and Execway invoices may have been improperly booked, the conservative accounting treatment Livent used for other assets resulted in Livents balance sheet actually being undervalued, Greenspan suggested.
For instance, Livent had already written off all of its pre-production costs associated with Phantom of the Operaand thus was not carrying any asset value for the show on its balance sheet, Greenspan said. Phantomwould become Livents most successful show, running for more than nine years and grossing more than $420 million.
At the time of the initial public offering, the best thing Livent had going for it was Phantomand its value appears on the books as zero, Greenspan said.
Coort pointed out that the company had recouped its costs for that show and all subsequent profits would appear on the companys income statement.
Livents other successful musical, Joseph and the Amazing Technicolor Dreamcoatonly had an asset value of $2.4 million on Livents balance sheet, noted Greenspan. That show would go on to gross more than $225 million at the box office.
Coort said that he was not hired to do a comprehensive analysis of the value of Livents IPO, but only whether the Kofman and Execway and invoices were properly recorded which they were not.
At the time of the IPO, Livents one fixed asset the Pantages Theatre was also undervalued, Greenspan insisted. The theatre was listed as valued at $56 million on MyGars 1992 financial statements, Greenspan said. However, a market valuation done three years earlier valued the theatre at between $70-$75 million, Greenspan pointed out.
The defence didnt spend all its time talking about the pre-IPO period. David Roebuck, one of the defence lawyers representing Drabinsky, questioned Coort about the probity of Livent moving advertising expenses to future periods something Livent did at the end of every year.
Roebuck suggested that this is allowed under matching principles laid out in the Canadian Institute of Chartered Accountants handbook the bible of Canadian accounting. The handbook even lists direct response advertising like that employed by Livent as an example, he said. This is allowed under GAAP [generally accepted accounting principles], Roebuck said. Advertising can be treated like an asset and booked in future periods.
In theory, yes, Coort replied. But that was inconsistent with Livents accounting policies.
But Roebuck pointed to a section of the due diligence report prepared by KPMG for Michael Ovitz prior to his investment in the company that quoted former Livent chief financial officer Maria Messina saying that the company was capitalizing advertising for Ragtime, New York, and Phantom of the Opera, Toronto.
Prosecutors followed up on that question during a brief re-examination of Coort. Crown lawyer Alex Hrybinsky asked if there was anything in Livents general ledger that indicated that the company had set up its advertising costs as a pre-paid expense as required if it were to book those costs to a future period.
No, replied Coort.
As for the suggestion that MyGars assets were really undervalued at the time of the IPO, Hrybinsky asked if that would provide any sort of accounting justification for improperly booking the Kofman and Execway invoices.
No, Coort replied once more.
The defence is arguing that their clients were improperly taking money out of the company, only to put it back in. It’s hard to tell how much traction that argument will have with Madam Justice Mary Lou Benotto, who is overseeing the case.
And the suggestion that Drabinsky and Gottlieb did not know wherethose Kofman and Execway invoices were being booked is a familiar refrain. Defence lawyers have suggested over-and-over that Gordon Eckstein, Livents former senior vice president of finance and administration, did all the accounting manipulations without their knowledge.Eckstein, Maria Messina and Chris Craib all testified that Drabinsky and Gottlieb not only knew what was going on, they were the ones directing the alleged fraud.
Does this mean that Drabinsky and Gottlieb will testify to try to convince the judge that Eckstein was doing the manipulations on his own, while providing them with bogus justifications?
The trial continues tomorrow.