Blogs & Comment

The Livent Verdict: Guilty on All Counts

During his time as Canadas best known producer of live theatre, Garth Drabinsky knew how to pack a house. And today was no different as there was standing-room only in a downtown Toronto courtroom to hear a judge declare Drabinsky and his partner Myron Gottlieb guilty of two counts of fraud and one count of forgery in connection to the collapse of Livent.
As Justice Mary Lou Benotto delivered her verdict, an audible gasp could be heard from family members and supporters who filled the courtroom. As the verdict was being delivered Drabinsky slumped in his seat while members of his family wept and hugged each other for support.
In a brief verdict, Benotto commended Drabinsky for his spectacular achievements and creative success with theatre productions such as Phantom of the Opera, Ragtimeand Showboat. Those shows helped attract thousands of tourists to the city and reflected favorably on all of us in Canada, she said. However, the trial was not about that creative success, but rather about the widespread accounting fraud that occurred under their watch at the company. This was widespread and long-standing, said Benotto. The accounting system was fraudulent. Most importantly, I have been satisfied beyond a reasonable doubt that you knew what was happening with the financial statements.
The verdict brings to a close one of the most sensational chapters in the ongoing Livent Saga. The transcript of the 10-month long trial exceeds 7,000 pages, as the court heard from more than a dozen witnesses and examined literally thousands of company documents that prosecutors said clearly laid out the fraud and Drabinsky and Gottliebs complicity.
Neither Drabinsky nor Gottlieb would comment on the case as they left the courtroom. We will have to read the 80-page judgment before we make any comment, said Edward Greenspan, the lawyer representing Garth Drabinsky.
Lawyers will be back in court on April 8 to set a date for sentencing. The pair will be sentenced under guidelines that were in place in 1998 the date of the actual crime. Under those guidelines the former executives could face a maximum sentence of 10 years for each count of fraud and 14 years for forgery.
Over the course of the trial, prosecutors and defence lawyers painted a very different picture of the accounting fraud that destroyed what was once North Americas largest live theatre company. Prosecutors argued the case was simple: Drabinsky and Gottlieb arbitrarily manipulated the companys books to hide mounting losses and ensure that investors continued to buy the companys stock.
The fraud was ultimately uncovered after Micheal Ovitz the former Hollywood superagent bought a controlling stake in Livent in early 1998 and installed his own executives to manage the day-to-day financial affairs of the company. In August 1998, Maria Messina, the companys former chief financial officer, blew the whistle on the fraud and Drabinsky and Gottlieb were suspended. The pair were fired soon after and an internal investigation found evidence of rampant accounting manipulations.
Defence lawyers painted a much more complicated picture of what brought Livent to ruin. The accounting manipulations were masterminded by Gordon Eckstein, the companys senior accountant, who was aided by Messina, the defence argued. The judge rejected the defence argument that Messina, Eckstein as well as junior Livent accountants then conspired with executives representing Ovitz and lawyers from the prominent Toronto law firm of Stikeman Elliott to plant incriminating documents and frame Drabinsky and Gottlieb for crimes they did not commit.
This was widespread and long-standing, she said. The accounting system was fraudulent. Most importantly, I have been satisfied beyond a reasonable doubt that you knew what was happening with the financial statements.
One of the main reasons cited by the judge for her rejection of the defence’s notion that Eckstein carried out the accounting fraud on his own was the existence of the now-notorious Executive Summaries Eckstein produced at the end of every financial quarter. The one-page document provided a stark and simplified picture of Livents financial health or lack thereof. Each summary contained a line-item stating Livents actual net income which was almost always a substantial loss, as well as its reported net income which was almost always a healthy profit. The report then summarized the amount of expenses that had been moved to the companys fixed assets or rolled into future periods where they would improperly boost the companys bottom line. Mr. Eckstein had these reports prepared in order to report to management. Were he on a frolic of his own, he would not have needed these reports in simplified format, Justice Benotto wrote in her decision. I believe that Mr. Eckstein gave the management summaries to Mr. Drabinsky and Mr. Gottlieb and discussed the documents with them at management meetings.
Both Eckstein and Messina pled guilty to fraud charges in the United States. Neither has been sentenced in those cases. Eckstein also pled guilty to a single count of fraud in Canada but received a conditional sentence with no jail time.
Eckstein was perhaps the most vilified witness during the months long trial. Defence lawyers and even many of the prosecutions own witnesses portrayed him as a rude, aggressive bully who was prone to verbal and even physical abuse. He admitted calling Drabinsky and Gottlieb fucking idiots but denied allegations that he once threw a clock at Maria Messina. Even the judge found his behaviour reprehensible. Mr. Eckstein demonstrated a complete lack of understanding of basic human dignity, the judge wrote.
Ecksteins testimony was often exaggerated, overstated and even changed when he was challenged by defence lawyers,” Benotto wrote. However, not everything he said was a lie, according to the judge. Mr. Eckstein is an unsavoury witness. He is also the perfect fall guy, Benotto wrote.
Benotto accepted Ecksteins testimony that he was instructed by Gottlieb to bury millions of dollars in kickback payments on Livents balance sheet shortly after the company was formed in 1993. She also accepted that Drabinksy and Gottlieb rejected his advice that they write down those payments prior to the companys initial public offering. At the time of the IPO Livent’s reported assets of about $97 million were overstated by about $6.8 million as a result of the improper accounting related to the kickback scheme, the court heard.
Another controversial figure in the trial was Messina who prior to joining the company also audited the companys books. While Messina portrayed herself as a whistleblower who informed new Livent managers brought in by Michael Ovitz about the fraud, defence lawyers insisted that she was a master manipulator who concocted the complex scheme to frame Drabinsky and Gottlieb for fraud. Neither portrait is accurate, wrote Benotto. Once new Livent managers began rooting through the companys books, it was only a matter of time before they uncovered the fraud, Benotto wrote. [Messina] saw the curtain coming down. She knew she could not hide the fraud. The disclosure was self-preservation not whistle blowing.
And while Messina is an expert in self-preservation the judge rejected the defence’s assertion that Messina lied when she testified about Drabinsky and Gottliebs role in the fraud. Ms. Messina failed miserably in her role as officer of a public company. To participate in a fraud violated her duty. She could have stopped it and did not. Her conduct was inexcusable, Benotto wrote. That said, I believe her evidence as to Mr. Drabinsky and Mr. Gottliebs role in the fraud.
The judge did agree with the defence’s assertion regarding one of the most dramatic incidents connected with the Livent fraud: the controversial management meeting on April 24, 1998. Both Gordon Eckstein and Chris Craib a Livent controller testified they attended a meeting with Drabinsky on that day where he openly discussed manipulating Livents first quarter financial results. In earlier interviews and testimony before the Ontario Securities Commission, Craib provided elaborate details about the meeting and emerging from the meeting sick to his stomach by what he had witnessed. Theres just one problem it couldnt have happened the way Craib described it.
At the time Craib said the meeting was taking place, Drabinsky was in Livents corporate jet flying back from a gala lunch in Washington, D.C., attended by then-president Bill Clinton. At the trial, Eddie Greenspan submitted a photo of Drabinsky, Clinton and Drabinskys girlfriend at the time at the lunch as proof of his attendance.
Prosecutors suggested that Craib merely got the time of the meeting wrong and Drabinsky could well have attended the meeting later that afternoon after he returned from Washington. Defence lawyers insisted that Craib was lying about the meeting and that perjury should cast doubt not only on Craibs testimony, but the prosecution’s entire case.
There are so many inconsistencies in Craibs evidence and evidence of collusion with Messina, regarding the events surrounding the meeting that it is impossible to rely on anything Craib says about that infamous meeting, Benotto wrote. As a result, Benotto ruled that the meeting never took place. However, that fact does not negate the evidence that other executive meetings did take place where accounting manipulations were discussed, she says. It does not follow that because one meeting did not take place as described, the accused had no knowledge of the manipulations going on in the books of the company, Benotto wrote.
Despite the problematic testimony of Eckstein, Messina and Craib, the mountain of documents that made up the heart of the prosecutions case backed much of what they said, wrote the judge. Benotto also rejected the defence’s notion that the documents were so vague and ambiguous that they could not be used to ascribe knowledge of the fraud. During final arguments, defence lawyers even argued that the word actual does not actually mean actual. However, Benotto cites earlier testimony by Eckstein and Messina that Drabinsky knew full well what actual actually meant.
During a particularly heated management meeting in the fall of 1997 Eckstein had two sets of financials prepared: one that represented the financials Livent would report to shareholders and another that accurately reflected the companys financial position. When those actual figures were presented to Drabinsky, he asked what they were. Eckstein replied they were the fucking real numbers, before Drabinsky pushed them aside and focused on the manipulated financials. This is evidence [Drabinsky] knew what the word meant, Benotto wrote.
The judge also rejected the defence’s contention that many of the accounting transactions the prosecution said were fraudulent could have been justified by accounting experts who were not called as part of the case. Even if some of the entries are justifiable, the cumulative effect of the manipulations is not, Benotto wrote.
During final arguments of the trial, the defence argued that the actions of Drabinsky and Gottlieb indicated that they were innocent. The men never personally directed any of Livents junior accountants to commit fraud, they never told anyone to hide the fraud from Livents auditors and they were not panicked by the thought of accountants working for Michael Ovitz poring over Livents books as part of a due diligence examination. And while the conduct of Drabinsky and Gottlieb is consistent with someone who doesnt know about the fraud, it is also consistent with executives confident that their crimes will not be discovered, Benotto wrote. The accounting practices at Livent had gone on for a long time. They were entrenched The practices had become a way of life and no one had detected them. The confidence could have easily have been the result of having fooled the auditors for many years.
The judge also rejected the notion that Drabinsky and Gottliebs firing of Robert Topol the companys former chief operating officer and a co-conspirator in the fraud indicated their innocence. Topol was fired in early 1998 after it was discovered he had mis-appropriated several hundred thousand dollars in Livent securities, the court heard. Had Drabinsky and Gottlieb known about the fraud, it would have been too much of a risk to fire Topol, the defence argued. After all, an incensed Topol could have gone to the police and blown the whistle on the fraud. Given Topols alleged complicity in the fraud, it was highly unlikely he would have gone to the authorities, Benotto wrote.
Topol was originally charged with Drabinsky and Gottlieb. However, those charges were dropped in 2007 due to unreasonable delays in the case coming to trial. Topol made a brief appearance at the trial early in the proceedings, but was quickly ushered out of the courtroom and banned from returning since he may have been called as a witness.
Benotto also dismissed the defence’s contention that Drabinsky was too busy working on the creative aspects of Livents theatre productions to know about the fraud. Mr. Drabinsky may not have known of every detail in the accounting department. He knew that the system of manipulations was taking place. He had long ago pushed the first domino.
Other actions by Drabinsky and Gottlieb that the defence insisted pointed to their clients’ innocence are not consistent with the facts of the case, the judge ruled. If Drabinsky and Gottlieb knew about the fraud, why on earth would they hire Maria Messina as their chief financial officer? Messina was a respected auditor with Deloitte and Touche who gave no indication that she would go along with the fraud, the defence argued. But that alone is not an indication of innocence, Benotto ruled. Perhaps they wrongly assumed she would not find out. Perhaps they knew she would and then be drawn into assisting in the fraud out of fear of shame. Perhaps they believed she would be ‘hooked’ by the excitement of the company, Benotto wrote. Whatever the reasonthe fact of her hiring does not raise a reasonable doubt.
Benotto acknowledged that some of the evidence against Gottlieb is contradictory and incomplete. Gordon Eckstein made sweeping allegations that Gottlieb always attended the raucous quarterly management meetings where the accounting fraud was discussed. Those charges, however, were contradicted by other evidence. But thats not enough to exonerate him, Benotto writes. There is no doubt that some of the evidence against Mr. Gottlieb is incorrect. However, the evidence that I believe places him at meetings where fraudulent manipulations were openly discussed and documents were reviewed in detail.
Benotto also rejected the defence’s assertion that Livent investors did not care about any potential misallocation of expenses on the companys balance sheet since that document was barely mentioned in the documents used to market Livents initial public offering. The inclusion of a balance sheet that is false is an act of deceit, falsehood and dishonesty, Benotto wrote. As a result of that inclusion, the judge found Drabinsky and Gottlieb guilty of the first count of fraud.
Drabinsky and Gottliebs criminal actions continued after the company went public as the executives worked to keep the company afloat, Benotto wrote. Their dedication to the company compelled them to direct staff members to falsify the companys financial statements in order to keep the money flowing, she said. The company experienced exponential growth in a very short time. The exponential growth was analogous to an athlete taking a performance enhancing drug. The result may be spectacular but the means involve cheating. As a result of that as well as the submission of Livents falsified financial statements to investors, regulators and the companys board of directors, the judge found Drabinsky and Gottlieb guilty on the second count of fraud as well as guilty of forgery.