Strategy

Livent: I told you so

A long-time Livent critic gets vindication.

Perhaps no one has waited longer to hear a judge convict Garth Drabinsky and Myron Gottlieb of fraud than Alex Winch. It’s been nearly 14 years since Drabinsky launched a $10-million libel suit against the former investment adviser and short-seller for writing a letter to Forbes magazine complaining that Livent Inc.’s accounting was far more aggressive than the company claimed. In March, Winch sat in a packed Toronto courtroom to hear Justice Mary Lou Benotto agree with his assessment and rule that Livent founders Drabinsky and Gottlieb cooked the books in a scheme that defrauded investors of nearly $500 million. “I feel vindicated, elated and relieved,” says Winch. “I don’t think I have the vocabulary to properly express how I feel.”

That vindication has come at a high cost. Faced with financial ruin as his legal bills piled up, Winch settled the Drabinsky lawsuit in 1996. Under the terms of the agreement, Winch could not comment on the theatre company for three years and had to apologize to Livent in ads he was forced to buy in The Globe and Mail, The Wall Street Journal and Forbes. “It was a horrible choice,” says Winch, who is now a private investor living in Toronto. “I could either sacrifice my reputation or the financial security of my family.”

Winch’s fight with Drabinsky was the subject of extensive testimony during the recent criminal trial. Livent’s former CFO Maria Messina cited Winch as an example of the “ruthless” way Drabinsky dealt with critics. Defence lawyers insisted that Winch actually made $1,000 more by shorting Livent’s stock than he ultimately paid as a result of the lawsuit. Those defence calculations don’t cover the additional $211,000 Winch was forced to pay, as part of the settlement, to personally cover his ongoing Livent short positions. “Once again, Livent got the accounting wrong,” he says.

During his dispute with Drabinsky, Winch kept waiting for securities regulators in Canada and the U.S., or even Livent’s own auditors, to call him to either challenge or debunk his claims. Tracking cash flow in Livent’s own public financial filings revealed that pre-production costs for shows like Kiss of the Spider Woman were increasing even after the show had opened. That’s an accounting impossibility, Winch knew, and would have shown what prosecutors spent more than six months in court proving: that Livent’s managers were padding production costs with illegitimate expenses. “I could have explained it in a two-minute phone call,” says Winch. This was not the first time that regulators refused to act on Winch’s warnings about Drabinsky’s unique approach to accounting. Back in 1989 — less than a year before Drabinsky would be ousted as chairman and CEO of Cineplex Odeon Corp. — the Ontario Securities Commission failed to act on a 140-page report Winch wrote, pointing out a myriad of “inconsistencies” in the company’s accounting.

Winch’s Cineplex battle with Drabinsky came to a head later that year at the company’s bizarre annual general meeting. As Winch attempted to question Drabinsky about the firm’s accounting, a competing stock analyst tried to drown him out by faking a loud and prolonged coughing fit. When that didn’t work, the coughing analyst — who was a loud booster of Cineplex’s stock — shouted: “Is this a trial?” The meeting devolved from there and eventually ended when a silent Drabinsky, pursued by reporters and photographers, left the building by a back stairwell and was ushered into a waiting car by a phalanx of burly bodyguards.

Much has changed in Canada since Winch first tussled with Drabinsky. Back then, most investors were more trusting of company managers and had hadn’t even heard of terms like “aggressive accounting,” says Winch. Today, spurred by homegrown corporate crimes at Bre-X, YBM Magnex and Nortel Networks, investors are much more skeptical. Those corporate scandals, and the 10 years it has taken to close the Livent case, has bolstered Canada’s reputation as a country that doesn’t take fraud seriously. However, that reputation could begin to change if Drabinsky and Gottlieb are sentenced to significant jail time, says Winch. “In order for there to be deterrence, we need to send a message,” he says. “And the message is: if you break the law you will go to jail.”