Strategy

Livent trial: Encore!

The Livent drama is far from over, as a host of other legal dramas come to the surface.

The criminal fraud trial of Livent Inc. founders Garth Drabinsky and Myron Gottlieb may have drawn to a close, but the curtain is now rising on a host of other legal dramas related to the once high-flying theatre company. The outcome of two long-brewing lawsuits will determine how much money Livent creditors and investors will get back.

The receiver overseeing the Livent reorganization has already recovered about $70 million from the sale of most of the company’s assets, according to the latest plan of arrangement filed with a U.S. court back in 2003. However, there are currently more than $233 million in claims against Livent — not including those of shareholders who have yet to receive anything for their now worthless stock. That number could rise substantially if Livent wins the more than $550 million in lawsuits filed against Drabinsky, Gottlieb and Deloitte & Touche LLP.

The success of Livent’s $100-million civil fraud lawsuit against Drabinsky and Gottlieb will depend on whether the executives are found guilty of criminal fraud. (At press time, the verdict had yet to be delivered.) Even if the company wins a civil judgment against the former Livent executives, it may be hard to collect any money from the pair. Gottlieb has already said in court filings that he is broke, and neither Gottlieb nor Drabinsky have paid any of the $40 million Livent bondholders won in a 2003 U.S. civil lawsuit against the men. In February, the Supreme Court of Canada declined to hear an appeal of a lower court ruling ordering Drabinsky and Gottlieb to pay the judgment.

A more lucrative target may be Deloitte & Touche — Livent’s former auditor and currently a defendant in a $450-million lawsuit. Livent alleges that Deloitte’s negligence stopped it from uncovering the massive financial fraud that stretched back to the company’s initial public offering in 1993. Deloitte, for its part, counters that it was a victim of the fraud along with everyone else.

Many of the allegations against Deloitte have already been hashed out before the Institute of Chartered Accountants of Ontario, the province’s professional accounting body. In 2007, the ICAO ruled that three senior Deloitte auditors — including Douglas Barrington, the firm’s former chairman — were guilty of professional misconduct for their handling of the Livent file. In February, an ICAO appeal panel upheld the ruling and ordered the three senior auditors to pay more than $1.5 million in fines and costs.

The ICAO found that the Deloitte auditors had violated professional standards by continuing to rely on the representations of Livent’s managers even after discovering that Myron Gottlieb had misled them about the existence of a secret agreement that would have significantly altered the theatre company’s bottom line. “The auditors failed to consider the broader implications of the admitted deception, including the representations made by management throughout the audit,” the panel said in their original ruling.

The civil lawsuit will likely rehash many of the findings of the ICAO but will also deal with other allegations about Deloitte’s handling of the Livent file that surfaced during the long criminal trial of Drabinsky and Gottlieb. For instance, Maria Messina testified that during her time at Livent as chief financial officer, she had a romantic relationship with a senior Deloitte partner who helped oversee the Livent account. Messina also testified that while she did not tell Deloitte auditors about the alleged financial fraud at Livent, she did repeatedly call them to beg for increased oversight of the theatrical company. Despite Messina’s pleadings, the auditors continued to give Livent’s financial filings a clean bill of health. Deloitte & Touche refused to comment on the pending lawsuit.

The ICAO ruling does not seem to bode well for Deloitte. That said, the accounting firm won a minor victory earlier this year when an Ontario judge ruled Livent’s lawyers could not introduce into evidence transcripts of the ICAO hearing used during ongoing depositions of the Deloitte auditors. More than 10 years after the lights dimmed on Canada’s biggest theatre company, it’s clear that the Livent drama is far from over.