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Livent Accounting: Nasty, "Brutal" and Long

Weve all been waiting for this moment in the criminal fraud trial of Garth Drabinsky and Myron Gottlieb. The moment when courtroom observers would be overwhelmed by the minutiae of the accounting, finding ourselves floating in the sea of complicated and impenetrable accounting transactions that culminated in the widespread alleged fraud that eventually brought down the once high-flying theatre company. That day has arrived.
Grant Malcolm, Livents former senior production controller, spent most of the morning going through volumes of documents prosecutors have compiled to track the alleged accounting fraud. Even the judge found it hard slogging and could be seen stifling the occasional yawn. But prosecutors have to go through the painstaking process of proving that a fraud occurred at Livent. And the fraud, as prosecutors say, is in the companys documents.
There are certainly a lot of those. The number of documents speaks volumes as to how the alleged fraud grew at the company. For instance, for 1994 and 1995 prosecutors have just one volume of allegedly improper accounting manipulations for each year. For 1996 there are two volumes of allegedly improper transactions. For both 1997 and 1998 the last year of the alleged fraud there are three volumes of allegedly bogus transactions for each year.
As chief crown prosecutor Robert Hubbard took Malcolm through the reams of documents, Malcolm described the daisy chain of allegedly improper accounting transfers that saw millions of dollars in advertising and production costs transferred from show to show or deleted from the company’s financials and moved to future periods. “Expenses were moved between shows, they were moved to fixed assets or into future periods,” Malcolm told the court. “The transactions were allocated to places where they didn’t belong or places where they didn’t originate.”
Expenses for Livent’s production of Show Boatin Minneapolis, for instance, were moved to Show Boatin Los Angeles. Expenses from Los Angeles were transferred to productions in Detroit, expenses from Chicago were moved to Boston and so-on and so-on and so-on.
When there wasnt room in the production budgets, costs were then transferred to the companys fixed assets under the guise of theatre construction, Malcolm told the court. One schedule prepared by Malcolm in 1997 outlined more than $2.1 million in production and operating costs that were to be allegedly moved to Livents fixed assets accounts.
Eventually the alleged fraud became so widespread there was no more room in many of the theatres pre-production accounts. At that point, even legitimate pre-production costs had to be moved from the accounts of the shows where the costs were incurred to other shows, to hide the fact that the existing budgets were bloated with so many allegedly illegitimate entries, Malcolm said. There were cases where pre-production costs had become so overstated we had to move those costs to other productions, he said.
Advertising was a large expense that was often allegedly manipulated eventually with the co-operation of two of Livents largest advertising agencies, Malcolm testified.
In his earlier testimony, Malcolm told the court about how Toronto-based Echo Advertising Livents Canadian ad agency – willingly cooked its own books by cancelling advertising invoices in one period and then re-issuing the identical invoices in future periods. That had the effect of reducing Livents expenses for the period in question and making the company appear more profitable.
Today, Malcolm testified how he used the same scheme with LeDonne Wilner & Weiner Inc., Livents New York-based advertising agency. Robert Hubbard showed Malcolm dozens of LeDonne invoices that had been originally issued in Dec. 1995 for ads that ran on television, radio and newspapers. Malcolm testified that the invoices were subsequently cancelled and he deleted them from Livents financial accounts. Identical invoices were then re-issued in 1996, helping to boost the companys profits for 1995. It was LeDonne’s accommodation to make it seem the invoice belonged in a different period, Malcolm told the court.
Malcolm had testified earlier that he flew to New York to convince the ad company to participate in the scheme. When he arrived, he found that someone although he could not say who had already convinced the agency to co-operate and even agreed to provide Livent with copies of its own letterhead so the company could create its own invoices. Getting the ad agencies to co-operate was important because Livents auditors would often contact the agencies to ensure that their accounts matched, Malcolm told the court.
One schedule presented in court entitled 1998 First Quarter Adjustments Including 1997 Carry Forwards, detailed just under $19 million in allegedly improper accounting manipulations.
As the alleged fraud grew at Livent, so did the number, and violence, of the outbursts by some Livent senior managers, Malcolm testified. It became more and more brutal and demanding, he said. They were always characterizing us as stupid or not knowing anything.
When asked by chief crown prosecutor which Livent managers were responsible for such treatment, Malcolm responded: Typically it was Mr. Drabinsky and Mr. Eckstein.
Hubbard wrapped up his examination of Malcolm by asking why he stayed in such a volatile and abusive environment.
I had a family to feed, Malcolm replied.
In responding to questions from David Roebuck the defence lawyer who has represented Garth Drabinsky in much of the civil proceedings surrounding the collapse of Livent and who stepped in for Edward Greenspan Malcolm testified he knew the accounting adjustments he was making were fraudulent but he did not fully consider the effect they would have on the companys shareholders. You are not a child and this wasnt a game, Roebuck said. You knew you were participating in fraudulent manipulations that would have severe consequences for the company, its shareholders and creditors.
I didnt dwell on it, but I knew, replied Malcolm. I didnt think there was an expectation we would get caught.
But by the time new management came to Livent, it became clear that the fraud was going to be revealed and Malcolm prepared to reveal what he knew, he said. My resolve was I wouldnt lie to them, regardless of the consequences, Malcolm told the court.
But there were little consequences for Malcolm and other member of the accounting department who eventually disclosed the fraud to new managers who joined the company following purchase of a controlling stake in the company by former Hollywood mogul Michael Ovitz, Roebuck suggested.
Even before the accountants had disclosed what they knew about the alleged fraud and their role in it Livent managers offered the group an indemnity agreement that guaranteed they would keep their jobs, the company would pay for legal representation and the company would not sue them for their participation in the alleged fraud. “In some religious circles you’re expected to confess and repent,” Roebuck said. “I haven’t heard of any confession or repentance before this agreement.
Malcolm testified he would have told Livent managers everything he knew even without the agreement. The indemnity was not a motivating factor for me, Malcolm testified. I was going to tell what I knew to the authorities. The indemnity wasnt going to change that.
After Malcolm and other members of the Livent accounting department revealed their knowledge of the fraud, Livents new managers were looking for someone to blame and that someone was going to be Drabinsky and Gottlieb, Roebuck suggested. Livent is not willing to forgive everyone they were looking for someone to pay for this financial situation, Roebuck said. Lets be candid, you knew they were looking to pursue Mr. Drabinsky and Mr. Gottlieb, isnt that right?
Thats right, yes, Malcolm replied.
Even if Malcolm would have talked without the indemnity agreement, it was a very valuable consideration, Roebuck argued. In the agreement Livent agreed to pay legal bills up to $10,000. But Malcolm never received a bill for his legal advice, despite the fact that between Aug. 26 and Sept. 8, legal bills for the five Livent accountants who blew the whistle on the alleged fraud had already reached more than $35,000.
One could even call the agreement a free lunch, Roebuck said. But Malcolm disputed his suggestion that the agreement was, in fact, a quid-pro-quo in which the accountants agreed to help Livent pursue Drabinsky and Gottlieb in exchange for the indemnification.
I dont make that characterization, Malcolm said. There was never you do me a favor and Ill do you a favor’ for this.
Roebuck then questioned Malcolm about his working relationship with Eckstein, quoting extensively from Malcolms initial interview with the RCMP. Eckstein felt he was smarter than everyone else and smart enough to successfully pull off the alleged fraud, Malcolm told the RCMP in Nov. 1998. But Malcolm soon added: We believed that the nature of the manipulations we were doing were undetectable, he told the court.
Roebuck quoted a letter Malcolm wrote to the Institute of Chartered Accountants of Ontario in support of former Livent chief financial officer Maria Messina as part of her disciplinary hearing before the institute. Gordon Eckstein intimidated the accounting staff by screaming profanities at individuals and referring to them as stupid or idiots, the letter read. [Eckstein] made it clear that he was in charge and that his decisions should never be questioned.
The letter went on to explain that Eckstein often imposed impossible deadlines on his tasks and dropped assignments on staff at the last minute that often required them to work well into the night sometimes straight through the night without a break. The fatigue associated with the intense pressure along with the fear of failing to get the job done clearly interfered with our ability to react reasonably to his requests, Malcolm wrote.
But Eckstein was not the only Livent official to come in for criticism for his violent and unreasonable management style. Malcolm also wrote that Garth Drabinsky was an extremely volatile manager who often resorted to screaming at staff members.
Roebuck didnt read that part of the letter into the court transcript. Prosecutors used a printer in the courtroom to print off a copy of the entire letter and offered it to Roebuck so that he could make it an exhibit that the judge could read. But he politely declined.
Malcolms cross examination will continue on Thursday, since tomorrow he has a medical appointment that cannot be changed. Taking the witness stand in his place is Raymond Cheong, Livents former manager of information services, who is expected to testify about how he hacked into Livents accounting software and changed the program to allow for transactions to be manipulated without leaving an audit trail.