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Livent CFO: “I Was Terrified”

Attempts by Livent co-founders Garth Drabinsky and Myron Gottlieb to continue to allegedly cook the company’s books finally prompted Maria Messina to blow the whistle on the fraud that ultimately destroyed the theatre company.

In her second day of testimony at Drabinsky and Gottlieb’s criminal fraud trial, the former Livent chief financial officer offered gripping testimony of a series of tense meetings where Messina says she finally gained the courage to stop participating in the fraud and inform new company managers representing former Hollywood super-agent Michael Ovitz.

In April 1998, before Livent had announced the Ovitz transaction, Messina learned company managers were planning to implement more than $20 million in accounting manipulations to its first quarter results. Messina testified she met with Myron Gottlieb on Saturday April 25th and told him she knew about the proposed manipulations and urged him to meet with Garth Drabinsky and reconsider the move, she testified. Gottlieb replied that it was “just income smoothing,” and she shouldn’t worry. “[Gottlieb] really didn’t respond directly to my concern, other than he didn’t see anything wrong with continuing this,” Messina told the court.

She was so concerned that she hired her own lawyer who suggested she put something in writing. She wrote that the accounting adjustments being considered were not in accordance with accounting rules and she would not support them to either the new Ovitz managers or Livent’s audit committee. “In my professional capacity as a chartered accountant and as chief financial officer for Livent Inc., I cannot support the judgments made by management in the preparation of the 1998 Q1 financial statements,” Messina wrote.

Nervousness about writing the memo caused Messina’s hands to shake so badly that she had to call Livent controller Chris Craib to type the memo for her. She waited until Sunday night when no one was in the office before hand-delivering copies of the memo to Gottlieb, Drabinsky and Livent’s in-house lawyer Jerald Banks. “I was terrified, I did not know what their response would be,” she testified.

And she had good reason to be worried. Later in the day, Messina testified Drabinsky’s management style was “dictatorial” and “bullying.” He would often fly into a rage and abusively, profanely and personally attack anyone whose work he didn’t like. “No one wanted to make a mistake that would trigger his anger,” she testified. “There was no way I was going to go up against them… I was afraid of what they would do to me.”

Messina nervously waited in her office all day to hear a response from Gottlieb or Drabinsky. Only Banks came into her office to ask her questions on an unrelated matter. Just as he was leaving — almost as an afterthought, she said — he turned back and said he read and agreed with her memo. It was not until after 5 p.m. that Gottlieb summoned her to Drabinsky’s office for a meeting. If Messina was uncomfortable with the proposed manipulations, Drabinsky allegedly asked Messina, then what number was she comfortable with the company reporting, Messina told the court. “I said, `Garth, this is not a negotiation. The number is what it’s supposed to be,`” she testified.

In the end, Gottlieb and Drabinsky agreed to write down some of the allegedly fraudulent transactions and take an additional writedown that was being proposed by the Ovitz group. However, it wasn’t long before the topic of fraudulent manipulations of the company’s financials was back again, Messina said.

On June 29, 1998 Messina was asked by new Livent executive vice president Robert Webster to give him updated company financial performance and projections. But before she could hand over the documents that would have showed Livent reporting a loss of more than $13.2 million, she was instructed by Livent senior vice president finance, Gordon Eckstein, to run the figures past Drabinsky.

At 8:15 the next morning Messina met with an annoyed Drabinsky who demanded she make changes to the financials. “When Mr. Drabinsky saw it, he said to me, `these numbers are all fucked up. You don’t know what the fuck you are doing. You can’t show these to anyone,`” Messina told the court. “He said that the new guys don’t understand the business, I have to teach them.”

Drabinsky then proceeded to shave millions of expenses and add millions in revenue to the projections. In the end, the projected $13.2 million loss was cut in half to just $7 million. One of the adjustments was the addition of several million in sponsorship revenue — even though no revenue was expected for the period. When Messina warned Drabinsky she would have to tell the new managers about the changes, he told her that would cost at least one Livent employee his job and he threatened her. “Mr. Drabinsky said that if I knew what was good for me, I wouldn’t discuss sponsorship with new management,” she said.

And Drabinsky wasn’t done making changes to the document. Before she could hand over the document to Webster, Drabinsky made even more changes to the financial projections that cut the now $7 million loss to just $200,000.

But Messina didn’t heed Drabinsky’s warnings and told her new bosses about the changes. The managers told her to pass financial data onto them directly and not to let Drabinsky vet any more financial data.

Webster asked Messina to put together what she felt were accurate financial data for Livent. She did, but still kept quiet about the how pervasive the alleged fraud at the company had become. “I didn’t know how to handle it,” she told the court. “I was waiting for a good time to tell them and there never was a good time.”

But Messina testified she could no longer live with herself while keeping the fraud a secret. “How do you tell somebody that, when you are a chartered accountant?” she said. “I was also obviously going to be destroying my own life. And it affected a number of other people in the accounting department. It just took me several weeks to find the courage to do it.”

That day was Aug. 6, 1998, a little more than a week after the new managers terminated the employment of Gordon Eckstein. Since Eckstein had been in charge of the company’s fixed asset accounting, Webster asked Messina to give him an update on the company’s Chicago theatre construction accounts — accounts where millions in improper expenses had been dumped over the years.

Messina and former Livent controller Tony Fiorino assembled a schedule that disclosed the allegedly fraudulent transactions in the accounts and waited to present them to Webster. Late in the afternoon, Messina called Webster to ask if she could talk to him about the accounts, but he said he was too busy. Messina told him this was important and he should make time. Minutes later, he was in Messina’s office and the fraud was blown. “Needless to say Mr. Webster was quite shocked, quite taken aback,” she said. “He asked if there is anything else he needed to know.”

Messina and Fiorino told him there were millions more in fraudulent transactions riddled throughout the company’s books but other people were involved and she would have to speak with them before involving them. Messina had a brief meeting with others from the accounting department who all agreed to come forward and speak with Webster. The group met in Webster’s office where they spent the next several hours disclosing the millions in fraud the group had spent the past five years burying deep in Livent’s books.

The next day, the group returned to the office not knowing what to expect, Messina testified. Livent’s new managers asked them to give statements to lawyers brought in from the Toronto firm of Stikeman Elliot. Ominously, the managers asked if any of the accountants wanted to bring in their own lawyers. Messina testified that she called the lawyer she consulted with previously, but decided to proceed without one — as did the rest of the accounting staff. Three days later Drabinsky and Gottlieb were suspended by Livent.

Back on Aug. 7, just before Messina and the other Livent accounts made their statements about the alleged fraud, Webster spoke privately with Messina and warned her: “You know there are going to be ramifications to you personally,” Messina told the court. He was right. Soon, Messina was facing criminal charges brought by the New York district attorney and securities regulation charges brought by the U.S. Securities and Exchange Commission. Messina has pled guilty to one count of filing false securities documents but has yet to be sentenced. The SEC complaints have been stayed. In 2000 she pled guilty to professional misconduct before the Institute of Chartered Accountants of Ontario and was fined $7,500 and had her licence suspended for two years.

Livent filed for bankruptcy protection in November 1998, but Messina remained employed as its chief financial officer until Dec. 14, 1998 when she was terminated as part of settlement deal with the SEC. In January 1999, she began working as a consultant with Stikeman Elliot in connection with the numerous lawsuits and bankruptcy filings associated with the case. She continues to work on the Livent case to this day.