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Livent Controller: "I Did What Was Expected"

Of the former Livent accounting department staff members who have testified at the criminal fraud trial of company founders Garth Drabinsky and Myron Gottlieb, Grant Malcolm is the first witness that actually looks like an accountant. Gordon Eckstein, Livents former senior vice president of finance who was prone to profane and angry outbursts as well as throwing the occasional clock or pen at his accounting staff, was lean, dark and had an intense glare that made him look more like an Olympic wrestler or Eastern European assassin who could snap your neck like a twig. Maria MessinaLivents former chief financial officer and, arguably, the crowns star witnessis a petite and attractive young blonde woman who shunned corporate power suits on the witness stand in favour of Capri-pants, casual tops and high heels.

But Grant Malcolm, with his receding hairline, round features and non-descript grey suit looks like the guy you would hire to do your taxes. The irony is he isnt an accountant at all. The former Livent controller graduated from the University of Victoria with a BA in economics but has no official accounting designation. As far as accounting, he learned that on the job at what Im sure defence lawyers will soon refer to as The Gordon Eckstein School of Accounting.

In his first day on the witness stand, Malcolm testified he eventually spent all of his time at Livent tracking the alleged widespread fraud that occurred at the doomed theatre company. It was virtually 100 per cent of my timemore than 100 per cent. The volume increased to the point where it couldn’t be maintained on a periodic basis, Malcolm told chief crown prosecutor Robert Hubbard.

Malcolm testified that the alleged accounting manipulations began in 1994before the company went public and continued until 1998 when Messina finally revealed the extent of the alleged manipulations to new managers brought in by former Hollywood super agent Michael Ovitz.

Malcolm told the court Eckstein would tell him and other members of the accounting staff how much of Livents ballooning losses would need to be trimmed from the companys financial statements. Malcolm and other accountants would go through the companys general ledger and identify invoices from advertising, pre-production costs and other large expenses. Those items would then be deleted from the companys computerized accounting system and then rolled forward into future periods, transferred to the accounts of other shows or applied to the companys fixed assets, such as theatre construction. Was there any reasonable accounting explanation for any of this activity on your part? Hubbard asked.

In my opinion, no, Mr. Malcolm replied.

Hubbard posed the question again after reviewing a long list of advertising expenses Malcolm had deleted from the companys system at the end of 1996thus increasing the reported profits of the company for that yearand then re-entered into the system a month later in 1997. Was there any particular magic as to why these [advertising] invoices were reversed? Hubbard asked.

They were big, Malcolm replied.

Defence lawyer David Roebuckwho has represented Garth Drabinsky in many of the civil lawsuits surrounding Livent and who has been sitting with Drabinskys criminal lawyer Edward Greenspan for much of the trialwas quick to object. After all, who is Malcolm to say whether or not the accounting was proper, Roebuck, who will handle the cross-examination of Malcolm, told the court. As my friend has pointed out earlier, Mr. Malcolm does not have an accounting designation.

To conceal the alleged fraud from Livents auditors, Malcolm testified he convinced two advertising companies to cook their books, as well, to reflect Livents alleged manipulations. Auditors would check the accounts of large Livent suppliers to ensure the books of the two companies matched. Malcolm testified about conversations he had with Robin Pullen, an executive with Toronto-based Echo Advertising in which he would tell Echo which invoices Livent was going to delete from its ledger. Echo would then credit Livent for those accounts and re-issue the invoices at a later date to make the company appear more profitable.

Malcolm testified he travelled to New York to meet with Livents advertising supplier for the U.S. to start a similar scheme. Malcolm thought he would have to explain the entire process to the agency, but when he arrived, he discovered that someonealthough he testified, he never found out whomhad already explained what Livent required.

Malcolm had very little contact with either Garth Drabinsky or Myron Gottlieb. All of the instructions to allegedly manipulate the companys books came from Gordon Eckstein, Malcolm testified. However, Malcolm did meet face-to-face with both men on two separate occasions that seemed to support the prosecutors contention that both men had intimate knowledge of the fraud.

In the spring of 1998, Gottlieb called Malcolm on the phone and summoned him to his office. It was the first time he had been called to Gottliebs office, Malcolm testified, and may have been the first time he had really spoken to the Livent founder outside of casual hellos in the company elevator, he said.

Gottlieb told him that he wanted to talk about the new owners who were going to be coming into the office and wanted to alleviate any of Malcolms concerns, he testified. He talked in terms of the baggage’ that Liventhad, Malcolm told the court. [He said] that over the next few quarters they were committed to cleaning everything up… And for that quarter, he and Mr. Drabinsky would remain in charge, and everything was going to be okay.”

In June 1998 Malcolm was called into Drabinskys office to explain the amounts that had been allegedly transferred to the accounts for the musical Show Boat, Malcolm testified. He wanted to know how much problem existed in future cities that had been transferred from other productions, Malcolm testified. I told him [the transfers] were affecting Show Boatand other productions as well.

Soon after the meeting, Malcolm produced a reportwhich was shown in courtthat included a breakdown of each of the amounts that had been allegedly and illegitimately transferred to the Show Boataccounts, Malcolm said.
During that same time, Eckstein ordered Malcolm to produce a report that included details of accounting manipulations on the accounting for R a gtimes Vancouver account. The report, which was also presented in court, indicated that it had been distributed to top Livent officials, including David Maisel, who was now acting as Livents new president. However, Maisel was not actually given the report, Malcolm testified. Rather, Maisel received a cleaned-up version of the report that did not include any mention of the accounting manipulations. It was made to appear he was on the distribution list, but he did not receive this document, Malcolm said. It was supposed to appear that everyone received the same copies.
That was not the first time Livent executives had concealed knowledge of the fraud from new mangers, Malcolm testified. When former auditor Maria Messina joined the company, Livent accountants were told to keep her in the dark about the alleged fraud, Malcolm told the court. Eckstein reportedly said he wanted to hook her and reel her in slowly, Malcolm said. Over a period of time she would reach a point of no return where she would be committed to participating in the ongoing fraud.

The plan appears to have worked since Messina testified she did not learn about the fraud until July 1997 more than a year after joining the company, and then was too immobilized by fear to blow the whistle. And while she testified she took steps to negate or stop the fraud from the inside, she did not ultimately reveal her knowledge of the fraud to new Livent managers until more than a year later.

But before Messina arrived, Malcolm testified he was quite open about the accounting manipulations he had been ordered to engineer. Malcolm produced voluminous reports detailing the type and amount of accounting manipulations he was engaged in and reconciling those manipulations to Livents actual financials. The reports helped to avoid nasty disagreements between Livent managers about the companys financials. Malcolm often hand-delivered those reports to former Livent chief operating officer Robert Topol and routinely placed the documents in the “In Box” outside Garth Drabinskys office. There was no secret to what I was doing, he testified. It was prudent to identify what should have been to what existed.

When asked why he agreed to make the manipulations, Malcolm paused and then replied thatat the time there were a lot of reasons: It started off as a short-term process. I didn’t know at that time it was going to continue quarter after quarter, year after year. It was part of my job. I did what was expected of me.

The alleged manipulations even produced gallows humour among the accounting staff, Malcolm said. In the later years, Mr. Eckstein used to refer to us all being fitted out with pinstripes, referring to the fact we’d all be likely spending some time behind bars, Mr. Malcolm said.

In the end, Malcolm did not spend any time behind bars. He entered into a plea agreement with authorities in both Canada and the U.S. in which they agreed not to charge him with any offence in exchange for his testimony.

Malcolm is expected to wrap up his testimony tomorrow. He will likely face a long and gruelling cross examination by defence lawyers.