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Livent’s “baseless and arbitrary” books

As a former partner at the accounting firm of Deloitte and Touche, Maria Messina audited Livent’s books for more than four years and never had an inkling of the massive fraud that was occurring at the theatre company, Messina told an Ontario court today. Even after joining Livent in 1996 to serve as the company’s chief financial officer, it was more than a year before she found out that the financial results the company was reporting to investors, analysts and financial regulators were just as fictional as the plots to the musical spectacles it was producing on stages in Toronto, New York and Chicago.

In her first day of testimony in the criminal fraud trial of her former bosses and Livent founders, Garth Drabinsky and Myron Gottlieb, Messina testified about the day in July of 1997 when she first became aware of the widespread alleged manipulation of the company’s financials.

Messina was not directly involved with preparing the company’s financial statements until June 1997 when Gordon Eckstein, the company’s senior vice president of finance, went on vacation. In compiling the company’s second quarter financial report, Messina was “shocked” to learn that the company had suffered a substantial loss of between $15—20 million for the first six months of the year — a loss that was not reflected in the company’s current public financial statements. “I was surprised by the magnitude of the loss,” Messina told the court.

When Messina confronted Livent controller Diane Winkfein about the report: “She just kept her head down low and said, `We do whatever Gord tells us,`” Messina testified.

By the time Livent publicly reported its second quarter financials, that multi-million dollar loss had somehow transformed into a profit of between $7 and 8 million, Messina said. When she confronted Eckstein about the manipulations, he calmly told her not to worry, that the company was merely engaging in “income smoothing” — a common practice among publicly traded companies, Eckstein claimed. “He was very calm. He sat back in his chair, put his arms behind his head and his feet on the desk, and he said, `Maria, it’s just income smoothing. Everybody does it,`” Messina testified.

When Ms. Messina asked him if Livent co-founders Garth Drabinsky and Myron Gottlieb were aware of the financial manipulations, Eckstein replied: “Where do you think this comes from?” Messina told the court.

The revelation that the company’s books were full of falsehoods and manipulations paralyzed the chartered accountant, Messina testified. “I was completely numb. It was complete shock and disbelief,” she told the court. “I panicked, and I was completely immobilized by fear.”

Messina testified she did not know how to get out of the situation and did not have the courage to confront Drabinsky and Gottlieb and blow the whistle on the fraud. “I did not have the strength to go up against Mr. Drabinsky and Mr. Gottlieb,” she testified. “They were men of money, power and influence. I was a nobody.”

By August, Messina said she refused to present the company’s financial to the company’s board and audit committee. A refusal that did not sit well with Eckstein, who insisted she attend the meeting. “You’re going to go,” Eckstein told Messina. “You shut the fuck up and you let Myron [Gottlieb] and [Livent chief operating officer] Rob [Topol] do all the talking.”

By the time it came to prepare the company’s third quarter financials, it became clear that all of Livent’s senior managers were intimately involved in the fraud. At one meeting with Gord Eckstein and the company’s accounting staff, Eckstein dictated changes to the financial statements to transform the company’s mounting financial losses into profits. None of the accounting changes were justified, she said. “They were baseless and completely arbitrary,” Messina testified. It would not be the last time she used that phrase to describe the seemingly endless manipulations that company managers were making to the books.

Messina joined Livent in 1996 after working as an auditor on its books for the past four years. Messina testified Myron Gottlieb asked her to join the company on three other occasions before she finally accepted his job offer. Joining the company was a great opportunity to join a unique and glamorous company that would give her the opportunity to expand her skills in business, she testified. “It was a very exciting industry,” she said.

But soon, Messina found herself consumed by the company’s massive fraud. Shortly after leaning of Livent’s allegedly cooked books, Eckstein told Messina to prepare financial statements for a meeting with Drabinsky, Gottlieb and Robert Topol that showed the company’s real financial situation, the proposed accounting manipulations and the final fraudulent numbers Livent would report to investors. Eckstein became angry with her when she produced the report on two separate sheets — one with the company’s real numbers and another with the alleged fraudulent numbers. “[Eckstein] said he wanted to make sure that Mr. Drabinsky saw everything so he couldn’t turn around and say he didn’t know what was going on.”

When Eckstein presented Messina’s report to Drabinsky, Gottlieb and Topol at the quarterly financial meeting, Drabinsky asked: “What’s this?” Messina testified. “`It’s the fucking real numbers,` Eckstein replied. [Drabinsky] just put his hand on the paper and slid it across the desk to the other side and went to the other statement.”

How to best manipulate the financials of the company was openly discussed among the senior Livent officials, Messina testified. At one point, the executives debated how to explain the high pre-production costs that had been elevated above analysts expectations because they contained millions of dollars in inappropriate accounting adjustments. Allegedly Gottlieb suggested he could concoct a story that the analysts would believe, Messina testified. An argument arose when Drabinsky asked Topol if the analysts would buy the story. Topol said they wouldn’t, but eventually agreed to adopt the fictional account into his own talking points with analysts.

But there appeared to be light at the end of the tunnel, Messina told the court. As the meeting progressed, Topol explained that the fraud had grown too large and could not continue, Messina said. The company would need to start recording the proper expenses and take a major writedown to account for the millions in misidentified expenses, she said. Drabinsky, however, said that he “couldn’t worry about that now,” there was no way he was going to consider such a massive writeoff — not since Livent had just sold investors US$125 million in bonds the previous week.

At subsequent meetings accounting manipulations were openly discussed by all members of senior management, Messina testified. Sometimes, Drabinsky didn’t like the accounting manipulations suggested by Eckstein and would demand different financial engineering, she told the court. For instance, Drabinsky didn’t want additional expenses buried in the accounts of Ragtime New York, for instance, and instead demanded they be put into a show like Fosse, that was not scheduled to open for some time.

Tensions at the theatre company began running extremely high and the workplace became increasingly abusive, Messina said. Not just because of the alleged fraud, but also because the company was burning through money at an alarming rate and had trouble paying their suppliers, creditors and other expenses, she told the court. “It was a very difficult time,” she said. “There’s nothing I can say to help anyone in this room understand the intensity of that experience. It was that extreme.”

Messina, Eckstein and Topol began working on a plan to issue the writeoff in the fourth quarter. “I placed all my hope that they could make this happen and the fraud would be ended and taken care of once and for all,” Messina testified.

And while the company did report a $27.5 million writedown in 1998, it had little to do with cleaning up Livent’s books and more to do with making the company more attractive to former Hollywood super-agent Michael Ovitz who eventually bought a controlling stake in the company. When Myron Gottlieb proposed the writedown to board members, he wanted to make it contingent on the Ovitz investment. If the investment failed to come through, he wanted to reverse the writedown, a request that was rejected outright by Livent audit committee chairman Garfield Emerson.

Messina confirmed the notion, presented by Brian Greenspan — the defence lawyer representing Myron Gottlieb — that Gottlieb had a more “macro” understanding of Livent’s affairs. However, she maintained that both Gottlieb and Drabinsky were well versed with everything that was happening at Livent and that both men had a sophisticated understanding of the company’s books and the fraud that was used to manipulate the company’s earnings.

And it would only get worst, testified Messina. In early 1998, the chartered accountant realized the alleged fraud was not limited to pushing expenses that should have been reported in the past into future periods, improper transfers between shows and just deleting expenses outright. Soon she learned that expenses were being buried into the company’s fixed assets that would improperly inflate the value of the company’s theatres and other assets. “For me it was very de-motivating, demoralizing,” she said.

“The whole thing was a nightmare,” she told the court.