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Livent’s hidden losses

Every quarter Livent’s accountants were faced with a growing challenge: turn the company’s mounting losses into profits that reflected the rosy financial projections dictated by company founders Garth Drabinsky and Myron Gottlieb, Livent’s former senior accountant testified in an Ontario court today.

For nearly every one of Livent’s financial statements, company accounts would turn losses into profits by “improperly” moving expenses to future dates, shifting costs between Livent’s different theatre productions, bury those costs deep in the company’s balance sheets or merely delete the expenses altogether, testified Gordon Eckstein, Livent’s former senior vice president of finance and administration. “That’s the way it was every quarter,” he told the court. “We would start off with a loss and make certain adjustments to end up with a profit.”

Eckstein compared Livent’s reported financial statements to internal company documents — many of which contained handwriting that Eckstein identified as belonging to Garth Drabinsky — that detailed the various accounting techniques Livent would use to improve its bottom line. For instance, in the first quarter of 1996, the company reported to shareholders that it made a profit of US$1.67 million. In actual fact, the company had losses of more than US$5.8 million during that period but only reported profits after Livent accountants shifted millions of dollars in expenses between shows or into the future.

The same pattern occurred a year later when Livent reported a profit of US$4.3 million in the first quarter of 1997. According to internal company documents, the company had really lost more than US$8 million during that period and those losses continued to mount throughout the year. By the third quarter of 1997, Livent had lost more than US$41 million for the year. However, after a flurry of what prosecutors allege are improper accounting adjustments, the company managed to report a profit of more than US$14 million.

Eckstein kept detailed records of the transfers, expense eliminations and other so-called “adjustments” to show Drabinsky and Gottlieb the scale of the accounting changes, Eckstein testified. “I wanted to ensure that they realized what was going on the size of the numbers,” he told the court. Eckstein has already pled guilty to one count of fraud in Canada and been given a conditional sentence. He also pled guilty to fraud in the U.S. in relation to his activities at Livent. He has yet to be sentenced in that case. Drabinsky and Gottlieb have both pleaded not guilty to charges of fraud and forgery related to the case.

The company continued to make the allegedly improper accounting adjustments in 1998 when Drabinsky and Gottlieb were negotiating the sale of a controlling stake in the company to former Hollywood super-agent Michael Ovitz. Prior to the sale, the company took a US$27 million write down of some of those allegedly-bogus assets on its balance sheet. However, the motive behind that big bath was not to clean up the companys books for good, but rather to “clean up the books so that, post-transaction, the company could look fore profitable,” Eckstein told the court.

But while transferring and eliminating costs of the company’s financial statements may have made Livent look more attractive to investors, it did little to help ease the company’s increasingly perilous financial situation, Eckstein testified. “We were deeply cash flow negative,” he told the court. With more money going out of the company than was coming in, Livent often failed to pay suppliers all the money that was owed them. Livent engineer Peter Kofman has already testified that Livent was often delinquent paying his bills — sometimes taking up to a year to pay for work he had done for the company.

Eckstein has been testifying about Livent’s tortured accounting for the past three days. He will return tomorrow to continue his testimony before facing what is expected to be a long and brutal cross examination by defence lawyers.