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RBC warned Livent about accounting

Long before Livent became shorthand among Canadian investors for accounting irregularities, the theatre company’s accounting practices were under fire from another source: its bankers. The Royal Bank of Canada complained to Livent executives about how the upstart company was booking pre-production costs, according to a letter presented in court at the criminal fraud trial of Livent founders Garth Drabinsky and Myron Gottlieb. Both men have pled not guilty.

The letter, dated March 11, 1992, complains that booking pre-production costs differently from other capital expenses was “not appropriate.” The letter, which was addressed to Myron Gottlieb, went on to complain about the lack of disclosure the company was giving the bank.

At the time Livent had a “very strained” relationship with the bank, testified Gordon Eckstein, Livent’s former senior vice president of finance and administration. The bank had loaned the company about $45 million and had expressed concern about how much money Drabinsky and Gottlieb were taking out of the company, Eckstein told the court.

Prosecutors allege that the allegedly fake invoice scheme involving former Livent engineer Peter Kofman was a means by which Gottlieb and Drabinsky could circumvent bank covenants that restricted how much money they could pay themselves each month.

Eckstein testified that Livent’s deteriorating relationship with the bank was one of the main reasons the company went public in 1993. “(The bank) was forcing the company to go public to pay them back,” he told the court. Livent eventually ended its banking relationship with RBC and moved to the Canadian Imperial Bank of Commerce.