Livent: Exit, stage left

The Livent trial comes to an end — with jail time.

The longer the criminal fraud trial of Livent Inc. co-founders Garth Drabinsky and Myron Gottlieb dragged on, the more quaint the charges against the theatre moguls seemed — even to Drabinsky. As the trial entered its sixth month, the rest of the world was scrambling to unfreeze international credit markets and save financial powerhouses such as American International Group Inc. and the Bear Stearns Cos. Inc. who were buckling under the weight of the toxic assets clogging their balance sheets. But in Toronto, Livent prosecutors and defence lawyers were still wrangling with an accounting scandal that dated back to a time when investors thought Enron Corp. was a great company. At one point, Drabinsky beckoned a reporter over and asked, “How much jail time do you think the real crooks on Wall Street will get for selling all the sub-prime junk?”

Real crooks — that’s what Drabinsky and Gottlieb are now labelled after Justice Mary Lou Benotto on Aug. 5 rejected their claims that they were victims of an elaborate conspiracy to frame them for accounting crimes they did not commit. Their punishment for masterminding a massive fraud, misstating Livent’s finances between 1993 and 1998: seven and six years in prison, respectively.

The length of the sentences might shock those accustomed to Canada’s usually kind and gentle approach to white-collar crime. Drabinsky and Gottlieb may have been the most surprised of all. They clearly never expected criminal charges, let alone convictions. Both have proclaimed innocence from the start and will continue to do so in a pending appeal.

Neither man reacted as Justice Benotto read the sentence, but the reality of their situation crystallized as uniformed court officers approached with handcuffs out. Gottlieb seemed to deflate slightly as he quietly stood and put his hands together, waiting to accept the metal bracelets. But before courtroom spectators could witness the once high-flying executives treated like common criminals, Drabinsky’s lawyer Eddie Greenspan intervened. Greenspan approached the officers and explained that his client’s childhood bout of polio made it impossible for Drabinsky to walk with the shackles. To maintain his balance — even for short distances — Drabinsky must hold a hand against his own thigh, Greenspan said. The court officers took mercy on the men and ushered them out of the courtroom without the cuffs.

Justice Benotto wasn’t so lenient. She chastised the men for creating a corporate culture saturated with dishonesty, but she also put the entire Canadian business community on notice, saying that “deception” and “dishonest dealing” will be severely punished. “There is a real need to warn individuals currently involved in such scams, and those devising new ones, that substantial penitentiary sentences will follow this type of crime,” she wrote in her reasons for sentence. Whether six- and seven-year sentences will accomplish that is an open question.

After all, if justice delayed is justice denied, then Livent’s investors, creditors and employees have been denied justice for more than a decade. Indeed, the sentencing date for Drabinsky and Gottlieb came almost 11 years to the day after former Livent CFO Maria Messina blew the whistle on the public company’s fraudulent books. On Aug. 6, 1998, Messina walked into the office of Robert Webster, a member of the new Livent management team — brought in after former Hollywood super-agent Michael Ovitz bought a controlling stake in the company — and told him that Livent’s books were a sham.

Messina and others subsequently showed the stunned managers how Drabinsky and Gottlieb had systematically overstated profits, low-balled the costs of stage productions such as Kiss of the Spider Woman, Ragtime and Show Boat, and grossly inflated the value of just about every asset on the balance sheet. Drabinsky and Gottlieb were locked out of their offices within days. But it would be more than four years before they were charged with a crime in Canada. (They were charged in January 1999 in the United States.)

Drabinsky’s seven-year prison sentence is just shy of the eight to 10 years prosecutors were demanding. But the term is laughable compared to the 25 years that Bernie Ebbers, the Alberta-born former WorldCom Inc. CEO, is currently serving for fraud at the one-time telecom powerhouse.

More disturbing is that the sentences for Drabinsky and Gottlieb could be gutted by Canada’s generous parole system. As first time, non-violent offenders, they will be fast-tracked for early release and could be out of prison after serving just one-sixth of their sentences. That means they will likely be free long before Conrad Black, the former Hollinger International Inc. CEO — and member of the Livent board of directors — is released from the Florida prison where he is currently serving a 6½-year sentence for mail fraud and obstruction of justice.

Still, investors should be thankful Justice Benotto rejected the defence’s proposal that Drabinsky and Gottlieb serve no jail time and tour Canadian arts and business schools to deliver “inspirational speeches” on the arts and business ethics. It’s hard to imagine what the pair would have said. On the other hand, if the dozens of letters of support submitted on behalf of Drabinsky and Gottlieb are any indication, many Canadians have an unusually high tolerance for bad corporate behaviour. Esteemed actors such as Christopher Plummer and Martha Henry submitted letters to the judge that praised Drabinsky for his creative genius and contributions to Canadian culture.

Fair enough; no one disputes Drabinsky’s artistic flair. But some of Canada’s best-known business people — including some Livent directors — also gave letters praising the honesty and integrity of the disgraced executives.

Martin Goldfarb — who was on Livent’s audit committee — praised Gottlieb “as a man of integrity and honesty.” Scott Paterson, who played a lead role in Livent’s 1993 initial public offering, wrote Gottlieb was an honest man who “provided all the information that we asked for on a timely and transparent basis.” But crown prosecutors pointed out that Gottlieb refused to correct the company’s prospectus even after being warned that asset values were overstated. The support is shocking in light of the fact that Drabinsky and Gottlieb were convicted of repeatedly lying to their investors, auditors, underwriters and directors.

Yet, given Gottlieb’s reputation for honesty, it is curious he was sentenced to less jail time than Drabinsky. Investors knew about Drabinsky’s reputation as a free-spending creative visionary, and they relied on Gottlieb’s solid business judgment to restrain his partner. That never happened, and Canada’s lax attitude toward white-collar crime may be to blame.

Fraud in the U.S. is treated like a blood sport in which police, prosecutors and perpetrators play for keeps. In Canada, white collar crime is still treated like a gentlemen’s game.