Livent trial: Curtain raiser

Livent impresarios star in a tense courthouse drama next month.

Senior writer John Gray covers the Livent trial in his blog and in occasional pieces for Canadian Business magazine.

As the founders of Livent Inc., Garth Drabinsky and Myron Gottlieb staged some of the biggest and most eye-catching theatre productions. At the height of their success, theatregoers in Toronto, New York and Chicago lined up to see musical spectacles like Phantom of the Opera, Kiss of the Spider Woman and Ragtime. Of course, that was before the company collapsed in 1998 amid allegations of overspending, accounting manipulation and outright fraud. Now, Drabinsky and Gottlieb find themselves starring in perhaps the most important production of their lives, the duo’s long-awaited criminal fraud trial.

The trial begins May 5 — more than five years after the initial charges were filed in Ontario, 10 years after Livent declared bankruptcy and almost 15 years after some of the alleged fraud took place. Drabinsky and Gottlieb both face three counts of fraud, down from the original 19 counts filed back in 2002. Over the past five years of court wrangling and preliminary hearings, some of the original charges were dropped. The remaining were consolidated into charges relating to alleged fraud in connection with Livent’s initial public offering, alleged accounting fraud that occurred during the company’s operations and one count of uttering a forged document relating to the dozens of regulatory filings and official financial statements that prosecutors allege the men knew were riddled with false and misleading information.

The proceedings have taken so long to come to trial that one Livent executive saw the charges against him dismissed while another pleaded guilty. Last June a judge dropped charges against Robert Topol, Livent’s former chief operating officer, citing the long trial delays. Gordon Eckstein, Livent’s former senior vice-president of finance, pleaded guilty to fraud charges last year and is expected to testify at the upcoming trial.

And while Livent may have become shorthand for Canadian accounting fraud, both Drabinsky and Gottlieb continue to maintain their innocence and insist the trial will finally vindicate them, says Brian Greenspan, the Toronto-based lawyer who is defending Gottlieb. “Both Mr. Drabinsky as well as my client have told anyone who will listen that they are innocent of these charges,” he says. “They are both looking forward to finally being able to clear their names.”

The criminal charges aren’t the only legal battle Drabinsky and Gottlieb are facing. The same day the criminal trial is set to begin in Ontario Superior Court in Toronto, an Ontario civil court is scheduled to hear the partners’ long-awaited appeal of a judgment ordering them to pay more than US$36.6 million to over 100 investors who bought Livent’s corporate bonds prior to the company’s collapse. That money includes a US$23-million judgment plus interest granted by an American judge back in 2005, following six years of litigation in which neither Drabinsky nor Gottlieb filed a defence.

Not only is the Livent criminal case one of the most anticipated Canadian financial fraud trials in recent memory, it is also one of the only recent homegrown financial scandals to come to trial here. Despite high-profile police investigations, criminal charges have yet to be laid in connection with alleged fraud at either Nortel Networks or Royal Group Technologies. And Conrad Black, perhaps Canada’s best-known white-collar criminal as well as a former member of Livent’s board of directors, was charged, tried and convicted in a U.S court.

While Black is currently serving a six-and-a-half-year prison sentence in a minimum security Florida prison, the outcome of the Livent case is still anyone’s guess. Recent high-profile insider trading prosecutions conducted by the Ontario Securities Commission have met with mixed results. Last year, John Felderhof, the former chief geologist of Bre-X Minerals Ltd., was acquitted of insider trading following an oft-delayed seven-year trial. In February, the OSC announced it would not retry Andrew Rankin on charges of giving illegal stock tips to a childhood friend. In exchange, the former investment banker agreed to pay $250,000 in costs and penalties, accept restrictions on his ability to trade securities, and accept a ban on working as an officer or director for any publicly traded company in Ontario. Rankin had been convicted of tipping, but that conviction was overturned on appeal.

Observers looking for a quick verdict in the Livent case will be sorely disappointed. It is expected to last six months, and prosecutors are scheduled to call as many as 20 witnesses. They will give the first eyewitness accounts of what prosecutors and regulators in Canada and the U.S. allege was a massive and systemic fraud. As the U.S. Securities and Exchange Commission (SEC) alleges in its statement of allegations filed nearly a decade ago: “Garth Drabinsky…and Myron Gottlieb were the architects of a fraud which included a multi-million-dollar kickback scheme designed to misappropriate funds for their own use; the improper shifting of preproduction costs…to fixed assets…and the improper recording of revenue for transactions that contained side agreements purposefully concealed from Livent’s independent auditors.”

Those schemes allegedly involved not just questionable accounting decisions, but also systematic lying to auditors, regulators and investors, allegations that Gottlieb and Drabinsky used friends and associates to buy bulk theatre tickets in an effort to inflate revenues, and even allegations that the pair oversaw the creation of secret computer software to keep track of the company’s bogus transactions.

Since Drabinsky and Gottlieb have opted to have the case heard by a judge alone, Superior Court Justice Mary Lou Benotto will ultimately decide their fate. Benotto is a former civil attorney specializing in family law until she was appointed to the bench in 1996. In 2001, she was appointed Senior Justice of the Family Court. The next year, she heard the lawsuit brought against ex-Toronto mayor Mel Lastman by his former mistress and the two adult children she says Lastman secretly fathered. Benotto ultimately dismissed the case that had demanded $4.5 million in retroactive child support payments.

Perhaps her most controversial ruling came when she acquitted four doctors and a pharmaceutical company of criminal charges in the so-called tainted-blood trial that concluded last October. In that case, the doctors — including the former head of the Canadian Red Cross — as well as New Jersey–based Armour Pharmaceutical Co., were accused of criminal negligence and endangering the public. They were alleged to have allowed Armour’s blood-clotting product, which was infected with HIV, be given to hemophilia patients. The decision resulted in more than 1,200 Canadians contracting HIV and up to 20,000 contracting hepatitis C. Benotto’s ruling was a shock since a public inquiry into the case severely chastised the Red Cross for its handling of the situation and ultimately led to its being removed as the manager of Canada’s blood supply.

There are some similarities between that blood case and the upcoming Livent trial. Criminal charges in both cases were laid in 2002 and resulted in prolonged court battles that delayed the actual trial. As well, noted Toronto criminal defence lawyers Eddie Greenspan (who did not return calls seeking comment for this story) and his brother Brian represented two of the defendants in the blood case. In the Livent case, Eddie is representing Drabinsky while Brian represents Gottlieb.

Acting for the prosecution is Robert Hubbard, senior general counsel for the Department of Justice. Hubbard has been a prosecutor for the past 31 years and argued numerous cases before both the Ontario Court of Appeal and the Supreme Court of Canada. He has written extensively about wire-tapping and other electronic surveillance and is co-author of a book on money laundering.

Hubbard made headlines in February when he successfully argued that the National Post newspaper should be compelled to turn over documents provided by an unnamed source in the so-called Shawinigate Affair. The documents, which have since been dismissed as forgeries, purported to show a financial link between former prime minister Jean Chrétien and a developer who inappropriately took money to renovate a hotel in Chrétien’s political riding. Ironically, it was Madame Justice Benotto who in 2004 quashed the original search warrant used by the RCMP to try to seize the documents.

Hubbard has his work cut out for him in successfully prosecuting the case, says David Paciocco, who teaches law at the University of Ottawa. “Generally, these complex white-collar crime cases can go off the rails very easily,” he says. “It is essential the prosecution have witnesses that are credible, can make the details comprehensible and have as much of their testimony as possible backed up by documents. Otherwise, the defence can pass the buck to lower-level employees .”

That blame game has been underway for years in numerous civil and regulatory actions surrounding the collapse of the theatre company. In various lawsuits filed over the past decade, Drabinsky or Gottlieb have blamed Livent’s fall on the company’s auditors, its accounting staff and even Michael Ovitz, the Hollywood super-agent and former president of the Walt Disney Co. It was Ovitz’s purchase of a controlling stake in Livent in 1998, and a subsequent investigation by his management team, that ultimately led to the firing of Drabinsky and Gottlieb and the unravelling of the alleged fraud. Many of Livent’s senior accounting staff have already pleaded guilty to criminal and regulatory charges in Canada and the U.S.

Gordon Eckstein, for instance, pleaded guilty to criminal charges in Canada, similar felony charges brought by the SEC in the United States, as well as charges of professional misconduct brought by the Institute of Chartered Accountants of Ontario (ICAO). Maria Messina, Livent’s former chief financial officer, settled SEC charges and also pleaded guilty to professional misconduct charges brought by the ICAO. Junior Livent finance officials such as Chris Craib and Tony Fiorino, as well as Jerry Banks, a company lawyer, have also pleaded guilty to criminal or regulatory charges.

The accountants are expected to testify that it was Drabinsky and Gottlieb who demanded they cook Livent’s books to hide losses and inflate profits. In his settlement with the SEC, Eckstein described one meeting in 1998 where the impresario was told the company would report quarterly losses of US$23 million. “Drabinsky objected to such a loss and directed staff to find a way to record a profit of $2 million,” the SEC alleged. At a subsequent meeting to discuss the quarter, Eckstein is quoted by a colleague as saying: “I have to keep all the lies straight…I’ve told so many lies to different people I have to make sure they all make sense.”

The fact that those accountants have already admitted to knowingly breaking accounting rules and lying to auditors, regulators and investors, will provide a great deal of fodder to defence lawyers eager to convince the judge that neither Drabinsky nor Gottlieb had anything to do with the alleged fraud. In civil court filings, both Drabinsky and Gottlieb have maintained their innocence, noting that they were not accredited accounting experts and relied on their accounting staff to ensure the treatment of transactions was legal and proper. However, court records and their past behaviour would seem to indicate that the defendants weren’t financial neophytes who would turn over financial control of Livent to underlings.

Gottlieb was a member of Livent’s audit committee — along with noted Toronto lawyer Garfield Emerson and AlfredTaubman, the U.S. real estate developer and former chairman of Sotheby’s auction house who in 2001 was convicted of price-fixing and sentenced to a year in prison. Prior to partnering with Drabinsky, Gottlieb was a well-known financial manager and deal-maker who eventually rose to become president of Merit Investment Corp., a boutique brokerage firm.

Drabinsky is well known for his super-sized personality, charm and showmanship. In both regulatory actions and civil court filings, however, he is often portrayed as a micro-managing tyrant. Not a single detail of the company’s operations seemed to escape his notice, and he was known for berating employees who did not do what was demanded of them. “I had never before experienced anyone with Drabinsky’s abusive and profane management style,” stated Robert Webster, Livent’s former executive vice-president, in a lawsuit filed against Drabinsky and Gottlieb in 1999. Webster, who joined Livent with Michael Ovitz, went on to describe incidents where the company’s accounting staff left meetings in tears, complained of nausea due to the tense atmosphere at the office and were repeatedly told to “shut up and do what they were told.”

Brian Greenspan would not say whether Gottlieb or Drabinsky would ultimately take the stand and testify in their own defence. But even without their testimony, the trial promises to be one of the most dramatic and long-running courthouse dramas in recent Canadian memory. Would you expect anything less from a Livent production?