The Office of the U.S. Attorney for the Southern District of New York has indicted ousted Livent founders Garth Drabinsky and Myron Gottlieb on 16 felony counts each.
At the same time, the U.S. Security and Exchange Commission has sued Drabinsky and Gottlieb, painting them as "the architects of an accounting fraud designed to inflate earnings, revenues and assets reported by the company" during the period covering 1990-98 - roughly the entirety of the Canadian theatrical producing company's existence. Seven other top Livent executives were also indicted.
The SEC charged that widespread fraud led Livent to submit at least 17 false filing with the SEC, reports that routinely and systematically overstated Livent's financial health. Drabinsky, Gottlieb and other executives are also variously accused of manipulated income and cash flow, insider trading and kickback schemes. According to Government papars, Drabinsky and Gottlieb collected $7 million in kickbacks. The executives accomplished this by having two contractors submit bills for construction work that had never happened. When Livent paid these bills, the construction companies returned $7 million of the money to Drabinsky and Gottlieb. The two execs then pocketed the millions.
The two former Livent heads also reportedly instucted companies to purchase $380,000 worth of tickets to Livent's production of Ragtime in order to make the Broadway-bound show look more successful than it was.
Drabinsky delivered a statement on Jan. 13 in which he accused Livent and its new management team, headed by Michael Ovitz and Roy Furman, of deliberate designs to "damage my reputation." He insisted on his innocence in the matter. He declined to take any questions. Other executives named in the indictment are former Livent senior vice-president Gordon Eckstein; former senior executive vice-president and CEO Robert Topol; former chief financial officer Maria Messina; former theatre controller Tony Fiorino; former senior production controller D. Grant Malcolm; former senior corporate controller Diane Winkfein; and former senior budgeting controller Christopher Craib.
"This case should send a strong message to officials of public companies that the SEC is on guard for companies that cook the books and when detected, we will take swift action," said SEC director of the division of enforcement, Richard H. Walker at a Jan. 13 press conference at the Office of the U.S. Attorney in Manhattan.
Drabinsky and Gottlieb were suspended last August and later dismissed when Livent's new management team uncovered evidence that they had participated in widespread accounting fraud. Since then, Livent has fallen on hard times, soliciting multi-million loans to cover daily operating costs, laying off hundreds of staffers and abandoning or canceling touring productions.
"We informed the SEC immediately upon the discovery last August of serious accounting irregularities at Livent," said a company spokesman. "The government's order makes clear where responsibility lies for this regrettable matter.... The company has said all along that the facts would speak for themselves and we believe that in the SEC's order they do."
The SEC is seeking civil fines from all the defendants except controller Craib and will attempt to permanently bar Drabinsky, Gottlieb, Topol and Eckstein from ever serving as officers or directors of a public company again.
Eckstein, in a settlement, has already agreed with SEC officials to be barred from heading a public company. And Eckstein and Messina have pled guilty to one felony count of violation of federal securities laws and are awaiting sentencing.
Drabinsky and Gottlieb have not settled their cases. According to various accounts, they could face decades in jail and millions of dollars in fines. Drabinsky's lawyers could not be reached for comment.
-- By Robert Simonson