Risk Management

Real-Life Accounting Scam Nets Producers

One-time Broadway giants Garth Drabinsky and Myron Gottlieb are convicted in Canada of a $400m fraud. Star witness is the VP for finance.
Roy Harris and Stephen TaubMarch 26, 2009

Note to Mel Brooks: It’s no longer fiction, as two of the biggest of Broadway’s former producing bigshots — Garth Drabinsky and Myron Gottlieb — were found guilty of engaging in an elaborate accounting fraud.

The cofounders of the now-defunct Livent Inc. were found guilty in a Canadian court of two counts of fraud and one of forgery, according to Reuters. Press accounts said that their activity had been described in court as deception that netted Livent more than $400 million.

“The accounting system was fraudulent,” Justice Mary Lou Benotto said after a trial that lasted nearly 11 months. “You knew what was happening.” In a peculiar blend of praise and blame, she began her presentation of the verdict with praise of the two men for their creation of an apparently successful Canadian company that responsible for the production of such hits as “Kiss of the Spider Woman,” “Ragtime,” “Joseph and the Amazing Technicolor Dreamcoat,” and “The Phantom of the Opera.” Her written verdict, however, said that Drabinsky and Gottlieb had “systematically manipulated” the books in order to increase profits.

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An account of the trial in the New York Times noted that the government’s star witness against the two was Gordon Eckstein, Livent’s vice president for finance, who said he had been ordered to keep a second, fraudulent set of books between 1993 and 1998. Evidence at trial suggested that the company had taken costs off its books in the scheme. It was also alleged that millions of dollars were funneled to Drabinsky and Gottlieb through fraudulent invoices from suppliers.

Accounts of the trial in Ottawa rarely avoided comparisons to the celebrated fraud operated by Max Bialystock and Leo Bloom in Brooks’s movie and Broadway-comedy version of accounting abuse on the Great White Way, “The Producers.” In that case, producer Bialystock and his whimpy accountant Bloom intentionally produced a lousy show, “Springtime for Hitler,” in an attempt to close after the first night and pocket investors’ money.

In the Livent case, Drabinsky and Gottlieb face a maximum of 10 years for each fraud conviction and 14 years in prison on the forgery count, according to press accounts. The sentencing portion of the trial is scheduled to begin on April 8.

During the trial, the defendants reportedly blamed Eckstein and other senior executives for recording improper accounting entries without the consent of Drabinsky and Gottlieb. Attorney Edward L. Greenspan, who represented Drabinsky and Gottlieb, said in an E-mail response to a query from CFO.com that the two defendants would not be making a statement. He was quoted in the Canadian Press as saying of the verdict: “We have not read it and we need an opportunity to review it carefully. We have to do that before we can make any comment.”

The two men also face fraud and conspiracy charges in New York.

Judge Benotto said in her ruling the two men “were so devoted to the continuation of Livent that they directed the falsification of the financial statements in order to continue the flow of money to the company. They were deceitful, they perpetrated a falsehood and reasonable people would consider them dishonest.”

The company was sold in 1998, and was then headed by former Walt Disney Co. executive and talent agent Michael Ovitz. He reportedly ordered an audit of the company’s books shortly after taking over, thus exposing the fraud.

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