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From: Securities and Exchange Commission Release
Time: 7:47:05 AM
So these guys were going to build a show-business empire and so what if it wasn't working a fast as they intended. By cooking the books and running the enterpirse with an iron-hand, no one would be the wiser for years to come. Not! They didn't realize that buying having ultra-sophisticated shareholders, they also had a group of people that would soon be on to them and would know what to do about. Read the story of Livent from the SEC's prospective.
Robert A. Spira Chapman Spira and Carson LLC
SECURITIES AND EXCHANGE COMMISSION Washington, D.C.
Litigation Release No. 16022 / January 13, 1999
SECURITIES AND EXCHANGE COMMISSION V. GARTH H. DRABINSKY, MYRON I. GOTTLIEB, ROBERT TOPOL, GORDON C. ECKSTEIN, MARIA M. MESSINA, DIANE J. WINKFEIN, D. GRANT MALCOLM and TONY FIORINO, 99 CIV.0239 (TPG) (SDNY) (January 13, 1999)
SEC SUES GARTH DRABINSKY, MYRON GOTTLIEB AND SIX OTHER FORMER LIVENT INC. EMPLOYEES FOR A MULTI-FACETED ACCOUNTING FRAUD SPANNING EIGHT YEARS
On January 13, 1999, the Securities and Exchange Commission filed a civil injunctive action in the United States District Court for the Southern District of New York, alleging that former senior officers, directors, and members of the accounting staff of Livent Inc., a Canadian-based theater owner and producer of live theatrical entertainment such as Ragtime, The Phantom of the Opera, Show Boat, and Fosse, engaged in a multi-faceted and pervasive fraud spanning eight years from 1990 through the first quarter of 1998. Garth Drabinsky, Livents former chairman and chief executive officer, and Myron Gottlieb, the companys former president and a director, were the architects of an accounting fraud designed to inflate earnings, revenues, and assets reported by the company in financial statements filed with the Commission and disseminated to the public. The fraudulent scheme involved multiple violations of the antifraud, books and records, and internal controls provisions of the federal securities laws. As a result of the fraud, Livent made at least seventeen false filings with the Commission which materially overstated the results of Livents operations and its financial condition.
According to the Complaint, Drabinsky and Gottlieb manipulated income and operating cash flows with the active participation of several long-time associates, including Gordon Eckstein, Livents former senior vice president of finance and administration, Robert Topol, the companys former senior executive vice president and chief operating officer, as well as several individuals in the companys accounting department. Maria Messina, Livents former chief financial officer, and former Deloitte & Touche engagement partner for Livents 1995 audit, also participated in the scheme. Drabinsky and Gottlieb also enlisted the support and assistance of numerous Livent personnel in their far-reaching fraud and solicited assistance from various other individuals and entities to facilitate and conceal the fraud. While in possession of material nonpublic information concerning the fraudulent conduct at Livent, the Complaint alleges, Topol, Eckstein, Tony Fiorino, Livents former theater controller, D. Grant Malcolm, Livents former senior production controller, and Diane Winkfein, Livents former senior corporate controller, engaged in insider trading of Livent securities.
The Complaint alleges that Drabinsky and Gottlieb orchestrated the fraudulent scheme in three ways, all of which violated Generally Accepted Accounting Principles. First, from 1990 through 1994, even before Livent became a U.S. public company, Drabinsky and Gottlieb operated a kickback scheme with two Livent vendors which siphoned approximately $7 million (Cdn) from the company for their personal benefit. Drabinsky and Gottlieb, according to the Complaint, directed the vendors to artificially inflate invoices. Livent then paid the invoices and the vendors returned most of the money directly to Drabinsky and Gottlieb, or to Gottliebs Canadian company. As a result of this scheme, Livents financial statements for fiscal years 1991 and 1992 were materially false and misleading. Livent included these false numbers in several filings with the Commission, including the companys 1995 registration statement, signed by Gottlieb, to register 12 million common shares, and the companys $35 million U.S. equity offering in February 1996, signed by Drabinsky and Gottlieb.
Second, the Complaint alleges that commencing in 1994 and continuing through the first quarter of 1998, Drabinsky and Gottlieb directed three fraudulent manipulative devices to effect the accounting scheme. First, Livent transferred preproduction costs for shows to fixed assets such as the construction of theaters. Next, Livent simply removed certain expenses and the related liabilities from the general ledger, literally erasing them from the companys books. Finally, Livent transferred costs from one show currently running to another show that had not yet opened or that had a longer amortization period. All of these manipulations were designed to understate expenses in order to fraudulently inflate earnings, portray unsuccessful theatrical productions as profitable, and to meet quarterly and annual projections provided to Wall Street analysts.
According to the Complaint, for each reporting period, Drabinsky generally directed the amounts of arbitrary adjustments for each manipulation, which were discussed and agreed upon by Drabinsky, Gottlieb, Eckstein, Topol and Messina. At Ecksteins direction, two senior Livent controllers, Winkfein and Malcolm, effected the adjustments in the companys accounting system using a computer program which allowed them to make the adjustments without a trace in order to hide the fraud from the companys auditors. Also at Ecksteins direction, Malcolm maintained separate records showing the adjustments, so that senior management could track the manipulations and know Livents true financial condition. Fiorino tracked the costs that were improperly transferred to theater construction accounts.
Third, the Complaint alleges that from 1996 through 1997, Gottlieb, Topol and other Livent former senior officers entered into various "revenue-generating" agreements containing secret side agreements that required Livent to pay back amounts advanced by the counter parties. Drabinsky, Gottlieb, Topol, Eckstein, and Messina concealed these side agreements from the companys auditors in order to improperly record revenue from the transactions and inflate the companys revenues.
The Complaint alleges that as a result of the scheme, Livent reported inflated pre-tax earnings, or understated pre-tax losses, for each of its fiscal years as a U.S. public company, 1995 through 1997. For fiscal 1995, Livent reported pre-tax earnings of $18.2 million when, in fact, it should have reported approximately $15 million in earnings. For fiscal 1996, Livent reported pre-tax earnings of $14.2 million when, in fact, the company incurred a loss of more than $20 million in that year. For fiscal 1997, Livent reported a pre-tax loss of $62.1 million when, in fact, the companys true loss in fiscal 1997 was at least $83.6 million. The Complaint alleges that as a further result of the scheme, Livent reported preproduction costs or fixed assets that were fraudulently overstated for fiscal years 1994 through 1997.
Finally, the Complaint alleges that defendants Eckstein, Topol, Fiorino, Malcolm, and Winkfein each benefited from the fraudulent scheme by avoiding losses when they sold Livent stock while in possession of material nonpublic information that Livents earnings, revenues and assets were materially overstated in the companys public filings and press releases.
The Commissions Complaint seeks to permanently restrain and enjoin Drabinsky, Gottlieb, Topol, Eckstein, Messina, Winkfein, Malcolm and Fiorino from violating or aiding and abetting violations of the antifraud, books and records, and internal controls provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 ("Securities Act") and Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act"), and Rules 10b-5, 13b2-1 and 13b2-2 promulgated thereunder, and seeks civil monetary penalties against them. The Complaint further seeks to permanently bar Drabinsky, Gottlieb, Topol and Eckstein from serving as officers or directors of a public company. Finally, the Complaint seeks disgorgement, prejudgment interest and Insider Trading Sanctions Act ("ITSA") penalties from Topol, Eckstein, Fiorino, Malcolm, and Winkfein for insider trading.
Simultaneous with the filing of the Complaint, Eckstein consented, without admitting or denying the allegations of the Complaint, to the entry of a final judgment permanently enjoining him from his violative conduct, and permanently barring him from acting as an officer or director of a public company. Winkfein and Malcolm consented, without admitting or denying the allegations of the Complaint, to the entry of final judgments permanently enjoining each of them from their violative conduct. Winkfein was also ordered to pay $8,137 in disgorgement and prejudgment interest.
Also simultaneous with the filing of the Complaint, the Commission entered three administrative orders related to the conduct described in the Complaint. Without admitting or denying the Commissions findings, Livent consented to an Order directing Livent to cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act, Sections 10(b), 13(a) and 13(b) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-16 and 13b2-1 thereunder, and ordering Livent to cooperate with the Commission. See In the Matter of Livent Inc., Securities Act Release No. 7627, dated January 13, 1999. Eckstein, a Chartered Accountant, the Canadian equivalent of a Certified Public Accountant, consented, without admitting or denying the Commissions findings, to an Order pursuant to Rule 102(e) of the Commissions Rules of Practice, finding that he engaged in improper professional conduct and willfully violated the federal securities laws. The Order bars Eckstein from appearing or practicing before the Commission as an accountant, with the right to re-apply after five years. See In the Matter of Gordon C. Eckstein, Chartered Accountant, Securities Act Release No. 7629, dated January 13, 1999.
The Commission also instituted a settled cease and desist and Rule 102(e) proceeding against Christopher Craib, Livents former senior budgeting controller and a Chartered Accountant. In its Order, the Commission found that Craib maintained a document reflecting the companys true financial picture while, at the same time, illustrating certain fraudulent manipulations. Craib showed these to Livents officers so that they could track adjustments to the books, records and accounts of the company. Craib consented, without admitting or denying the Commissions findings, to the entry of a Rule 102(e) Order directing Craib to cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5 and 13b2- 1 and 13b2-2 thereunder, and finding that Craib engaged in improper professional conduct and willfully violated the federal securities laws. The Order bars Craib from appearing or practicing before the Commission as an accountant, with the right to re-apply after three years. See In the Matter of Christopher M. Craib, Chartered Accountant, Securities Act Release No. 7628, dated January 13, 1999.
Also on January 13, 1999, the United States Attorney for the Southern District of New York announced the indictment of Drabinsky and Gottlieb for sixteen felony counts each, for violations of the federal securities laws. In addition, the United States Attorney announced that Eckstein and Messina pleaded guilty to one felony count each, for violations of the federal securities laws. The Commission wishes to thank the United States Attorneys office for its cooperation in this matter.
The Commission is continuing its investigation in this matter.