BULL STREET - The art of the Con

Livent, One of the Best Shows on Wall Street but It Closed Early

We have all heard of Livent by this time. You know those lovable show business folks personified by Garth Drabinsky and Myron Gottlieb who came down from Canada and told us that they were going to revitalize Broadway by bringing new shows and exciting performances to the Great White Way. In addition, they did what they said they were going to do but there was a small catch. They raised money from some very influential people both in and out of show business. They raised more money from people that had nothing to do with show business playing the “don’t you really want to own a piece of this sure thing” gambit.  people that trusted them. They made Broadway exciting and in the same motion, These friendly people dissipated millions of dollars of investors’ money by keeping two sets of books, one with totally phony results and the other which showed exactly how bad they were doing. It seems that you can’t both completely satisfy the public’s taste and make money at the same time on a continuous basis.

“But that’s old hat - every crook since the beginning of time has played that trick. What makes this deal different than all the others?  Tell us something different.”

“Ok, I’ll tell you something these guys did that was different from anything that we have seen before.  They hired the former chief auditor on their Livent account at Deloitte Touché, Maria Messina, and put her to work as the chief financial officer of Livent, in house. Talk about setting the fox to guard the hen house. Talk about accountants protecting the public interest. This one toke the cake.”  Oh, people have hired an employee from an accounting firm before.  Moreover, some of them even did it at an outrageous salary, which normally couldn’t have been justified.  However, we do not know an instance where it was done during an audit and with the accounting turncoat able to be intricately involved with her former employees in going over her own books and records.  She knew how their audit was done; what they would look for and how to hide whatever was necessary from her former associates at Deloitte. She was very adept at using every trick of the trade in duping her former employees who for some unknown reason, still trusted her.

Therefore, when the story began to leak, stockholders and investors filed class actions that named anybody and everybody as defendants. Early on though, people just didn’t catch on to the fact that Livent and Deloitte had committed just about the biggest no-no in the accounting’s professional rules.  They walked into an audit without clean hands, and then certified that Livent’s books were in good condition, despite having amazingly condoned Livent’s capitalization of unrecoupable expenses for shows that had already closed.

Deloitte, already in over its head, should have had the common sense to at least footnote the fact that Maria Messina was at least originally one of theirs. The lawsuit that was filed against Deloitte indicated that it had “recklessly disregarded the facts when it audited Livent.” The statement of claim goes on to state that “Deloitte & Touché produced three sets of false and misleading financial statements.  Deloitte either knew or recklessly disregarded the facts, which indicated that Livent’s financial statements were materially false and misleading; As a result, Deloitte issued unqualified opinions on Livent’s fiscal 1995, 1996 and 1997 financial statements, when such financial statements materially overstated the company’s revenues, net income, total assets and stockholders’ equity. These unqualified audit opinions and reports greatly enhanced and facilitated the fraud.” Sounds like a reasonable conclusion to us; at least based on what facts we have available.

After all, didn’t the Securities and Exchange Commission later file a civil suit against both men charging them with accounting fraud and insider trading? In addition, weren’t Drabinsky and Gottlieb both indicated in New York on sixteen counts of conspiracy and securities fraud?  Isn’t it also true that the two men also fled the United States in order to avoid standing trial and have refused to defend themselves in this country?  Isn’t it a fact that Maria Messina as Livent’s chief financial officer pled guilty to one count of filing false financial statements with the Securities and Exchange Commission?  Wasn’t the head of Livent’s audit committee charged with engaging in fraudulent transactions along with his associates; a man that was in a job that was supposed to be sacrosanct.

Strangely, the accounting profession has no particular rule against “revolving-door accountants” and with SEC telling them in no uncertain terms that had they better address the problem before the government does it for them has caused no little consternation in the industry.  We don’t see how something won’t get done regarding this issue because the conflict is so obviously egregious.  We would look for the Independence Standards Board, which has been around for three years without accomplishing much, to either make the accounting industry toe the mark, or you can bet that the SEC is going to force the issue.  We seriously have to wonder what the people in this industry are thinking about when it comes to protecting the public trust, or just about anything else for that matter. Now that Andersen has tanked after getting involved in no less than three major frauds in succession, big changes are coming in a under-regulated profession that is supposed to know better.

As to Messer’s Drabinsky and Gottleib, when U. S. Attorney for the Southern District filed 16 felony counts of fraud and conspiracy against the two, Mary Jo White had indicated that in spite of the fact that the co-conspirators were now living in Canada and had flown to avoid prosecution, she would see that they were brought back to stand trial.  So far, that has not been the case and in spite of the massive amount of money that went through Drabinsky’s hands, he has now gotten another stack.  He has announced that he is bringing the play, “The Island,” to Toronto next May.  As to money, Drabinsky indicates that “a number of splendid friends and individuals” have staked him to another chance.  We would ask, another chance at what?

 

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