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U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES ACT OF 1933

Release No. 7628 / January 13, 1999

SECURITIES EXCHANGE ACT OF 1934

Release No. 40938 / January 13, 1999

ACCOUNTING AND AUDITING ENFORCEMENT

Release No. 1096 / January 13, 1999

ADMINISTRATIVE PROCEEDING

File No. 3-9807

In the Matter of Chartered Accountant,
Respondent.
ORDER INSTITUTING PUBLIC
PROCEEDINGS PURSUANT TO
SECTION 8A OF THE SECURITIES
ACT OF 1933, SECTION 21C OF THE
SECURITIES EXCHANGE ACT OF 1934
AND RULE 102(e) OF THE
COMMISSION’S
RULES OF
PRACTICE, MAKING FINDINGS
AND IMPOSING A CEASE-AND-DESIST
ORDER AND REMEDIAL SANCTIONS

I.

The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act of 1933 ("Securities Act") and Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Christopher Mark Craib ("Craib"). Craib is a Chartered Accountant, the Canadian equivalent of a Certified Public Accountant.

The Commission further deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted against Craib pursuant to Rule 102(e)(1)(ii) and (iii) 1 of the Commission’s Rules of Practice.

II.

In anticipation of the institution of these proceedings, Craib (the "respondent") has submitted an Offer of Settlement ("Offer") which the Commission has determined to accept. Solely for the purpose of these proceedings, and any other proceedings brought by or on behalf of the Commission, or in which the Commission is a party, without admitting or denying the findings set forth below, except as to jurisdiction of the Commission over him and over the subject matter of these proceedings, which the respondent admits, the respondent consents to the entry of this Order Instituting Public Proceedings Pursuant to Section 8A of the Securities Act of 1933, Section 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making Findings and Imposing a Cease-and-Desist Order and Remedial Sanctions ("Order") set forth below.

Accordingly, IT IS ORDERED that a proceeding pursuant to Rule 102(e)(1) of the Commission’s Rules of Practice be, and hereby is, instituted.

III.

FACTS

The Commission makes the following findings 2 :

A.Respondent

Craib, age 30, is a Canadian citizen and a Chartered Accountant. Since June 1997, Craib has worked as the Senior Controller for Budgeting at Livent Inc. ("Livent"), a Toronto, Ontario company that produces live theatrical entertainment and owns and operates theaters in North America. Prior to joining Livent, Craib worked as an audit manager for Deloitte & Touche Canada ("Deloitte") and was the audit manager for Livent’s 1995 and 1996 audits.

B.Related Entity

Livent Inc. ("Livent" or the "company"), is a Toronto, Ontario company that produces live theatrical entertainment, such as Ragtime, The Phantom of the Opera, Show Boat, Sunset Boulevard and Fosse, and owns and operates theaters in Toronto, Vancouver, Chicago and New York. Livent became a public company in Canada in May 1993, and pursuant to Section 12(g) of the Exchange Act, registered its common stock with the Commission in May 1995. Livent’s stock is traded on the NASDAQ national stock market and on the Toronto Stock Exchange. On November 18 and 19,1998, respectively, Livent declared bankruptcy in the United States and Canada.

C.Summary

The former senior management of Livent engaged in a multi-faceted and pervasive accounting fraud spanning eight years from 1990 through the first quarter of 1998. Garth Drabinsky ("Drabinsky"), Livent’s former Chairman and Chief Executive Officer, and Myron Gottlieb ("Gottlieb"), the company’s former President and a director, were the architects of a fraud which included: a multi-million dollar kick-back scheme designed to misappropriate funds for their own use; the improper shifting of preproduction costs, such as advertising for Ragtime, to fixed assets, such as the construction of theaters in Chicago and New York; and the improper recording of revenue for transactions that contained side agreements purposefully concealed from Livent’s independent auditors.

Drabinsky and Gottlieb manipulated income and operating cash flows throughout the relevant period with the active participation of several long-time associates. Drabinsky and Gottlieb also enlisted the support and assistance of numerous Livent personnel, including Craib, who is a Chartered Accountant.

Former senior management’s manipulation of income for eight years caused Livent to file with the Commission materially false and misleading financial statements and disclosures in at least seventeen filings during the company’s first three fiscal years as a publicly traded company in the United States, 1995, 1996 and 1997, as well as the first quarter of its fiscal year 1998. These filings included: annual and quarterly reports filed during the time period 1995 through 1998;reports; Livent’s 1995 registration of 12 million common shares; period 1995 through 1998; a $35 million (US) equity offering of 3.75 million common shares in 1996; and a $125 million (US) debt offering in 1997.

As a result of the scheme, Livent’s financial statements for fiscal years 1991 and 1992, prior to Livent becoming a U.S. public company, were materially false and misleading in that Livent overstated pre-tax earnings, or understated pre-tax losses, in each of those years. For fiscal 1991, Livent reported a pre-tax loss of $1.2 million. 3 In fact, Livent’s loss in that year was approximately $4.6 million. For fiscal 1992, Livent reported pre-tax earnings of $2.9 million. In fact, the company’s true earnings were approximately $100,000.

As a further 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. In fact, the company’s true earnings were approximately $15 million. For fiscal 1996, Livent reported pre-tax earnings of $14.2 million. 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. In fact, the company’s true loss in fiscal 1997 was at least $83.6 million.

As a further result of the scheme, Livent reported fixed assets that were fraudulently overstated for fiscal years 1994 through 1997. For fiscal 1994, 1995 and 1996, respectively, Livent reported fixed assets of $78 million, $80.8 million and $133.2 million. In fact, these amounts were overstated by at least $5 million in fiscal 1994 and 1995, and $6 million in 1996. For fiscal 1997, Livent reported $200.8 million in fixed assets, which was materially overstated by at least $23.9 million.

As a further result of the scheme, Livent reported preproduction costs or fixed assets that were fraudulently overstated for fiscal years 1994 through 1997. For fiscal 1994, 1995 and 1996, respectively, Livent reported preproduction costs of $28 million, $55.4 million and $75.6 million. In fact, each of these amounts was overstated by approximately $4 million. In addition, for fiscal 1996, Livent reported fixed assets of $133.2 million, which was overstated by at least $6 million. For fiscal 1997, Livent reported fixed assets of $200.8 million, which was materially overstated by approximately $23.9 million.

D.Livent Fraudulently Manipulates its Books and Records

1.The Accounting Manipulations

Livent’s accounting staff used four basic forms of manipulation. First, the staff transferred preproduction costs 4 for shows to fixed asset accounts such as the construction of theaters, 5 in order to delay the amortization of those costs. Second, the accounting staff, at the end of each quarter, simply removed certain expenses and the related liabilities from the general ledger. These items were literally erased from the company’s books. Third, the accounting staff transferred costs from one show currently running to another show that had not yet been opened or that had a longer amortization period, again in order to delay the amortization of those costs. Finally, senior management entered into various "revenue-producing" contracts containing purposefully concealed side agreements that, in effect, required Livent to pay back to the counter party the amount originally advanced. These transactions should have been booked as loans payable rather than as revenuerecognition of revenue.

2.How the Accounting Fraud Worked

Beginning in late 1993, Livent personnel began manipulating the company’s books, records and accounts. Standard operating procedure was as follows: Diane Winkfein ("Winkfein") and Grant Malcolm ("Malcolm"), two senior Livent controllers, regularly produced a general ledger showing financial results for a certain quarter or year end. They provided this information to Gordon Eckstein ("Eckstein"), Livent’s Senior Vice President of Finance and Administration, and later, to Craib, who then put the information into an easily understood summary format, or schedules, for Livent’s executives. Eckstein met regularly with Drabinsky, Gottlieb and Robert Topol ("Topol"), Livent’s COO, to review the results.

During these meetings, the group openly discussed the manipulations, and agreed on the approximate nature and quantity of adjustments to be made to the company’s books, records and accounts in order to achieve a predetermined financial picture that matched projections Drabinsky, Gottlieb and Topol had provided to analysts. In general, Drabinsky directed that certain adjustments be made and Eckstein made notes of the adjustments. Eckstein then communicated the adjustments to members of the accounting staff and instructed that they effect the adjustments in such a manner as to give the adjustments the appearance of original entries in the accounting system, so that they could not be detected.

3.Livent Personnel Override the Internal Controls

After meeting with Drabinsky, Gottlieb and Topol, Eckstein met with Winkfein and Malcolm and provided them with the approximate dollar amounts for adjustments that they were required to make to various accounts in the balance sheet and income statement, including expense categories, specific shows and fixed asset accounts. Winkfein, Malcolm and Tony Fiorino ("Fiorino"), another controller, then processed the adjustments. 6

To make the adjustments, Malcolm identified individual invoices to alter in order to achieve the overall level of adjustment specified by Eckstein. Then, on an invoice-by-invoice basis, he and Winkfein changed the distribution dates or account codes of the selected invoices, deleted the original entries from the general ledger system, and re-posted the fraudulent information to the general ledger. In a standard accounting system, these adjustments would have been made through journal entries. However, the enormous number of entries, which comprised millions of dollars in invoices, necessary to comply with Drabinsky’s directives required a more efficient method of adjustment. Moreover, adjusting journal entries can be "red flags" that leave a paper trail, something Livent did not want to create. Consequently, Eckstein told Malcolm to enlist the assistance of Livent’s manager of its information services department ("IS Manager") to write a program that would enable the accounting staff to override the accounting system without a paper or transaction trail. The IS Manager complied. The accounting staff, including Craib, all understood that they were concealing the adjustments from the Company’s auditors.

4.Livent Personnel Track The Fraud

As the theater controller, Fiorino’s responsibility was to take the costs that were fraudulently transferred from shows to theater cost accounts and then allocate them to various dummy accounts within the fixed assets. In fiscal 1997, Fiorino segregated the transferred costs from the genuine costs by creating a numerical range of accounts in the general ledger in which he recorded the transferred amounts. He did this so he could keep track of the true costs of theater construction as distinguished from the improperly transferred costs. 7

After the adjustments were processed, Winkfein or Malcolm provided Eckstein and, commencing in 1997, Craib with an adjusted general ledger containing the accounting manipulations. Craib was responsible for calculating the amortization charge for preproduction costs and had responsibility for preparing the quarterly schedules containing a comparison of actual and budgeted results, at Eckstein’s direction. These schedules showed items such as the "expense roll" and the "amortization roll," which quantified certain of the accounting irregularities. Craib included the amount of rolled costs on a summary that he prepared because Drabinsky complained that he was not able to tell from looking at the schedules how much had changed from the actual numbers. Indeed, after creating a new format for his summary, Craib showed Drabinsky how the summary had been set up and how to read it. After a final review by senior management, these bogus numbers were presented to the audit committee, the auditors, investors and eventually filed with the Commission.

Maria Messina ("Messina"), Livent’s CFO, who joined the company from Deloitte in May 1996, began attending the "after," or post-manipulation, meetings with management in October 1997. For these meetings, she prepared a pre- and post-adjustment balance sheet, income statement and statement of changes in financial condition, which she distributed to Drabinsky, Gottlieb, Eckstein and Topol. At this October meeting, all in attendance were provided with her documents, Craib’s schedules and individual show expense charts, which reflected improperly transferred amounts in detail. Discussion centered on the magnitude of the proposed manipulations, and the fact that the manipulations would make the fourth quarter results look poor because of the magnitude of amounts transferred to that quarter. Drabinsky stated that he did not care about the rest of the year, and that he had to have a good number for the third quarter since the debt offering was scheduled to conclude in the fourth quarter, and he could not show a loss. In looking at the figures, Drabinsky also asked Gottlieb if he would be able to "spin" the numbers to analysts, and asked how the analysts would react. Gottlieb told Drabinsky that although the level of preproduction expenses was higher than what the analysts expected, he could just blame it all on Ragtime.

The manipulations were often completely arbitrary. For example, one document, prepared by Winkfein for the audit committee, showed over $100 million of preproduction costs on the balance sheet. Drabinsky demanded that the number be reduced to below $100 million so that psychologically it somehow would not seem as high to the audit committee. Drabinsky ordered that the preproduction costs for Candide be reduced from $6 million to $4 million, because, he reasoned, the audit committee might insist that the preproduction costs be written down if they were $6 million, but a level of $4 million would probably be acceptable. Craib attended a meeting with Drabinsky and Eckstein to discuss the first quarter of 1998, which showed a loss of $23 million, Drabinsky objected to such a loss and directed certain members of the staff to find a way to record a profit of $2 million. At a subsequent meeting Craib attended with Eckstein to discuss the quarter, Craib transcribed Eckstein’s remarks as follows: "I have to keep all the lies straight. I have to know what lies I’m telling these people 8. I’ve told so many lies to different people I have to make sure they all make sense."

5.Livent Personnel Lie to Deloitte

Drabinsky, Gottlieb and Topol instructed Eckstein to conceal accounting irregularities from the audit committee and from the auditors. Indeed, Eckstein told Winkfein that although independent auditors were a "necessary evil," it was no one’s business how they ran their company. Fiorino created dummy accounts for the amounts that were improperly transferred to fixed assets. This enabled Livent to conceal these material transfers from Livent’s auditors. Craib created schedules that tracked the expense and amortization rolls, which enabled Livent to keep track of the rolled amounts internally, without the auditors’ knowledge. As a result, Livent’s accounting staff, including Craib, concealed the fraud from the auditors.

6.New Management Takes Over Livent

The arrival of new management merely emboldened Drabinsky and Gottlieb. The two continued to manipulate the company’s financial statements and instructed their staff to generate two versions of financial schedules -- one, designed for Drabinsky and Gottlieb, which included the description of improper cost transfers, and a second, designed for new management, which did not provide the description of improper cost transfers. Drabinsky instructed Messina and Eckstein not to give the more illustrative schedules to new management. Livent’s accounting staff, including Craib, concealed the fraud from new management.

IV.

LEGAL DISCUSSION

As described herein, Craib, a Chartered Accountant, maintained a document which reflected sets of reports, one reflecting the company’s true financial picture and, at the same time, illustrated reflecting certain of the fraudulent manipulations. He showed these to the company’s officers so that they could track adjustments to the books, records and accounts of the company. Craib knew what he was doing was wrong, and knew that certain information was concealed from the auditors.

Accordingly, Craib willfully violated 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 promulgated thereunder, and caused violations of Rule 13b2-2.

As a Chartered Accountant, the Canadian equivalent of a CPA, Craib is a professional charged with recognizing and preventing fraudulent accounting. Not only did he fail to fulfill his duty, he also intentionally participated in fraudulent conduct. He engaged in improper professional conduct, within the meaning of Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.

V.

FINDINGS

Based on the foregoing, the Commission finds that Craib:

A. Engaged in improper professional conduct, within the meaning of Rule 102(e)(1)(ii) of the Commission’s Rules of Practice, by intentional conduct that resulted in violations of applicable professional standards; and

B. Willfully violated, within the meaning of Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, 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 thereunder; and caused violations of Rule 13b2-2 promulgated under the Exchange Act.

VI.

Based on the foregoing, the Commission deems it appropriate and in the public interest to accept Craib’s Offer and impose the sanctions specified therein.

Accordingly, IT IS HEREBY ORDERED that:

Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, Craib cease and desist from committing or causing any violation and any future violation of Section 17(a) of the Securities Act and Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13b2-1 and 13b2-2 promulgated thereunder.

VII.

Based on the foregoing, the Commission deems it appropriate and in the public interest to accept Craib’s Offer, and impose the sanctions specified therein.

Accordingly, IT IS HEREBY ORDERED that, effective immediately:

A. Craib is denied the privilege of appearing or practicing before the Commission as an accountant.

B. After three (3) years from the date of this Order, Craib may apply to the Commission by submitting an application to the Office of the Chief Accountant which requests that he be permitted to resume appearing or practicing before the Commission as:

1. a preparer or reviewer, or a person responsible for the preparation or review, of financial statements of a public company to be filed with the Commission upon submission of an application satisfactory to the Commission in which Craib undertakes that, in his practice before the Commission, his work will be reviewed by the independent audit committee of the company for which he works or in some other manner acceptable to the Commission;

2. an independent accountant upon submission of an application containing a showing satisfactory to the Commission that:

a. Craib, or any firm with which he becomes associated in any capacity, will join as and will remain a member of the SEC Practice Section of the American Institute of Certified Public Accountants Division for CPA Firms ("SEC Practice Section") or an equivalent Canadian organization that includes or is supplemented by peer review, concurring partner review, continuing professional education and other membership requirements that provide appropriate quality controls over an accounting and auditing practice, as long as he appears or practices before the Commission as an independent accountant;

b. Craib or his firm has received an unqualified report relating to his or the firm’s most recent peer review conducted in accordance with the guidelines adopted by the SEC Practice Section or equivalent organization; and

c. Craib will comply with all applicable requirements of the SEC Practice Section or equivalent Canadian organization, including all requirements for periodic peer reviews, concurring partner reviews, and continuing professional education, as long as he appears or practices before the Commission as an independent accountant.

3. The Commission’s review of any request or application by Craib to resume appearing or practicing before the Commission may include consideration of, in addition to the matters referenced above, any other matters relating to Craib’s character, integrity, professional conduct, or qualifications to appear or practice before the Commission.

VIII.

IT IS FURTHER ORDERED that Craib comply with his undertaking to: on reasonable notice, and without service of a subpoena, cooperate with the Commission and its staff and truthfully disclose all information with respect to his activities and the activities of others about which the Commission or its staff may inquire; accept service, appear and testify in all investigations, administrative and judicial proceedings at which the Commission or its staff makes requests for such testimony except to the extent that the U.S. Department of Justice objects to such testimony; make himself available as may be required by the Commission or its staff; produce any documents within his possession, custody or control, domestic or foreign, which are requested by the Commission or its staff; be accompanied at any time he so desires by counsel of his choice; give truthful and accurate information and testimony and not assert any evidentiary or other privilege, other than the attorney-client and work product privileges; and in the event of his failure to testify truthfully or to comply with the above requirements, be subject to contempt proceedings, charges of perjury and/or charges of obstruction of justice.

By the Commission.

Jonathan G. Katz

Secretary


FOOTNOTES

1

Rule 102(e) of the Commissionís Rules of Practice provides, in pertinent part, that: The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or practicing before it in any way to any person who is found by the Commission after notice and opportunity for hearing in the matter: ... (ii) To be lacking in character or integrity or to have engaged in unethical or improper professional conduct; or (iii) To have willfully violated ... any provision of the Federal securities laws or the rules and regulations thereunder.

2

The Commissionís findings herein are made pursuant to the Offer and are not binding upon any other person or entity in these or any other proceedings.

3

Canadian dollars will be used in this Order unless otherwise indicated.

4

Preproduction costs are costs incurred and capitalized on a particular production prior to opening. Upon opening, these costs are amortized over a period not to exceed five years.

5

Costs other than preproduction costs were also improperly transferred to fixed asset accounts. For example, day-to-day operating costs, such as salaries for the orchestra and payments to cast pension funds, were capitalized to theater accounts.

6

Since 1994, on a quarterly basis, Eckstein directed Winkfein to improperly move costs from Sunset Boulevard , a severe financial failure, to other shows, such as Ragtime and Show Boat . Fiorino estimated that the total transfer of costs in 1994 was approximately $5 million.

7

Because of the sheer volume in dollars and invoices being transferred within Liventís books and records, it became necessary for senior management to be able to distinguish between the real and phony numbers. At Ecksteinís direction, Malcolm maintained computer files of the manipulations to keep track of Liventís true financial position. The records he maintained show details of expense capitalizations, expense rolls and show-to-show transfers from 1995 through the first quarter of 1998. Eckstein insisted that these records be kept, and showed them to Drabinsky to be certain that Drabinsky knew exactly what manipulations had been implemented.

8

new management and due diligence accountants

http://www.sec.gov/litigation/admin/34-40938.htm


Modified:01/13/1999