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, Livent’s former chairman and
chief executive officer, and Myron Gottlieb, the company’s 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 Livent’s 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, Livent’s former senior vice president of finance and
administration, Robert Topol, the company’s former senior
executive vice president and chief operating officer, as well as
several individuals in the company’s accounting department.
Maria Messina, Livent’s former chief financial officer, and
former Deloitte & Touche engagement partner for Livent’s 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, Livent’s former
theater controller, D. Grant Malcolm, Livent’s former senior
production controller, and Diane Winkfein, Livent’s 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 Gottlieb’s Canadian company. As a result of this
scheme, Livent’s 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 company’s 1995 registration statement, signed by Gottlieb, to
register 12 million common shares, and the company’s $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 company’s 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 Eckstein’s
direction, two senior Livent controllers, Winkfein and Malcolm,
effected the adjustments in the company’s accounting system using
a computer program which allowed them to make the adjustments
without a trace in order to hide the fraud from the company’s
auditors. Also at Eckstein’s direction, Malcolm maintained
separate records showing the adjustments, so that senior
management could track the manipulations and know Livent’s 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 company’s
auditors in order to improperly record revenue from the
transactions and inflate the company’s 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 company’s 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
Livent’s earnings, revenues and assets were materially overstated
in the company’s public filings and press releases.
The Commission’s 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 Commission’s 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 Commission’s findings, to an Order
pursuant to Rule 102(e) of the Commission’s 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, Livent’s
former senior budgeting controller and a Chartered Accountant.
In its Order, the Commission found that Craib maintained a
document reflecting the company’s true financial picture while,
at the same time, illustrating certain fraudulent manipulations.
Craib showed these to Livent’s officers so that they could track
adjustments to the books, records and accounts of the company.
Craib consented, without admitting or denying the Commission’s
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 Attorney’s office for its cooperation in this
matter.
The Commission is continuing its investigation in this
matter.