Broadway producers guilty of fraud
Livent Founders Convicted of C$500 Million Fraud
Garth Drabinsky and Myron Gottlieb, founders of the collapsed theater producer Livent Inc., were convicted of a C$500 million ($407 million) fraud a decade after Canadian police began a probe into the company’s finances.
Ontario Superior Court Judge Mary Lou Benotto delivered the veredict today in Toronto in what police called one of the biggest frauds in Canadian history. She found both men guilty of two counts of fraud and one count of forging a document.
"The creative success you achieved through your companies was spectacular, but the trial wasn’t about that," Benotto told the men. "You knew what was happening" at Livent, she said.
Drabinsky, 58, and Gottlieb, 65, were accused by Canadian authorities in October 2002 of lying about Livent’s finances for nine years while they raised money to buy theaters in Toronto, Chicago and New York and paid for lavish productions, including Broadway hits "Ragtime" and "Phantom of the Opera."
Each fraud count carries a maximum jail term of 14 years, and the maximum prison sentence for forgery is 10 years. Lawyers and Benotto plan to meet April 8 to discuss a sentencing date.
"It’s been an 11-year struggle, so it takes a little time to react," David Roebuck, one of Drabinsky’s lawyers, said after the verdict. Drabinsky declined to comment.
'A Relief'
The successful prosecution may embolden Canadian prosecutors and securities regulators to press ahead with other cases, after being criticized for years for inefficient enforcement of securities law, said Alan Mark, chairman of the Toronto Litigation Group at Ogilvy Renault.
"This comes as a relief to law enforcement authorities," Mark said in a telephone interview. "They would’ve felt embarrassed" had the men been acquitted.
Drabinsky and Gottlieb were the toast of Broadway when Livent, which they founded in 1990, was North America’s biggest theater producer. They are fugitives from U.S. law after being indicted in 1999 on similar fraud charges by a federal grand jury in New York. Drabinsky and Gottlieb have refused to appear in a U.S. court. The U.S. had put an extradition request for them on hold, pending the outcome of the trial in Toronto.
Drabinsky and Gottlieb illegally pocketed millions of dollars by faking invoices and hiding production costs, prosecutor Robert Hubbard told Benotto. The men chose to be tried by a judge, rather than a jury.
No Evidence
The trial began May 5 and, after a midyear break, concluded Nov. 3, when lawyers for Drabinsky and Gottlieb announced they wouldn’t present any evidence. Neither of the accused testified. Lawyers made closing statements Dec. 23.
Gordon Eckstein, former vice president of finance at Livent, testified that he was aware of the fraud and worked under orders from the two accused.
Another lawyer for Drabinsky, Edward Greenspan, and Gottlieb’s lawyer, Brian Greenspan, argued that Eckstein directed the fraud on his own and the criminal case was based on false testimony of former executives.
Drabinsky productions were nominated for 61 Tony Awards, winning 19 times, according to American Theatre Wing, the awards’ founder. "Kiss of the Spider Woman," produced by Drabinsky, won three Tonys, including Best Musical.
Drabinsky was also producer and executive producer of the 2007 television mini-series "Triple Sensation," in which he played himself as a panelist judging Canadians who were taking part in a singing, acting and dancing competition.
Toronto IPO
Livent, an acronym for Live Entertainment, sold shares in an initial public offering on the Toronto Stock Exchange in 1993. The stock peaked at C$18.25 in 1996, giving the company a market value of C$287 million. Two years later, police started investigating allegations of accounting irregularities and the production company went bankrupt, Hubbard said.
Drabinsky and Gottlieb were accused of falsifying Livent finances from 1989 to 1998, while they sold shares, warrants, debentures and senior notes worth C$460 million.
They also obtained lines of credit worth as much as C$60 million from the Royal Bank of Canada, Bank of Nova Scotia and the Canadian Imperial Bank of Commerce, authorities said.
Investors sued in New York in 1998, alleging misrepresentation in a 1997 registration statement filed with the U.S. Securities and Exchange Commission in support of the sale of unsecured notes.
A year later, Livent restated financial results, reducing net income by $85 million. The company became insolvent and the unsecured notes were worthless.
U.S. Order
U.S. District Judge Victor Marrero ordered Drabinsky and Gottlieb to pay $36.6 million in 2005 to the noteholders. The judgment was upheld by courts in Ontario. Canada’s Supreme Court last month dismissed Drabinsky’s appeal of the rulings.
Drabinsky quit as chief executive officer in April 1998, saying he wanted to serve as chief creative officer. Two months later, Michael Ovitz, former president of Walt Disney Co., bought a 12 percent stake in Livent and a new management team took over. Drabinsky and Gottlieb were fired in November 1998.
SFX Entertainment Inc., a unit of Clear Channel Communications Inc., bought Livent’s theaters and rights to productions in 1999 for $98 million. The Clear Channel unit was spun off and is now part of Live Nation Inc.
The case is between Her Majesty the Queen and Garth Drabinsky, P592/06, Ontario Superior Court of Justice (Toronto).
(Published by Bloomberg - March 25, 2009)