This article was originally published in Maclean's Magazine on August 24, 1998
Drabinsky Gets the Hook
Imagine what it must have been like for Garth Drabinsky, a person who is, above all else, accustomed to getting his own way. Whether he is being charming or bombastic, whether it involves mounting an extravagant Broadway musical or raising millions of dollars on stock markets, Drabinsky has made bullying and cajoling the people around him into an art, rivalling whatever he accomplishes on the stage. He is so good at eliminating obstacles that he fully expected to be able to continue to do so, even last spring after selling control of his live theatre company, Livent Inc., to a group of entertainment executives headed by former Walt Disney Co. president Michael Ovitz. How then did it feel, early on Aug. 10, to be summoned, along with longtime business partner and Livent co-founder Myron Gottlieb, before Livent's board of directors at a meeting in which, suddenly, none of Drabinsky's friends and business associates were persuaded by anything he had to say?
Nobody knows, and, for the first time in years, Drabinsky isn't talking. But in a plot twist that has taken Bay Street and the Canadian theatre community by surprise, Drabinsky and Gottlieb emerged from the meeting accused of having spent more than two years hiding Livent's financial problems from the board. Both executives, who following the sale to Ovitz were respectively Livent's vice-chairman and vice-president of Canadian administration, were suspended from their jobs. They have not been allowed back into Livent's headquarters, despite repeated requests. In a dramatic gesture befitting the moment before the curtain goes down on the first act, Livent's executive offices were sealed that morning pending arrival of the firm's financial investigators.
The last time Drabinsky spoke with Maclean's, in April, he pounced on a question about the similarity between what was happening at Livent and past events at Cineplex Odeon Corp. in 1989. "There's not even a comparison," Drabinsky growled.
As it turns out, he was right. At Cineplex, Drabinsky and Gottlieb were allowed to make their exit in style, taking with them Canadian rights to Andrew Lloyd Webber's hit musical The Phantom of the Opera. From this, they created Live Entertainment Corp. and began building and renovating grand theatres in cities that now include Toronto, Vancouver, New York City and Chicago, as well as churning out their own lavish musical productions. The list includes Show Boat, Ragtime and, most recently, Fosse: A Celebration in Song and Dance, which opened in Toronto on Aug. 9.
Even in its opening scenes, last week's drama at Livent was shaping up to be a lot worse than the Cineplex story. Livent management's public statements have been vague and shrouded in financial bafflegab but they are still astonishing. ("This is an unbelievable story," one Livent insider says.) In a news release, Livent officials announced that Drabinsky and Gottlieb are being investigated for "serious irregularities" that include the methods they used to account for revenue and costs. They say the problems date back to 1996, could involve millions of dollars, and might even lead to a technical default on Livent's bank debt. Livent management has been unwilling to elaborate, other than to insist that untangling the accounting trail will have no adverse effect on cash flow, upcoming interest payments, or the company's ability to go forward with theatrical projects. For their part, Drabinsky and Gottlieb issued a single statement late the first day, asserting that they are also "surprised and dismayed" at the board's actions. "We have insufficient details to respond more fully."
Investors are in a similar quandary. The Toronto Stock Exchange and the Nasdaq Stock Market in the United States immediately halted trading in Livent's shares and have refused to let the stock change hands until the public gets more information. The Ontario Securities Commission's enforcement arm ordered four staff members to start combing through Livent's financial statements. The U.S. Securities and Exchange Commission is expected to follow. As are the lawyers: by Friday, nine U.S. law firms had already filed class action suits.
Livent officials say nothing more will be revealed until they know the outcome of the internal investigation, conducted by KPMG Investigation & Security Inc. But details of what the new management has found are trickling out. The most dramatic allegation, confirmed by sources close to the company, is that previous Livent management kept two separate sets of financial records - one set to show the board and shareholders, and a second from which to actually run their operations. The first set of records made the company look more profitable by shifting costs that might otherwise be subtracted from profit on to the company's statement of assets - a practice known as capitalizing expenses. Livent is alleged to have reallocated expenses from productions that were about to close to ones that were still running. In some cases, theatrical production costs were attributed to construction projects - an unorthodox practice that would disguise the true cost of producing and advertising Livent's shows.
Drabinsky and Gottlieb's spokesman denies his clients kept two sets of books and said they have been left "boxing at shadows" in a climate that they view as "rather Kafkaesque." Such melodrama is the last thing Livent's shareholders and employees want to hear. But like the rest of the audience, they must wait until the key players decide to come out from the wings.
The Skeptic was Gagged
Nobody knows exactly what Garth Drabinsky and Myron Gottlieb are supposed to have done that was serious enough to prompt Livent Inc.'s board of directors to suspend them. As soon as news broke that the company's new management had launched an internal investigation of the founders' accounting practices, however, one thing was certain: a lot of people in the investment business immediately wondered what this might mean for Alex Winch.
Winch, 34, is a Toronto investment analyst who made his reputation - and a lot of money for his clients in the late 1980s - taking apart Drabinsky and Gottlieb's financial statements. For the past two years, he has been under a gag order that prevents him from publishing research or even talking about Livent. The reason? A 1995 letter to Forbes magazine about Livent in which Winch said the company's accounting was not as conservative as management said. He pointed out that the company was consuming more cash than it generated (a fact Drabinsky himself acknowledged to Maclean's in April). He also concluded, based on an analysis of Livent's public documents, that the company was using sophisticated accounting techniques to postpone the day of reckoning when it would be forced to subtract the cost of some of its musical extravaganzas from profits.
Livent - which, by 1996 and 1997, was routinely refusing to provide corporate information to investment analysts who questioned its accounting - promptly sued Winch for $10 million. Winch still cannot discuss the case, but court documents show he defended the suit for almost a year - arguing with the company over issues that look remarkably similar to the accounting matters that current Livent managers are investigating now.
Investment sources familiar with Winch's situation say he settled out of court when it became evident he could not match Livent's ability to pay ongoing legal bills. He spent $55,000 to publish apologies in Forbes, The Globe and Mail and The Wall Street Journal. In the apologies, Winch said he was mistaken, and that "Livent's accounting policies should be properly described as conservative." Spokesmen for Livent said last week that senior managers are now too busy trying to untangle the company's past accounting practices to address the question of what, if anything, should be done about Winch's case. They might want to reconsider. With his track record, Winch might be able to help.
Maclean's August 24, 1998