NEW YORK — A top Livent exec for the first time publicly accused suspended vice chairman Garth Drabinsky of personally directing the accounting “irregularities” inflating the theater concern’s earnings over the past two years.
In an affidavit sworn Friday in Toronto for a court case brought by Drabinsky, Livent exec VP Rob Webster also claimed that Drabinsky had acknowledged accounting irregularities existed in Livent’s books in a private meeting with himself and Livent CEO Roy Furman.
Drabinsky went to court two weeks ago to block KPMG Peat Marwick from continuing an investigation into Livent’s financial records that was ordered by Livent’s board after the accounting irregularities were uncovered in early August. Livent stock has been suspended from trading since then, and the matter is being investigated by securities authorities.
Drabinsky claimed in his lawsuit that KPMG had a conflict of interest because the firm was his longtime personal accounting firm and because it did due diligence work for former Creative Artists Agency chairman Michael Ovitz when he was preparing to buy a controlling stake in Livent in late spring. It was Ovitz’s management team that uncovered the accounting problems.
Webster, who joined Livent from KPMG in July as part of the new management team, said in the affidavit that Drabinsky’s lawsuit was “simply a self-interested attempt to frustrate and delay Livent’s investigation into serious accounting irregularities which I believe … will ultimately be shown to have been known to and directed by him.”
David Roebuck, Drabinsky’s attorney, said Tuesday that Livent was “not a party to this motion … and frankly Mr. Webster’s views are not of any interest to us.”
“The issue is whether or not the defenses are in conflict, not whether Mr. Webster thinks that the case is made out even before the report has been completed,” Roebuck added.
Drabinsky had been chairman/CEO of Livent until Ovitz’s team took over and remained on as vice chairman and chief creative director, although he was suspended after the accounting problems emerged “based on what the company has learned to date,” Livent said in a statement at that time. Other than that reference, Livent has not elaborated previously about Drabinsky’s role in the irregularities.
Webster’s affidavit outlined the events leading up to the discovery of the accounting irregularities in more detail than previously disclosed. It revealed that while he was preparing the second quarter earnings statements, accounting staff gave him “incomplete or somewhat evasive” answers to his questions.
He said he was told by accounting staffers that “Drabinsky was repeatedly instructing Livent accounting personnel not to provide certain financial information to me and other members of new management unless and until he had reviewed and approved it.”
Finally, five members of the accounting staff came forward with information “that cast doubt upon the veracity and accuracy of the financial reporting of Livent,” Webster said.
After confronting Drabinsky with details of the allegations, Webster said he recalled “Drabinsky stating to me at our meeting with him that he was aware that there were in fact accounting irregularities” which he believed were adjusted by large writedowns taken by Livent against earnings earlier in 1998. Those writedowns were prompted by due diligence work done by Ovitz’s reps.
Webster disputed that writedowns were the “appropriate remedy” for accounting irregularities.
As to the main claim in Drabinsky’s lawsuit, Webster said removing KPMG “would cause severe and irreparable harm to Livent” by delaying resolution of the investigation and adding to the uncertainty now hanging over the company.
The inquiry has to finish before Livent can issue revised financial statements for the past couple of years, which in turn are necessary for securities authorities to allow Livent stock to resume trading, Webster said.
Livent’s failure to file its second quarter earnings statements on time has also put the company into technical default with its main lender, CIBC. “Accordingly the company makes daily borrowing requests at (the bank’s) forbearances,” Webster said, adding that finalizing the inquiry is necessary for this issue to be resolved.
Webster dismissed Drabinsky’s main complaint that KPMG could be prejudiced, noting that the firm’s report will be reviewed by PricewaterhouseCoopers as independent counsel to the board’s audit committee, as well as Livent’s management and board. Livent’s outside auditors, Deloitte & Touche, will likely audit the restated financial statements as well.
Drabinsky’s lawyer, David Roebuck, said a hearing on the lawsuit could be held as early as Monday.