Two sets of books unveiled at Livent
NEW YORK — Livent founder Garth Drabinsky hid the theater company’s true financial performance from its board and shareholders by keeping two sets of financial accounts — one reflecting the true numbers and a phantom set reflecting adjustments made to improve Livent’s apparent performance — said people close to the situation Wednesday.
The board and its audit committee were given the phantom set, while Drabinsky kept the true accounts secret from everyone but a small group of finance staffers, sources said.
A spokesman for Drabinsky could not be reached last night to comment on the latest allegations, which seriously raise the stakes in the investigation. The Securities & Exchange Commission is almost certain to pursue an inquiry, along with other regulatory authorities. Livent declined comment Wednesday night.
The two sets of books explains how Drabinsky hid Livent’s true performance from an investor group led by former Creative Artists Agency chairman Michael Ovitz, which agreed in April to invest $20 million in the company for a controlling stake.
Ovitz’s group, including investment banker Roy Furman, did extensive due diligence with help from accounting giant KPMG Peat Marwick and law firm Skadden Arps Meagher and Flom. But the due diligence was done on the phantom set of books.
Livent revealed Monday that it had suspended Drabinsky, who was CEO until Ovitz’s team took charge in June, and former president Myron Gottlieb after uncovering evidence of “serious irregularities” in the company’s accounting, which it said inflated the company’s profits by “millions of dollars” since 1996.
Livent has engaged KPMG to undertake a “comprehensive review” of its financial records. Sources said the investigation is continuing, so the full extent of what occurred may not yet be known.
Drabinsky is believed to have shifted costs from one quarter to another and from one production to another or into Livent’s real estate area, while accelerating the recognition of revenue from one quarter to another.
The second set of books was kept by members of Livent’s finance staff, on Drabinsky’s instructions, say people familiar with the situation. These staff members revealed the existence of the phantom books to the new management team last week, as work was progressing on Livent’s second quarter profit results.
Disclosure of the two sets of books started an inquiry, involving interviews with the finance staffers over several days into the weekend, sources said. The staffers claim Drabinsky instructed them to keep the second set of books a secret.
Meanwhile Livent stock remained halted Wednesday, while the Toronto Stock Exchange and Nasdaq continued to question Livent execs about the accounting irregularities.
Livent has said it will have to restate the company’s earnings going back to 1996. Already two writedowns done by Livent since Ovitz announced his investment have wiped out all the profit the company has made since it went public in 1993.