NEW YORK — Livent founder Garth Drabinsky, suspended last month after allegations surfaced of accounting irregularities at the theater concern, filed suit Wednesday to try to block KPMG Peat Marwick from undertaking an investigation into Livent’s financial records.
In a notice of action filed in the Ontario Court in Canada, Drabinsky claimed KPMG had a conflict of interest because it was Drabinsky’s longtime personal accountant and it had acted for an investment group led by Michael Ovitz as it prepared to buy control of the company.
Drabinsky asked for an injunction to restrain KPMG from “participating further in the pending investigation” and claimed $20 million in damages for breach of contract.
Drabinsky also wants the court to block the accounting firm from giving Livent access to documents seized from Drabinsky’s office after he was suspended Aug. 10 “pending determination” of ownership of the documents.
Livent revealed last month that it had uncovered accounting irregularities inflating the company’s earnings by “millions of dollars” since 1996. The discovery, made by a management team installed by Ovitz after he took control in June, prompted the company to hire KPMG to undertake a “comprehensive review” of the company’s financial records.
Ready for action
The action is the first legal offensive mounted by Drabinsky since his suspension as vice chairman and chief creative director. His main response to the allegations until now has been to ask for more details and to deny suggestions that he kept two sets of books.
KPMG general counsel Peter Sahagian said in a statement that Drabinsky’s lawsuit was “completely without merit.” He said KPMG’s engagement “is entirely appropriate and is being conducted in an ethical and professional manner in compliance with all the standards governing our profession.”
Livent is not a party to the action, but a spokesman noted that KPMG had been conducting the inquiry “for more than a month and it is proceeding on track with all deliberate speed. We are confident that when the investigation is concluded, the results will speak for themselves.”
In his lawsuit, Drabinsky noted that KPMG had been his personal accountants for almost 20 years and as a result had “intimate knowledge” of his financial affairs and had documents relating to his finances.
Confidential information known to KPMG as a result of its work for Drabinsky could become relevant to the investigation, the lawsuit said, and it asked for an injunction to prevent KPMG from disclosing any of that information.
Drabinsky also claimed in his lawsuit that KPMG breached the rules of professional conduct for chartered accountants when it accepted the job of investigating Livent’s financial records because it had investigated the same records for Ovitz’s investment group just two months earlier.
Drabinsky said KPMG’s work for Ovitz’s group was “extensive and continued without interruption” from February until the deal closed in June.
Because KPMG did not uncover the accounting irregularities then, Drabinsky said, KPMG knew “it could potentially be liable to … Ovitz” and as a result he claimed it cannot be objective in the current inquiry.
Drabinsky’s attorney, David Roebuck of Roebuck, Garbig in Toronto, said he hoped to get a preliminary hearing on the action within a week. Actions like these can take up to a month to be heard and KPMG’s inquiry is scheduled to be completed by late October.
New reviewer possible
But Roebuck said that even if the inquiry is almost completed by the time the action is heard, KPMG could hand over the results of their investigation to Livent for someone else to review.
“One of the issues is what reliance other parties will put on the investigation,” Roebuck added. The accounting irregularities are being investigated by the Ontario Securities Commission, with the Securities and Exchange Commission expected to join in.
KPMG’s Peter Sahagian questioned why Drabinsky had not objected to the firm’s appointment when it was first announced, rather than waiting five weeks to file the action. But Roebuck said Drabinsky had written to KPMG to object to its appointment and his objection was dismissed “out of hand.”
Roebuck said Drabinsky had waited so long to file the action partly because for the first two weeks after the allegations surfaced, Drabinsky was “consumed with his life crashing around him.”