Dual Books at Livent Alleged

The internal probe into theater producer Livent Inc. is focusing on whether the company kept a second set of books to hide financial irregularities that became public earlier this week, sources familiar with the investigation said.

According to those sources, Livent appears to have routinely bumped costs back into later quarters or shifted them from one production to another, thus inflating earnings. The true expenses appear to have been recorded in a second set of books that were a closely guarded secret, the sources said.

On Monday, the Toronto-based company dropped a bombshell when it suspended founder Garth Drabinsky, one of Broadway’s highest-profile producers, and a top Drabinsky lieutenant, Myron Gottlieb. The company said it found “serious irregularities” in its accounting.

David Weiner, a spokesman for Drabinsky and Gottlieb, said the two deny any allegations that they kept another set of financial records.

“They are unaware of anything other than one set of books,” Weiner said.

Livent declined to comment.

The company, responsible for such productions as “Ragtime” and “Show Boat,” is now headed by former investment banker Roy Furman, who advised Drabinsky before taking the job. It is in effect controlled by Michael Ovitz, former agent and Walt Disney Co. executive whose $20-million investment in the firm was announced in April. Other major investors include Boston investor Thomas Lee.

The latest development is a sign that Livent is building a case that Drabinsky and Gottlieb went to great lengths to deceive Ovitz and his managers--as well as Livent directors--when the Ovitz group agreed to invest in the company. One source said Livent executives discovered that company officials even took pains to make sure they didn’t accidentally bring the wrong set of books to meetings with the new investors.

Sources said a former top financial officer who was dismissed by the new management played a major role in revealing the irregularities. As accountants from KPMG Peat Marwick--brought in to get Livent’s books in order--began pressing for details, more employees came forward with information, which led to the discovery of the two sets of books, sources said.

The sources said the amount of money involved now appears to be about $5 million, but they said the estimate could grow as more details become known. The amount is not expected to seriously affect the company’s cash flow or operation, they said.

One focus of the probe is “side deals” in contracts that could come back to haunt Livent financially. One example being looked at, according to sources, is whether Livent received advances for promising to open shows in various cities and booked the advances as revenue. But, the sources said, it also secretly agreed that if the show didn’t open as promised, the advance would be repaid, along with a substantial penalty.

Also being investigated are alleged efforts to “capitalize” expenses, an accounting sleight of hand in which costs such as advertising--normally subtracted immediately from sales--are transferred to a category such as construction so they can be written off over several years. Earnings are inflated because the costs are not accounted for immediately.

Weiner said the company’s accounting practices at Livent--which he said have been described publicly by accounting experts as aggressive but legal--were well-known at the time of the transaction with the Ovitz group.

“Why the questions now, three months later?” he said.

He also said that Livent’s new management has continued to deny Drabinsky and Gottlieb written details of their allegations so they can address any concerns.

By suspending Drabinsky and Gottlieb, locking them out of their offices and denying them access to records, the two are limited in their ability to respond to the charges, Weiner said.