U.S. Indicts Stage Producer Drabinsky

Theatrical producer Garth Drabinsky, who brought such extravagant musical productions as “Ragtime” and “Show Boat” to Los Angeles and Broadway, and his former right-hand man were indicted Wednesday in New York for allegedly carrying on a brazen, eight-year accounting scam while heading Livent Inc.

If convicted, Drabinsky and his partner, Myron Gottlieb, face penalties of up to 10 years in jail and $1 million in fines on each of 16 criminal fraud counts, which include allegations that they took as much as $4.6 million in kickbacks. The two are also among nine former Livent employees simultaneously sued by the Securities and Exchange Commission on charges of fraud.

Both Drabinsky and Gottlieb denied the charges.

In its case, the SEC described a “multifaceted and pervasive” accounting fraud orchestrated by Drabinsky, 48, and Gottlieb, 55, starting in 1990 when they were operating a theatrical partnership. They converted the partnership into the public company Livent in 1993.

Among other steps, the pair is alleged to have taken kickbacks from outside contractors, improperly recorded production expenses such as advertising as construction costs, shifted expenses from quarter to quarter to make their productions appear more profitable, and improperly juggled production costs between current shows and others that had not yet opened. At one point, authorities charge, they illicitly bought hundreds of thousands of dollars in tickets to the Los Angeles production of “Ragtime” to keep the show from looking like a flop.

In all, authorities say, the schemes inflated Livent’s earnings by $42.7 million and cost investors $100 million in market value--the amount by which Livent shares plunged after the alleged accounting manipulations were revealed.

Five Livent executives were also charged with illegal insider trading of company securities. Authorities allege they sold them on the knowledge that the company was more financially shaky than its public filings revealed. Three settled the charges without admitting or denying wrongdoing; charges are pending against the others.

The SEC contended that Drabinsky inflated “Ragtime” ticket sales at the Shubert Theatre in Los Angeles to keep the theater from shutting down the production--which it could do if ticket sales fell below $500,000 a week.

According to the SEC, Drabinsky in late 1997 arranged for a Canadian engineer to buy $381,015 in “Ragtime” tickets, then reimbursed him. Drabinsky also asked a Canadian construction executive to buy an unspecified number of tickets at the Shubert, the SEC said.

The agency alleges that Livent was desperate to make “Ragtime,” which was in its pre-Broadway tryout, appear more financially successful than it was.

“Poor sales in Los Angeles would have undermined its planned [Broadway] opening,” the SEC said, “and an eviction would have been devastating.”

Late Wednesday in Toronto, Drabinsky declined to answer questions but read a statement saying: “I never would have permitted the release of false financial statements about Livent. I can say that I never instructed Livent’s accounting staff to engage in illegal or improper accounting practices, nor did I know of any illegal or improper accounting practices.”

Drabinsky’s lawyer, Edward Greenspan, said later that a decision on whether Drabinsky will voluntarily surrender to authorities or fight extradition will be reached during the next week.

Through a lawyer, Gottlieb said the charges covered actions that were “not within his area of expertise or even within his area of responsibility at Livent.”

The civil charges filed Wednesday by the SEC and criminal charges filed by the U.S. attorney’s office in Manhattan echo those brought against Drabinsky and his partner in a lawsuit by a group headed by former Hollywood talent agent Michael Ovitz.

Ovitz and a group of partners purchased 12% of Livent for $20 million in June. Ovitz, who now heads a talent management firm, coaxed longtime entertainment investment banker Roy Furman to run Livent. Within months the new management stumbled across the alleged fraud, ousted Drabinsky and Gottlieb, and placed the faltering company under Bankruptcy Court protection.

Shares of Toronto-based Livent closed Wednesday on the Toronto Stock Exchange at 27 cents, down less than a penny. The stock was delisted last week by Nasdaq.

Ovitz declined to comment Wednesday.

In a statement, Livent’s current management said the government order “makes clear where responsibility lies for this regrettable matter. The order also documents the elaborate steps that Livent’s former management took to conceal their actions.”

The SEC civil action alleges that one method Drabinsky and Gottlieb used to obscure Livent’s parlous financial position was to record as revenue more than $34 million from the sale of production rights to its shows that it was actually obligated to repay.

In 1997, for example, the company recorded as income $4.5 million in “nonrefundable” fees that a Massachusetts company had paid to present “Ragtime” in three theaters. In fact, the SEC alleged, Livent had signed a separate, secret agreement requiring that it repay the Massachusetts company as the productions were staged.

Livent also allegedly manipulated its own books to hide or misstate expenses. In 1997, for instance, the company transferred $15 million in pre-production expenses from six shows to three different construction accounts.

The change was significant because production expenses must be written down over five years, but construction and other “fixed asset” expenses can be amortized over as long as 40 years. Thus, rather than reporting expenses of as much as $3 million a year, the company could report as little as $375,000 a year--allowing Livent to inflate the profits for the shows.

The SEC contends that Drabinsky and Gottlieb were intimately involved in the manipulations. Livent’s bookkeeping staff produced accurate profit-and-loss records for them, according to the charges.

During those meetings, the executives “agreed on the approximate nature and quantity of adjustments to be made to the company’s books, records and accounts in order to achieve a predetermined false financial picture,” the SEC said, charging that Drabinsky often dictated the changes personally.

Eventually the sheer volume and dollar amount of the required changes became so great that the bookkeepers had to create a computer program specifically to track the changes and execute them without leaving a paper trail that Livent’s outside auditors might stumble across, authorities allege.

At a media briefing Wednesday in New York, U.S. Atty. Mary Jo White and Richard Walker, the SEC’s director of enforcement, sidestepped questions on whether Livent’s auditors at accounting firm Deloitte & Touche should have been able to uncover the alleged fraud themselves.

They said their probes are continuing, and added that Livent’s efforts to deceive the auditors were particularly aggressive. “This case is unusual in terms of the brazen nature of the fraud,” Walker said. “This is pretty blatant stuff, just wiping expenses off the books.”

Drabinsky’s business practices have been controversial since the 1980s, when he headed movie chain Cineplex Odeon Inc. In 1989, Drabinsky and Gottlieb were forced out of Cineplex amid battles with major shareholder MCA Inc., which publicly questioned their financial reporting.

Soon after that they founded Livent, which became renowned for staging extravagant and critically praised musicals, starting with “Kiss of the Spider Woman” in 1993. Livent’s 1995 production of the Jerome Kern musical “Show Boat” under Harold Prince’s direction was credited with giving renewed luster to a masterpiece.

They also acquired and refurbished theaters in New York, Toronto, Vancouver and Chicago.

But the Livent shows were also so lavish--”Show Boat,” for example, employed 67 cast members--that many in the theater community doubted they were as profitable as Livent claimed.

Livent’s financial problems were already becoming evident when Ovitz and his group made their investment. It had reported a pretax loss of $62 million (Canadian) for 1997--the SEC charges that the true loss was $83.6 million--and a further loss of $20 million in the first quarter of 1998.

The authorities said they have accepted guilty pleas to one criminal count each from Maria Messina, former chief financial officer, and Gordon Eckstein, former senior vice president. The two, who face up to five years in prison, are cooperating with authorities.

Andrew Van Velzen of The Times’ Toronto Bureau contributed to this report.

* RELATIONSHIP ENDS: Developer of Santa Anita project severs Drabinsky ties. C2