Proceedings

IN THE MATTER OF THE SECURITIES ACT

R.S.O. 1990, c.S.5, AS AMENDED

- AND -

LIVENT INC.

GARTH H. DRABINSKY

MYRON I. GOTTLIEB

GORDON ECKSTEIN

ROBERT TOPOL


STATEMENT OF ALLEGATIONS OF STAFF

OF THE ONTARIO SECURITIES COMMISSION



Further to a Notice of Hearing dated July 3, 2001, Staff of the Ontario Securities Commission (the "Commission") make the following allegations:


The Respondents

1. Livent Inc., (in the name of Live Entertainment of Canada Inc. ("LECI"), a predecessor to Livent Inc.) became a reporting issuer in Ontario on May 10, 1993 following an initial public offering of its common shares (the "Livent IPO") pursuant to a prospectus dated May 7, 1993. The company's common shares were listed and posted for trading on The Toronto Stock Exchange on May 19, 1993. Livent common shares commenced trading on the NASDAQ on August 3, 1995. Trading in shares of Livent Inc. ("Livent") were cease traded by the Commission on February 6, 2001 due to a failure to file the financial statements required by the Securities Act (Ontario) (the "Act").


2. Garth H. Drabinsky ("Drabinsky"), during the time period following the closing of the Livent IPO on May 17, 1993, held the following positions with Livent: director; Chairman through to April 13, 1998, at which time Drabinsky assumed the position of Vice-Chairman; Chief Executive Officer through to April 13, 1998, at which time Drabinsky assumed the position of Chief Creative Director.

On August 10, 1998 Livent announced that Drabinsky had been suspended from office by the Livent board of directors. On November 18, 1998 Livent announced that Drabinsky's position with Livent had been terminated by order of the Livent board of directors.

3. Myron I. Gottlieb ("Gottlieb") during the time period following the closing of the Livent IPO on May 17, 1993, held the following positions with Livent: director; President until April 13, 1998, at which time Gottlieb assumed the position of Executive Vice-President, Canadian Administration; member of the Audit Committee through to 1998. On August 10, 1998 Livent announced that Gottlieb had been suspended from office by the Livent board of directors. On November 18, 1998 Livent announced that Gottlieb's position with Livent had been terminated by order of the Livent board of directors.


4. Gordon Eckstein ("Eckstein") during the time period following the closing of the Livent IPO on May 17, 1993, held the following positions with Livent: Vice-President, Finance and Administration through to November 13, 1996, at which time he assumed the position of Senior Vice-President, Finance and Administration. Eckstein's employment with Livent was terminated in July 1998.


5. Robert Topol ("Topol") during the time period following the closing of the Livent IPO on May 17, 1993, held the following positions with Livent: director through to on or about March 11, 1998; Executive Vice-President through to August 17, 1994, at which time Topol assumed the position of Senior Executive Vice-President; Topol assumed the additional position of Chief Operating Officer in February 1997. Topol resigned from Livent on or about March 31, 1998.



Overview of Staff's Allegations

6. The following allegations are being advanced by Staff of the Ontario Securities Commission in respect of Drabinsky, Gottlieb, Eckstein and Topol (the "Respondents") and Livent:

(a) that Livent, for the fiscal years ending December 31, 1996 and December 31, 1997, and for the quarter ended March 31, 1998, made statements in its interim and audited annual financial statements required to be filed or furnished under Ontario securities law that, in a material respect and at the time and in the light of the circumstances under which they were made, were misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statements not misleading;

(b) that Drabinsky, Gottlieb and Eckstein, for the fiscal years ending December 31, 1996 and December 31, 1997, and for the quarter ended March 31, 1998, authorized, permitted or acquiesced in Livent making statements in Livent's interim and audited annual financial statements required to be filed or furnished under Ontario securities law that, in a material respect and at the time and in the light of the circumstances under which they were made, were misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statements not misleading; and

(c) that Topol, for the fiscal years ending December 31, 1996 and December 31, 1997, authorized, permitted or acquiesced in Livent making statements in Livent's interim and audited annual financial statements required to be filed or furnished under Ontario securities law that, in a material respect and at the time and in the light of the circumstances under which they were made, were misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statements not misleading.


7. The misconduct giving rise to these allegations falls into three general categories: conduct concerning the improper recording of financial information in the books and records of Livent; conduct concerning the improper recognition of revenue; and conduct concerning the payment of false invoices.

a) Improper Recording of Financial Information in Books and Records

8. Livent improperly recorded transactions and financial information in its books and records which resulted, among other things, in the overstatement of Livent's net income, retained earnings and earnings per share as originally reported to the public in the company's financial statements for fiscal 1996 and 1997 and the first quarter of 1998. The practices adopted by Livent included:

i) modifying the accounting computer system at Livent to permit changes to be made to entries posted to Livent's general ledger in such a manner that there would be no audit trail of the changes made;

ii) deleting from, or not recording in, Livent's general ledger certain expenses that had been incurred by Livent in a particular financial reporting quarter, and then in a subsequent financial reporting quarter, re-entering or entering the expenses as original entries;

iii) deferring the amortization of certain pre-production costs required to be taken in a particular financial reporting quarter and thereby not recording applicable expenses until a later financial reporting quarter;

iv) deleting from Livent's general ledger certain expenses and then re-entering them as pre- production costs associated with theatrical shows;

v) deleting from Livent's general ledger certain pre-production costs associated with certain shows and then re-entering them as pre-production costs associated with different shows;

vi) deleting from Livent's general ledger certain non-fixed asset expenses and pre-production costs and then re-entering them as fixed assets; and

vii) preparing and maintaining spreadsheets and other documentation intended to permit the Respondents to keep track of actual results as compared to results publicly reported.

b) Improper Recognition of Revenue




9. Livent improperly recognized revenue for accounting purposes which resulted, among other things, in the overstatement of Livent's net income, as originally reported to the public in the company's financial statements for fiscal 1996 and 1997. In particular, Livent entered into a number of transactions with third parties involving the sale, assignment or grant (hereinafter referred to as "sale") of certain intangible assets by Livent in respect of which Livent recorded substantial revenues in its financial statements. Each of these transactions were accompanied by "side deals', which were not properly disclosed, which materially modified the substance of the transactions and affected how the transactions should have been properly accounted for. The "side deals" required or permitted Livent or its subsidiaries to re-purchase or re-acquire the subject assets in the future, or obligated Livent or its subsidiaries to make payments to the third party in amounts comparable to the consideration received by Livent on the "sale" of those assets. By failing to disclose the "side-deals", Livent improperly treated what were lending arrangements and/or advances as revenue transactions. These transactions included:

- the "sale" of Australian production rights to Showboat to Dewlim Investments Inc.("Dewlim");

- the "sale" of density air rights relating to the Pantages Place real estate development project to Dundee Realty Corporation ("Dundee Realty");

- the "sale" of the right to organize a tour of Showboat and Ragtime in certain U.S. cities to American Artists Inc. ("American Artists"); and

- the "sale" of European production rights to Showboat and Ragtime to CIBC Wood Gundy(now known as CIBC Capital Partners) ("CIBC Capital");

c) Concealment of Improper Payments Involving False Invoices



10. To the knowledge of Drabinsky, Gottlieb and Eckstein, prior to the Livent IPO, a predecessor to Livent improperly participated in a series of transactions involving payments made to certain co-operative third parties on the basis of false invoices submitted to Livent. As part of the arrangement, Drabinsky and Gottlieb required the third parties to remit to each of them, directly or indirectly, a significant portion of the proceeds paid by Livent to the third parties further to the false invoices. The payment of these false invoices, which purported to relate to construction activity performed by the third parties, resulted in amounts being improperly recorded as fixed assets and pre-production costs on Livent's balance sheet. These transactions resulted, among other things, in an overstatement in retained earnings of approximately $5.5 million as at January 1, 1996, which was carried forward in Livent's 1996 and 1997 financial statements.



Livent's Corporate Evolution

11. Prior to Livent becoming a reporting issuer in Ontario, its assets and business were privately owned and controlled by Drabinsky and Gottlieb. In December 1989, Drabinsky and Gottlieb, through their Ontario general partnership, MyGar Partnership, acquired all of the assets and assumed certain of the liabilities associated with the live entertainment division of Cineplex Odeon Corporation, including the Pantages Theatre in Toronto, the Canadian stage rights to The Phantom of the Opera and certain other theatrical rights. In 1991, Drabinsky and Gottlieb caused a company called MyGar Realty Inc. to be incorporated under the laws of Ontario to acquire certain lands in Toronto for use in connection with a proposed development of land adjoining the Pantages Theatre.



12. Prior to the closing of the Livent IPO on May 17, 1993, LECI acquired all the assets owned by, and the liabilities of, MyGar Partnership and acquired all the outstanding shares of MyGar Realty Inc. in exchange for which Drabinsky and Gottlieb each received 2,777,274 common shares, representing approximately 28.3% of the outstanding common shares of Livent immediately after the closing of the Livent IPO.


13. Prior to the closing of the Livent IPO on May 17, 1993, Drabinsky, Gottlieb, Eckstein and Topol held the following positions with Livent or its predecessors:

a) Drabinsky: general partner of MyGar Partnership; director of MyGar Realty Inc.; director, Chairman and Chief Executive Officer of LECI;

b) Gottlieb: general partner of MyGar Partnership; director of MyGar Realty Inc.; director, President and Chief Operating Officer of LECI;

c) Eckstein: Vice-President, Finance and Administration of LECI; and

d) Topol: director and Executive Vice-President of LECI.


14. The audited financial statements contained in the final prospectus for the Livent IPO dated May 7, 1993, contained balance sheets for each of MyGar Partnership and MyGar Realty Inc., each of which were signed by Drabinsky and Gottlieb in their capacities as partners and directors, respectively. Drabinsky and Eckstein signed the Officers' Certificate to the final prospectus in their capacities as Chief Executive Officer and Chief Financial Officer, respectively. Drabinsky and Gottlieb also signed the final prospectus in their capacities as Promoters of LECI.


15. LECI subsequently changed its name from LECI to Livent Inc. on May 23, 1995.


16. In the period April 1996 to October 1997, Livent announced several equity and debt financings, including the following:

a) On April 2, 1996, Livent completed a U.S. equity offering of 3,750,000 common shares at US $8.75 per share generating proceeds of US$29.62 million (CDN $41.12 million). The net proceeds were stated to be used to satisfy equity contributions to be made by Livent towards the cost of new theatre developments, the elimination of term bank and other debt aggregating CDN $26.2 million;

b) On July 29, 1996, Livent issued 10% Subordinated Convertible Debentures due July 28, 2003 in the aggregate principal amount of $8.5 million. A financial institution controlled by a director of Livent purchased $2.6 million of such debentures. Livent stated that the proceeds of this financing would be applied to Livent's theatre construction activity in New York;

c) On December 10, 1996, Livent issued 8.07% Series "A" Senior Secured Debentures due December 1, 2003 in the aggregate principal amount of $72.5 million. Livent stated that net proceeds of this financing would be used to fund Livent's theatre construction projects in New York, Chicago and Toronto, to partially fund the previously acquired equity interest held by certain third parties in the Vancouver theatre, to repay bank indebtedness and for general corporate purposes. Livent stated that this financing, and the previous two financings, have considerably augmented the Livent equity base and facilitated the ongoing maintenance of a conservative balance sheet ;

d) In December 1996, Livent changed bankers and had a $30 million term credit facility in place at December 31, 1996;

e) On April 23, 1997, Livent issued 500,000 First Preferred Shares, Series "A", by private placement to an investment bank for a price of US$12.5 million. This financing was made in connection with Livent's acquisition of the Oriental Theatre in Chicago;

f) On May 8, 1997, Livent closed a public offering in Canada of 2,000,000 common shares pursuant to a short-form prospectus. The issue was priced at $13.75 per share and generated proceeds to Livent of $26.4 million. In the prospectus, Livent disclosed that its term credit facility with its banker has been increased from $30 million to $40 million.

g) On October 16, 1997, Livent closed an offering in the U.S. and Canada of US$125 million principal amount of 9 3/8% Senior Notes due 2004. Livent stated that the net proceeds of the offering of US$121.6 million would be used to retire in full the Company's outstanding Cdn $72.5 million senior secured debentures and to eliminate term bank debt which was Cdn $44.3 million at September 30, 1997, with the remaining funds invested for general corporate purposes.


17. On April 13, 1998, Livent announced that Michael Ovitz had agreed to purchase 2,500,000 common shares of Livent for total consideration of approximately US$20 million, representing approximately 12% of the outstanding shares of Livent. In addition, each of Drabinsky and Gottlieb personally granted options to Mr. Ovitz to acquire an aggregate of 2,000,000 common shares of Livent held by Drabinsky and Gottlieb. Drabinsky and Gottlieb also granted rights of first refusal to Mr. Ovitz on all their shares of Livent, and obtained rights to participate on certain sales of Livent shares by Mr. Ovitz. The acquisition of an interest in Livent by Mr. Ovitz also resulted in a change in senior management at Livent ("new senior management") .


18. On August 10, 1998, Livent issued a news release and filed a material change report pursuant to the Act publicly announcing that an internal investigation had revealed serious irregularities in the Company's financial records. The announcement disclosed that irregularities had been discovered by new senior management which involved improper recognition of revenue and the failure to record, or the improper deferral and capitalization of, expenses which appeared to involve millions of dollars. The announcement stated that it was virtually certain that Livent's financial results for 1996 and 1997 and the first quarter of 1998 would need to be restated.

19. On November 18, 1998, Livent issued a news release and filed a material change report pursuant to the Act publicly announcing that Livent and its U.S. subsidiaries had filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. The announcement stated that Livent was considering appropriate protective action in Canada. The stated purpose of the Chapter 11 filing was to permit Livent to pursue a comprehensive financial restructuring which had become necessary as a result of the negative impact of the serious accounting irregularities and inappropriate business practices which had been uncovered at the company in the period following August 10, 1998.


20. Livent filed for protection under the Companies' Creditors Arrangement Act in Canada on November 19, 1998. Ernst & Young Inc. ("E&Y") was appointed monitor in connection therewith. In July 1999, bankruptcy courts in Toronto and New York approved the sale of most of Livent's assets to a third party, SFX Entertainment Inc.


21. On September 29, 1999, Livent announced that the Superior Court of Justice (Ontario) had approved Livent's request for the appointment of E&Y as receiver and manager of the property, assets and undertaking of Livent Inc. Livent also announced that in connection with the previously announced completion of the sale of Livent's assets to SFX Entertainment Inc., the Livent board of directors had determined that it was appropriate that the realization of the remaining assets of Livent and the administration of claims of its creditors be conducted by the Court-appointed receiver and manager in conjunction with the continuation of the U.S. Chapter 11 proceedings. Members of the Livent board of directors and its senior management tendered their resignations effective upon the appointment of E&Y as receiver and manager.


22. Livent remains a "reporting issuer" in Ontario and is presently in default of its filing requirements pursuant to the Act.



The Restatement of Livent's Financial Statements for Fiscal 1996 and 1997

23. On November 18, 1998, Livent publicly released restated consolidated audited financial statements for the years ended December 31, 1996 and 1997 (the "Restated Financial Statements") and unaudited financial statements for the quarter ending March 31, 1998. The Restated Financial Statements reflected the following material adjustments to the results originally disclosed by Livent.

Adjustments
(Millions of CDN $ - except Per Share data)
Net Income/(Loss)

1996

1997

Originally Reported Amount

Restated Amount

Originally Reported Amount

Restated Amount

$11.1 ($18.0) ($44.1) ($98.7)
Retained Earnings (Deficit) $16.5 ($25.6) ($27.6) ($124.3)
Earnings/(Loss) Per Share $0.71 ($1.22) ($2.57) ($5.75)


24. The Restated Financial Statements also contained, for the first time, a "going concern" note as follows:

The consolidated financial statements have been prepared on the going-concern basis which contemplates that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business. The following paragraphs indicate that there is significant uncertainty concerning the Company's ability to do so........The Company was in breach of certain covenants under its bank term loan and other debt agreements which may cause the debt to become immediately due and payable and may cause the bank to terminate the term credit facility of which $50.7 million was drawn down at November 17, 1998...



Livent's Representations Respecting GAAP, Revenue Recognition and Preproduction Costs


25. As a reporting issuer in Ontario, Livent was required by the Act to file comparative financial statements prepared in accordance with generally accepted accounting principles. For the purposes of the Act, the term "generally accepted accounting principles" ("GAAP") means the principles recommended in the Handbook of the Canadian Institute of Chartered Accountants (the "CICA Handbook").


26. The objective of financial statements prepared in accordance with GAAP is to communicate information that is useful to investors, creditors and others to assist them in making decisions and/ or assessing management stewardship. However, to be useful, the information provided in financial statements must be reliable. The CICA Handbook defines reliability for the purposes of GAAP, as follows (at paragraph 1000.21):


Information is reliable when it is in agreement with the actual underlying transactions and events, the agreement is capable of independent verification and the information is reasonably free from error and bias. Reliability is achieved through representational faithfulness, verifiability and neutrality. Neutrality is affected by the use of conservatism in making judgments under conditions of uncertainty.

(1) Representational faithfulness:

Representational faithfulness is achieved when transactions and events affecting the entity are presented in financial statements in a manner that is in agreement with the actual underlying transactions and events. Thus, transactions and events are accounted for and presented in a manner that conveys their substance rather than necessarily their legal or other form.

The substance of transactions and events may not always be consistent with that apparent from their legal or other form. To determine the substance of a transaction or event, it may be necessary to consider a group of related transactions and events as a whole. The determination of the substance of a transaction or event will be a matter of professional judgment in the circumstances.

(1) Verifiability:

The financial statement representation of a transaction or event is verifiable if knowledgeable and independent observers would concur that it is in agreement with the actual underlying transaction or event with a reasonable degree of precision. Verifiability focuses on the correct application of a basis of measurement rather than its appropriateness.

(1) Neutrality:

Information is neutral when it is free from bias that would lead users towards making decisions that are influenced by the way the information is measured or presented. Bias in measurement occurs when a measure tends to consistently overstate or understate the items being measured. In the selection of accounting principles, bias may occur when the selection is made with the interests of particular users or with particular economic or political objectives in mind.

(1) Conservatism:

Use of conservatism in making judgments under conditions of uncertainty affects the neutrality of financial statements in an acceptable manner. When uncertainty exists, estimates of a conservative nature attempt to ensure that assets, revenues and gains are not overstated and, conversely, that liabilities, expenses and losses are not understated. However, conservatism does not encompass the deliberate understatement of assets, revenues and gains or losses or the deliberate overstatement of liabilities, expenses and losses.


27. Livent, in Note 1 of its financial statements as originally reported for the fiscal year ended December 31, 1996, stated:

The Company's accounting and reporting policies conform to generally accepted accounting principles in Canada.


28. Livent's financial statements as originally reported for the fiscal year ended December 31, 1997 (which included the comparative statements for the previous year) were accompanied by a statement dated March 27, 1998 signed by Drabinsky and Gottlieb entitled "Management's Responsibility for Financial Reporting" which stated as follows:

The accompanying consolidated financial statements and all of the financial data included in this [1997] annual report have been prepared by and are the responsibility of management, and have been approved by the Board of directors of the company. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada, and reflect management's best estimates and judgments based on currently available information. The Company has developed and maintains a [sic] systems of internal accounting controls in order to assure, on a reasonable and cost effective basis, the reliability of its financial information...


29. Livent made the following disclosure as to its accounting policy respecting "Revenue Recognition" in the financial statements originally filed for the fiscal year ending December 31, 1996:

[Livent] earns revenue from the production, presentation and commercial exploitation of live theatrical productions and the ownership and operation of theatre facilities. Production revenues consists of performance revenue, the sale of production-related merchandise, corporate sponsorship of productions, gains on the sale of production rights and exclusivity arrangements, royalties and other production-related items. Theatre revenue consists of concession income, merchandise rent, theatre rentals to third parties, sale of naming rights and other theatre-related fees. Advance ticket sales sold by the Company are recorded as deferred revenue and are recognized as revenue on the date of the performance. Gains on the sale of production rights and exclusivity and naming agreements are recognized on the date of sale and fulfilment by the Company of all significant obligations under the terms of the agreement. Sponsorship revenue related to productions is generally recorded over the period of the sponsorship agreement.


30. In the financial statements for fiscal 1997 Livent made the following disclosure as to its policy respecting "Revenue Recognition":

[Livent] earns revenue from the production, presentation and commercial exploitation of live theatrical productions and the ownership and operation of theatre facilities. Revenue consists of performance revenue, the sale of merchandise, corporate sponsorships, gains on sale of rights and exclusivity arrangements, royalties, concession income and other related fees. Advance ticket sales sold by the Company are recorded as deferred revenue and are recognized as revenue on the date of the performance. Gains on sale of production rights and exclusivity and naming agreements are recognized upon the fulfilment of all significant obligations under the terms of a binding agreement. Sponsorship revenue related to productions is generally recorded over the period of the sponsorship arrangement.


31. Livent described its accounting policies respecting "Preproduction Costs" in its Original Reported Results for the fiscal year ended December 31, 1996 as follows:

Preproduction Costs associated with the creation of each separate production and with the ongoing change of venues for touring productions are deferred to the opening of the production. Such preproduction costs, including expenses for pre-opening advertising, publicity and promotions, set construction, props, costumes and salaries and fees paid to the cast, crew, musicians and creative constituents during rehearsals, are then amortized based on expected revenues, net of direct operating expenses, from each production, In recognition of the significant degree of uncertainty in estimating the length of, and the revenues from, a live theatre production run, the forecasted revenues, net of direct operating expenses, used in the amortization calculation for each production are initially limited to amounts sufficient to recoup the original preproduction costs. The Company reviews the carrying value of unamortized preproduction costs for each separate production on a quarterly basis and, where conditions warrant for a particular production, the Company may revise the estimated revenue and resultant amortization period for preproduction costs based on the sales experience for that production and its experience with other similar productions. If appropriate, the Company amortizes preproduction costs down to an amount not in excess of their estimated net recoverable amount. The Company's period of amortization of preproduction costs for a particular production is limited to a maximum of five years.


32. Livent described its accounting policies respecting "Preproduction Costs" in its Original Reported Results for the fiscal year ended December 31, 1997 as follows:

Preproduction Costs associated with the creation of each separate production are deferred to the opening of the production . Such preproduction costs, including expenses for pre-opening advertising, publicity and promotions, set construction, props, costumes and salaries and fees paid to the cast, crew, musicians and creative constituents during rehearsals, are thereafter amortized based on estimated revenues, net of direct operating expenses, from each production. The Company's period of amortization of such preproduction costs for a particular production is limited to a maximum of five production years. The Company reviews the carrying value of unamortized preproduction costs for each separate production on a quarterly basis and, where conditions warrant for a particular production, the Company may revise the estimated revenue and resultant amortization period for preproduction costs based on the sales experience for that production and its experience with other similar productions. Where appropriate, the Company adjusts preproduction costs down to an amount not in excess of their estimated net recoverable amount. Subsequent preproduction costs incurred in connection with the moving of a particular production from one venue to another, including pre-opening advertising, are deferred to the opening of that production at that venue and the specific costs applicable to a particular venue are fully amortized during the presentation of the production at that venue.



Improper Recording of Financial Information in the Books and Records of Livent

33. During the material time, at the end of each financial reporting period, Livent accounting staff circulated to the Respondents a management summary reflecting actual results (including net income, on a show-by-show basis, compared to budget), as well as any improper adjustments carried forward from a prior financial period in connection with each show. Having regard to the actual results, the Respondents then provided instructions, directly or indirectly, to the Livent accounting staff specifying changes to be made to the actual results reflected in the company's books and records. In order to give effect to the Respondents' instructions, Livent accounting staff manipulated Livent's books and records by various means which did not accord with GAAP. The effect of the manipulations was to improve the presentation of Livent's financial results for the reporting period. Draft financial statements would then be generated for the reporting period incorporating the manipulations. These draft financial statements were then distributed to the Livent audit committee and, thereafter the Livent board of directors, for their review and approval. The Respondents attended meetings of the audit committee and the board of directors where these draft financial statements were discussed and ultimately approved. The Respondents did not disclose to the audit committee or the board of directors that, to their knowledge, the financial statements were false or misleading.


34. Examples of the practices adopted to manipulate the Livent books and records are summarized in paragraph 8 above.



Transactions Resulting in Improper Revenue Recognition

35. On November 18, 1998, Livent disclosed that following an intensive investigation of the accounting irregularities publicly announced on August 10, 1998, new senior management discovered transactions that had been improperly recorded as revenue. Livent disclosed that certain side agreements or other material terms between Livent and third parties had been discovered that had not previously been disclosed to the Livent board of directors or audit committee. These undisclosed side agreements materially altered the terms of the transactions for which the company had recognized revenues. The discovery of these previously undisclosed side agreements required the reversal or modification of revenue recognition for the transactions. Set out below are further particulars respecting certain of these "revenue recognition" transactions.

Dewlim: Assignment of Australian Production Rights to Showboat

Dewlim Transaction

36. Livent International Inc., a subsidiary company controlled by Livent, entered into a letter agreement dated October 21, 1996 with Dewlim, a company controlled by a member of the Livent board of directors (the "Dewlim Contract"). The Dewlim Contract provided for the assignment by Livent International of 57% of the production rights for Showboat in Australia and neighbouring countries (the "Australian Production Rights") for consideration of CDN$4.5 million, with $750,000 payable in 1996.


37. For the fiscal year ended December 31, 1996, in its original financial statements Livent recorded revenue relating to the assignment of the Australian Production Rights to Dewlim in the amount of CDN$4.2 million.


38. Livent entered into a letter agreement dated October 21, 1996 with Dewlim and Livent, signed on behalf of Livent by Gottlieb, which provided as follows:

This letter will confirm that Dewlim has granted an option to Livent Inc. or Livent International Inc. or as otherwise directed by Livent Inc. After receipt by Dewlim of Cdn. $8.0 million or equivalent currency, Dewlim, upon receipt of an additional $225,000, will assign without further consideration all of its rights and entitlements relating to Showboat. The options described can be exercised until March 31, 2002.


39. Gottlieb provided a personal guarantee dated October 21, 1996 (the "Gottlieb/Dewlim Guarantee") in favour of Dewlim, in which he personally undertook to provide to Dewlim full security coverage for CDN$4.5 million payable by Dewlim to Livent International pursuant to the Dewlim Contract. The security provided by Gottlieb consisted of publicly traded common shares of Livent beneficially owned by Gottlieb to cover each wire transfer of funds from Dewlim to Livent International at least one week in advance of the date of the requisite instalment payment by Dewlim for the Australian Production Rights. In consideration of the Gottlieb/Dewlim Guarantee, Dewlim agreed to advance to Gottlieb 50% of all receipts of Dewlim from Showboat after recoupment by Dewlim of its initial outlay of CDN$4.5 million plus interest. It was anticipated that such recoupment would take place by approximately December 31, 2000. The Gottlieb/Dewlim Guarantee was not disclosed.


40. In addition, as reflected in a memorandum dated June 9, 1998 from Gottlieb to Drabinsky, Gottlieb, on behalf of Livent, committed to Dewlim the following:

In the fall of 1996, Dewlim Investments, at our request, acquired an interest in the Showboat production in the amount of CDN$4.5 million for the territories of Australia and New Zealand. The funds were advanced on schedule between the fall of 1996 and February 1998. Accordingly, we have received the benefit of the full $4.5 million. As an inducement for Dewlim to participate in Showboat Australia, we committed to Dewlim on behalf of Livent that Dewlim would recoup by December 31, 2000 all capital together with interest accrued monthly at the rate of 10% per annum based on the outstanding balances from time to time.


Dewlim Contract in 1997

41. Dewlim and Livent International executed a new letter agreement dated November 3, 1997 which stated that it was replacing and superceding the Dewlim Contract and contained the following new provisions:

a) an increase in the ownership interest by Dewlim in the Australian Production Rights from 57% to 63.5%;

b) an express statement that the consideration to be paid by Dewlim for the Australian Production Rights was a non-refundable fee ;

c) an express statement that Dewlim has assumed, without recourse to [Livent] International, all risks associated with the non-performance or lack of financial success of the production and presentation of the Play [Showboat] in the Territory and has made its investment decision in reliance of its assessment of the prior North American productions of the Play; and

d) an express statement that the agreement contained the entire agreement between the parties with respect to the subject matter hereof and all prior agreements and understandings between the parties in respect thereof merge herein.



Restatement of Dewlim Transaction

42. In the Restated Financial Statements Livent reversed CDN$4.2 million of "revenue" previously recorded in connection with the Dewlim transaction for the fiscal year 1996.


43. Furthermore, in connection with the restatement, the Dewlim transaction has been characterized as a related party transaction because the principal of Dewlim during the material time was a member of the Livent board of directors which had not been previously disclosed.



Dundee Realty: "Sale" of the Pantages Air Rights

44. Livent and Dundee Realty entered into a letter agreement dated May 22, 1997 approving a term sheet (the "May 1997 Term Sheet") relating to the Pantages Place real estate development. One component of the proposed transaction involved the sale by Livent of "air rights" (the "Pantages Air Rights") to Dundee Realty for CDN$7.4 million, payable as follows: CDN$2.5 million on closing and CDN$4.9 million payable in instalments. Another component involved a mechanism by which Dundee Realty could "put" back all of its securities in a joint venture company to be incorporated to facilitate the transaction ("Newco") to Newco for CDN$7.4 million, plus accrued and unpaid management fees if construction of a certain phase of the proposed development had not commenced by December 31, 1999 (hereinafter referred to as the "Put").



45. On June 27, 1997 Gottlieb sent a personal letter to Livent, to the attention of Eckstein, in which Gottlieb referred to the May 1997 Term Sheet and informed Eckstein as follows:

...the air right purchase is a binding transaction for both parties to the agreement for closing June 30, 1997.... The sale by Livent of the exclusivity right associated with the air rights should not require financial consideration on closing or security in favour of Livent to ensure the same. However, in the event it is more prudent for Livent to have a guarantee that $2.5 M will be received by Livent, I am providing the same. I personally guarantee that Livent will receive the initial $2.5 M within 60 days of this letter and I am securing such guarantee with the deposit of 156,817 street form shares, as listed below, of Livent that can be sold in the public market in the event that Dundee Realty Corporation does not advance such $2.5 million within 60 days. In fact, I am providing my guarantee for the full payment of $7.4 million until such time as Livent receives the initial $2.5 million payment from Dundee Realty Corporation at which time my shares are to be returned.

This guarantee provided by Gottlieb was not disclosed.


46. The master agreement and contract for purchase and sale (the "Master Agreement") relating to the May 1997 Term Sheet between Livent and Dundee Realty is dated as of June 30, 1997 and the transaction closed in August 1997, when Dundee Realty made its initial payment of $2.5 million to Livent for the Pantages Air Rights. The Put that was referenced in the May 1997 Term Sheet was not included in the Master Agreement but rather was recorded in a separate document entitled "Put Agreement" dated August 15, 1997 (the "Put Agreement").


47. On August 15, 1997, Eckstein sent a letter to Gottlieb releasing Gottlieb from his personal guarantee in connection with Dundee Realty's payment obligation and returning to Gottlieb the Livent shares that Gottlieb had previously forwarded with his personal guarantee to Livent.


48. On or about August 25, 1997, in connection with the Livent audit committee review of Livent's recognition of revenue associated with the Dundee Realty transaction and whether or not there was a "Put" associated with the transaction that closed in August 1997, Gottlieb represented to the Chairman of the Livent audit committee that Livent's auditors:

" specifically in May approved a limited put in favour of Dundee Realty that could be put to Newco and not to Livent. [The Auditors] confirmed this mechanism would allow Livent to record an absolute gain on the sale of the air rights, rather than possibly a contingent gain. This was reported to our board of directors during the meeting held on May 14, 1997.

Gottlieb further advised:

" At the end of July, [a partner at Livent's auditors] had reservations regarding the put provision and suggested we should ask Dundee Realty to agree to remove the same. We succeeded based on the comfort level for the project by Dundee Realty. I was advised this morning by [a senior officer] of Dundee Realty, that [Dundee Realty's auditors, who happen to be the same firm as Livent's auditors] has now told Dundee Realty not to record the air rights transaction, as the removal of the potential put to the development company is a significant change in the transaction. This is ridiculous. If the removal of the put was fundamental to the transaction, Dundee Realty would have negotiated for receipt of additional benefits and simply chose not to. In fact, on closing, Dundee Realty even agreed to remove the provision that was in the May agreement for a buy-sell shot gun mechanism. We should simply add back the put and insist that [Livent's auditors] be bound by their initial confirmation. [Dundee's auditors] today also suggested to Dundee Realty that a fundamental change occurred as the closing documentation was not a joint venture.


49. On August 26, 1997 Gottlieb sent a further letter to the Chairman of Livent's audit committee and advised that a "put" was never part of the original negotiations with Dundee Realty and advised that a "put" was only included in the May 1997 Term Sheet after Livent's auditors had unequivocally confirmed to Gottlieb that notwithstanding the inclusion of the "put" in the structure of the transaction, Livent would be allowed to report 'revenue" on the "sale" of the Pantages Air Rights and that this would be absolute, as opposed to contingent.


50. On August 26, 1997 Gottlieb contacted a senior officer of Dundee Realty and Gottlieb forwarded a draft letter to be sent from Dundee Realty to Livent confirming that the "sale" of the Pantages Air Rights was a 1997 second quarter transaction. The draft letter included the following clause:

" Without any compensation thereof, the put which was included in the letter agreement for the benefit of Dundee Realty was removed from the Master Agreement at the request of Livent Inc.

The senior officer of Dundee Realty signed the form of letter provided by Gottlieb and forwarded it to Livent, to Gottlieb's attention, on or about August 27, 1997.


51. For the fiscal year ended December 31, 1997, in its original financial statements Livent recorded revenue relating to the "sale" of the Pantages Air Rights in the amount of CDN$5.6 million.


52. On September 17, 1997 legal counsel for Livent forwarded to Gottlieb a copy of the closing documents relating to the "sale" of the Pantages Air Rights and noted:

" You will find enclosed in the record all of the relevant documentation, save and except for the Livent/Dundee Put Agreement which we have attached hereto. We would be pleased to discuss any part of the record agreement or the Put Agreement with you.


53. On April 3, 1998, Gottlieb contacted a senior officer of Dundee Realty and informed him that Livent's auditors had just contacted Gottlieb to advise that they, in their capacity as the auditors for Dundee Realty, had just found a copy of a document entitled "Put Agreement" in Dundee Realty's office. Livent's auditors were concerned about this discovery because it had been their understanding, following discussions with Livent senior management and Livent's audit committee in August of 1997, that there was no "Put" associated with the Dundee Realty transaction in 1997.


54. On Saturday April 4, 1998, during a meeting held at Livent's office with Gottlieb, a senior officer of Dundee Bancorp Inc., which was a principal shareholder of Dundee Realty, signed a letter on Dundee Realty letterhead addressed to Livent stating:

" This letter is to confirm a verbal agreement that you and I had during August 1997 whereby the PUT agreement between Dundee and Livent relating to the Pantages Place Project was cancelled. I regret that because of the pace of business and travel, [the senior management of Dundee Realty] was never informed of our agreement....


55. On April 6, 1998, Gottlieb and Drabinsky signed and sent a letter, addressed to a senior officer of Dundee Realty indicating that notwithstanding the April 4, 1998 letter from the senior officer of Dundee Bancorp the Put Agreement dated August 15, 1997 is binding and effective and remains so in favour of Dundee Realty Corporation as if it has never been cancelled .


56. On May 27, 1998, Gottlieb and a senior officer of Dundee Realty signed a new contract entitled "Put Agreement" (the "New Put Contract") which was identical in substance to the Put Agreement dated August 15, 1997.


57. On May 28, 1998 Gottlieb sent a letter to the senior officer of Dundee Bancorp stating:

As discussed last night, I met with [a senior officer of Dundee Realty] and he and I reviewed together the enclosed PUT agreement [the New Put Contract] which is in the exact form as the original. I am forwarding herewith the original agreement as executed by both [the senior officer of Dundee Realty] and myself and I ask that you put this agreement in a sealed envelope in your safe or safety deposit box...


58. On October 20, 1998, the senior officer of Dundee Realty sent a letter to counsel for Drabinsky, in which the senior officer of Dundee Realty asserted that Dundee Realty's Put to Newco, referenced in the May 1997 Term Sheet and the executed Put Agreement dated August 15, 1997 were cancelled pursuant to an oral agreement made in August 1997 following the closing of the Dundee Realty transaction on August 15, 1997. The senior officer of Dundee Realty also asserted in the letter that notwithstanding both an April 6, 1998 letter from Livent to him regarding these put arrangements and a New Put Contract dated as of May 27, 1998, there is not now, nor has there been since the cancellation referred to in the preceding paragraph, any legally binding or effective put or agreement with similar effect between Dundee Realty and Livent or Newco.



59. In the Restated Financial Statements, Livent reversed CDN$5.6 million of "revenue" previously recorded in connection with the Dundee Realty transaction for the fiscal year 1997.



American Artists: Grant of Right to Organize a Ragtime Tour

American Artists Transaction

60. By agreement dated September 9, 1997 (the "American Artists Contract") between Livent U.S. and American Artists, Livent U.S. granted to American Artists the exclusive right to arrange and schedule a tour of Ragtime in certain U.S. cities. American Artists was granted the right and opportunity, but not the obligation, to schedule performances of Ragtime for a specified number of play weeks. In consideration of the grant, American Artists agreed to pay Livent U.S. a "non-refundable fee" of US$4.5 million payable in installments with US$700,000 due on signing of the American Artists Contract and an additional US$600,000 due in December 1997.


61. The American Artists Contract contained an acknowledgment by American Artists that its acquisition of the exclusive right to schedule a Ragtime tour was of significant competitive advantage to it and that it was in American Artists' business interest to pay the non-refundable fee of US$4.5 million to Livent U.S. and thereby exclude the opportunity of any other person presenting Ragtime in the subject cities throughout the term of the agreement. Accordingly, American Artists agreed that it would be unconditionally obligated to pay the US$4.5 million fee in full to Livent U.S. independent of whether Livent U.S. made available a production of Ragtime at any time.


62. For the fiscal year ended December 31, 1997, in its original financial statements Livent recorded revenue relating to the grant of the Ragtime touring rights to American Artists in the amount of CDN$5.8 million.


63. In connection with the American Artists Contract, Livent U.S. entered into a separate letter agreement with American Artists dated September 29, 1997 (hereinafter referred to as the "American Artists Side Letter") referencing certain formal theatre rental agreements which American Artists was proposing to enter into with a view to presenting performances of Ragtime. In the American Artists Side Letter, Livent U.S. agreed to pay the following amounts to American Artists:

a) Pre-opening Box Office Expenses:

Livent U.S. agreed to pay American Artists actual expenses incurred in connection with their presentation of performances of Ragtime, plus an additional payment of $12,000 per week for a 20-week period preceding the opening of Ragtime at each of two theatres;

b) Fixed and Operating Expenses:

Livent U.S. agreed to pay American Artists actual fixed and operating expenses incurred in connection with the presentation of performances of Ragtime (estimated to be approximately $60,000 and $65,000 per week for two theaters, respectively) including any participation in gross;

c) Rent:

Livent U.S. agreed to pay American Artists rent in the amount of $40,000 per week;

d) Accounting and Administration Fee respecting Settlements:

Livent U.S. agreed to pay to American Artists an additional $2,500 per week.


64. The American Artists Side Letter also contained a guarantee by Livent U.S. that if the theatres terminated their leases with American Artists, Livent U.S. would nonetheless pay to American Artists, as liquidated damages and not as a penalty, the amount that it would otherwise have paid to American Artists if performances of Ragtime had been presented at the theatres.


65. In addition, Livent U.S. entered into a letter agreement with American Artists dated November 15, 1997 (the "American Artists Consulting Agreement") pursuant to which Livent U.S. engaged the services of American Artists as a consultant for productions of certain shows in the U.S. and Canada for a term of three years beginning January 1, 1998 and expiring December 31, 2000. Livent U.S. agreed to pay American Artists a consulting fee in the aggregate amount of US$1.56 million, payable monthly in arrears in the amount of US$47,333.33 per month. Livent entered into a written, unconditional guarantee of all payments required to be made by Livent U.S. to American Artists pursuant to the American Artists Consulting Agreement.


66. The net effect of these arrangements between Livent U.S. and American Artists can be summarized as follows:

Amount payable by American Artists to Livent US$4,500,000
Amount payable by Livent to American Artists US$5,235,000

Overall, Livent U.S. was obligated to make a net payment to American Artists in the amount of US$735,000.

Restatement of American Artists Transaction

67. In the Restated Financial Statements, Livent reversed CDN$5.8 million of "revenue" previously recorded in connection with the American Artists transaction for the fiscal year 1997.



CIBC Capital: Sale of U.K. Production Rights to Showboat and Ragtime

1997 CIBC Capital Transaction

68. By letter agreement dated December 23, 1997 (the "CIBC Capital Contract") between Livent International and CIBC Capital, Livent International sold to CIBC Capital a portion of its European production rights to Showboat and Ragtime (the "U.K. Production Rights"). In consideration of this sale, CIBC Capital agreed to pay Livent International a "non-refundable" fee in the amount of 2 million British Pounds Sterling (the "U.K. Rights Price"), with 400,000 British Pounds Sterling payable in 1997. The CIBC Capital Contract contained the statement that Livent International was under no obligation to mount the shows.


69. In the CIBC Partners Contract, CIBC Capital granted to Livent International the right, but not the obligation, exercisable until June 30, 1998, to directly re-acquire or cause any designee to re-acquire all but not less than all of the UK Production Rights for a consideration equal to the fair market value thereof as at the time of re-acquisition or acquisition, together with any accrued and unpaid royalties.


70. For the fiscal year ended December 31, 1997, in its original financial statements, Livent recorded revenue relating to the "sale" of the UK Production Rights to CIBC Partners in the amount of CDN$4.6 million. Livent's auditors at the time did not concur with the revenue inclusion and consequently Livent also recorded additional amortization of pre-production costs in the amount of CDN$4.6 million so that there would be no effect on net income. However, reported revenue was increased by CDN$4.6 million.


71. During negotiations respecting the sale of the UK Production Rights, Gottlieb informed a senior officer of CIBC Capital that Livent intended, from the outset, to re-acquire the UK Production Rights within a period of months. The senior officer of CIBC Capital advised Gottlieb that CIBC Capital was prepared to participate in the business arrangement on the following conditions:

a) Livent would reimburse CIBC Capital its advance of 2 million British Pounds Sterling, plus some additional increment, to ensure a reasonable return on investment;

b) the term of the arrangement would be of short duration;

c) there would be a strong economic incentive built into the deal to ensure that Livent would actually re-acquire the UK Production Rights. CIBC Capital demanded a royalty interest in Ragtime New York to ensure this would occur; and

d) CIBC Capital had comfort that Gottlieb would cause Livent to re-acquire the UK Production Rights in the short-term.

Gottlieb agreed to each of these elements, except that in connection with the Ragtime New York royalty component, Gottlieb required that this component of the deal be placed in a separate side letter.


72. Livent and CIBC Capital entered into a letter agreement dated December 23, 1997 (the "Pricing Agreement") which set out a pricing mechanism for the re-acquisition by Livent of the UK Production Rights. The Pricing Agreement defined "fair market value" to be paid by Livent to CIBC Capital as an amount equivalent to the portion of the UK Rights Price actually paid by CIBC Capital to Livent International as at the date of the re-purchase transaction, together with any accrued and unpaid royalties, plus the sum of 112,500 British Pounds Sterling, if the re-purchase right were exercised by Livent by June 30, 1998.


73. Livent U.S. and CIBC Capital entered into a letter agreement dated December 23, 1997 (the "Ragtime Security Agreement") pursuant to which Livent U.S. granted certain security to CIBC Partners to demonstrate Livent's firm intention at the outset to re-acquire the UK Production Rights from CIBC Capital. Livent U.S. unconditionally and irrevocably agreed that in the event the UK Production Rights were not re-acquired on or before June 30, 1998, then commencing July 1, 1998 and continuing so long as Ragtime was performed in New York, in addition to any entitlement to royalties as provided in the CIBC Capital Contract, CIBC Capital would receive a royalty equivalent to 10% of the adjusted gross weekly box office (as that term was defined in the CIBC Capital Contract) for the Broadway production of Ragtime.


74. Livent provided a guarantee of the commitment of Livent U.S. set out in the Ragtime Security Agreement.

Restatement of CIBC Capital Transaction


75. In the Restated Financial Statements, Livent reversed CDN$4.6 million of "revenue" previously recorded in connection with the CIBC Capital transaction for the fiscal year 1997.



Concealment of Improper Payments Involving False Invoices

76. To the knowledge of Drabinsky, Gottlieb and Eckstein, prior to the Livent IPO, a predecessor to Livent improperly participated in a series of transactions involving payments to certain co-operative third parties on the basis of false invoices which the third parties submitted to Livent at the direction of Drabinsky and Gottlieb. As part of the arrangement, Drabinsky and Gottlieb issued invoices to the third parties requiring the third parties to pay to Drabinsky and Gottlieb, directly or indirectly, a significant portion of the proceeds paid by Livent to the third parties further to the false invoices. The impact of the payment of these false invoices by Livent, which purported to relate to construction activity performed by the third parties for Livent, resulted in amounts being improperly recorded as fixed assets and preproduction costs on Livent's balance sheet.


77. In the period 1991 to 1994 Livent paid approximately $8 million to the cooperative third parties from which approximately $5 million was paid by the third parties, directly or indirectly, to Drabinsky and Gottlieb.


78. The cumulative effect of these transactions on Livent's Retained Earnings(Deficit) through to December 31, 1995, as reflected in the Restated Financial Statements, was an overstatement of Retained Earnings in Livent's original reported results in the aggregate amount of approximately $5.5 million, comprised of the following components:

Costs improperly capitalized to "fixed assets": $1,264,000
Costs improperly capitalized to "preproduction costs": $4,287,000
Total: $5,551,000

These amounts were adjusted for in the Restated Financial Statements for fiscal 1996 and fiscal 1997.



Conduct Contrary to the Public Interest

79. It is the position of Staff that the conduct engaged in by Livent and the Respondents constitutes conduct contrary to the public interest in that:

a) Livent, for the fiscal years ending December 31, 1996 and December 31, 1997, and for the quarter ended March 31, 1998, made statements in its interim and audited annual financial statements required to be filed or furnished under Ontario securities law that, in a material respect and at the time and in the light of the circumstances under which they were made, were misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statements not misleading;

b) Drabinsky, Gottlieb and Eckstein, for the fiscal years ending December 31, 1996 and December 31, 1997, and for the quarter ended March 31, 1998, authorized, permitted or acquiesced in Livent making statements in Livent's interim and audited annual financial statements required to be filed or furnished under Ontario securities law that, in a material respect and at the time and in the light of the circumstances under which they were made, were misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statements not misleading; and

c) Topol, for the fiscal years ending December 31, 1996 and December 31, 1997, authorized, permitted or acquiesced in Livent making statements in Livent's interim and audited annual financial statements required to be filed or furnished under Ontario securities law that, in a material respect and at the time and in the light of the circumstances under which they were made, were misleading or untrue or did not state a fact that was required to be stated or that was necessary to make the statements not misleading.

80. Staff reserves the right to make such other allegations as Staff may advise and the Commission may permit.




Dated at Toronto this 3rd day of July, 2001