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IN RE LIVENT

June 29, 2001

IN RE LIVENT, INC. NOTEHOLDERS SECURITIES LITIGATION. THIS DOCUMENT RELATES TO ALL ACTIONS. ALICE F. RIEGER, ACTING BY AND THROUGH HER ATTORNEY-IN-FACT ROBERT L. WALTERS, TRI-LINKS INVESTMENT TRUST, AND CERBERUS CAPITAL MANAGEMENT, L.P., INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
GARTH DRABINSKY, MYRON I. GOTTLIEB, GORDON ECKSTEIN, ROBERT TOPOL, CONRAD M. BLACK, JOSEPH ROTMAN, SCOTT M. SPERLING, H. GARFIELD EMERSON, MARTIN GOLDFARB, A. ALFRED TAUBMAN, ESTATE OF ANDREW SARLOS, THOMAS H. LEE, JAMES PATTISON, LYNX VENTURES, L.P., LYNX VENTURES, L.L.C., MICHAEL S. OVITZ, RONALD W. BURKLE, ROBERT M.D. CROSS, QUINCY JONES, HEATHER MUNROE-BLUM, JERRY I. SPEYER, FURMAN SELZ, INC., ROY FURMAN, PAINE WEBBER, INC., DELOITTE & TOUCHE, L.L.P., DELOITTE & TOUCHE CHARTERED WEST PAGE 372
ACCOUNTANTS, CANADIAN IMPERIAL BANK OF COMMERCE, CIBC WORLD MARKETS, CIBC CAPITAL PARTNERS, CIBC WOOD GUNDY SECURITIES, INC., CIBC WOOD GUNDY CAPITAL, AND CIBC OPPENHEIMER SECURITIES CORP., DEFENDANTS.



The opinion of the court was delivered by: Marrero, District Judge.

              DECISION AND ORDER
Page TABLE OF CONTENTS
I. INTRODUCTION 383
II. THE PARTIES 385

A. PLAINTIFFS ........................................................................ 385

B. DEFENDANTS ........................................................................ 385

1. Inside Directors/Management Defendants ........................................ 385

2. Outside Directors ............................................................. 386

3. Securities Sellers ............................................................ 387

4. Auditors ...................................................................... 388

5. Nominal Defendants ............................................................ 388

  6. Additional Rieger Action Defendants ........................................... 388
III. LIVENT'S BACKGROUND AND DEMISE 389

A. PUBLIC FINANCINGS AND LOSSES ...................................................... 389

B. LIVENT'S FRAUD UNCOVERED .......................................................... 390

C. LIVENT'S BANKRUPTCY ............................................................... 391

D. THE INSTANT ACTIONS ............................................................... 392

1. The Noteholders' Action ....................................................... 392

2. The Rieger Action ............................................................. 392

IV. THE ALLEGED FRAUD 393

A. FRAUDULENT "REVENUE-GENERATING" TRANSACTIONS ...................................... 393

1. Pace Theatrical Group ......................................................... 393

2. American Artists .............................................................. 393

3. CIBC Wood Gundy ............................................................... 393

4. Dundee Realty Corporation ..................................................... 395

5. Pantages Theatre Naming Rights ................................................ 396

6. Dewlim Investments Limited .................................................... 397

B. FRAUDULENT MANIPULATION OF LIVENT'S BOOKS AND RECORDS ............................. 398

C. THE UNDISCLOSED KICKBACKS ......................................................... 401

D. OTHER FRAUDULENT CONDUCT .......................................................... 401

1. Livent's Fraudulent Ticket Purchases .......................................... 401

2. Allegations Specific to Deloitte .............................................. 402

V. DISCUSSION 403
A. LEGAL STANDARDS: MOTION TO DISMISS UNDER FED. R. CIV. P. 12(B)(6) ......................................................................... 404

B. THE SECURITIES LAWS ............................................................... 407

1. The 1933 Securities Act ....................................................... 408

a. Section 11 ................................................................ 408
b. Section 12(a)(2) .......................................................... 409
c. Section 15 ................................................................ 409

2. The Securities Exchange Act ................................................... 409

 
a. Section 10(b) and SEC rule 10b-5 .......................................... 409
b. Section 20(a) ............................................................. 413

3. The 1995 Reform Act ........................................................... 418

a. Pleading Standards ........................................................ 418
b. Policy and Procedural Objectives .......................................... 422
VI. APPLICATION OF THE SECURITIES STATUTES TO PLAINTIFFS' CLAIMS 426

A. THE NOTEHOLDERS' ACTION ........................................................... 426

1. Deloitte's Motion: Section 10(b) .............................................. 426

a. The Revenue-Generating Transactions ....................................... 426

(i) The Dundee Transaction ................................................ 427

(ii) CIBC Wood Gundy Transaction .......................................... 428

b. Livent's Manipulation of Its Books and Records ............................. 428

2. Deloitte's Motion: Section 11 Liability and Rule 9(b) Pleading Requirement .... 429

3. PaineWebber, Furman Selz, and CIBC Motion: Section 11 Claim ................... 430

4. PaineWebber/Furman Selz Motion: Section 12 Claim .............................. 432

5. CIBC Wood Gundy and CIBC Oppenheimer's Motion: Section 10(b) Claims ....................................................................... 432

6. CIBC Motion: Section 12(a)(2) Claim ........................................... 433

7. Outside Directors Motion to Dismiss: Section 10(b) Claim ...................... 433

8. Outside Directors' Motion: Section 11 Claims .................................. 434

a. Rule 9(b) ................................................................. 434

b. Standing ................................................................... 434

9. Outside Directors' Motion: §§ 12 and 15 Claims ................................ 436

10. Outside Directors' Motion: § 20(a) Claims ..................................... 436

B. THE RIEGER ACTION ................................................................. 437

1. Status of Plaintiff Rieger .................................................... 438

2. Motion to Dismiss: § 10(b) Claims ............................................. 438

a. Reliance .................................................................. 438
b. Forward Looking Statements and Safe Harbor Analysis ....................... 440
  3. Motion to Dismiss: Claims Under Section 11 and 12(a)(2) ....................... 441

4. Motion to Dismiss: Claims, Under Sections 15 and 20(a) ........................ 441

a. State Claims and the Securities Litigation Uniform Standards Acts .......... 442

b. Motion to Strike the Answer of Drabinsky, Ekstein, and Gottlieb and for Judgment on the Pleadings ............................................. 443
VII. ORDER 445

A. THE NOTEHOLDERS' ACTION, 98 CIV. 7161 ............................................. 445

B. THE RIEGER ACTION, 99 CIV. 9425 ................................................... 445

Livent, Inc. ("Livent") was once a well-known and seemingly successful producer of live theater on Broadway and around the world. Its credits include critically acclaimed musicals such as "Show Boat," "Fosse," "Phantom of the Opera," and "Ragtime." In November 1998, however, amid revelations of accounting fraud implicating its highest officers, Livent restated financial results for 1996, 1997, and the first quarter of 1998 by nearly $100 million. At the same time, the company declared bankruptcy in the United States and Canada.

The litigation spawned by Livent's demise includes two competing noteholders class actions now before this Court.*fn1 The first, In re Livent, Inc. Noteholders Sec. Litig., No. 98 Civ. 7191 (the "Noteholders' Action"), was brought on behalf of noteholders who purchased Livent 9 3/8% Senior Notes Due 2004 (the "Notes") from October 10, 1997 through August 10, 1998 (the "Class Period"). Rieger v. Drabinsky, No. 98 Civ. 9425 (the "Rieger Action"), was later brought on behalf of noteholders who purchased Notes "anytime after October 10, 1997." Each charges various Livent officers, directors, auditors, and bankers with violations of: §§ 11, 12(a)(2) and 15 of the Securities Act of 1933 (the "Securities Act" or the "1933 Act"), 15 U.S.C. § 77k, 77l(a)(2); §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act" or the "1934 Act"), 15 U.S.C. § 78j(b) and 78t; and S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5. The actions gave rise to a series of motions brought pursuant to Fed.R.Civ.P. 12(b)(6) and 9(b), as well as under the Private Securities Litigation Reform Act of 1995 (the "PSLRA" or "1995 Reform Act"), Pub.L. No. 104-67, 109 Stat. 737 (1995) (codified at 15 U.S.C. § 77z-1-77z-2, 78u-4-78u-5). The motions assert that the complaints in both suits fail to state a claim upon which relief may be granted and to plead fraud with sufficient particularity.

I. INTRODUCTION

Plaintiffs in the related Livent actions comprise different classes of interests which vary by (1) the time of their securities purchases: before and after public disclosure of Livent's disintegration; (2) the type of equity they held: stocks and notes differently dated; and (3) the theory of liability they claim: federal securities fraud under § 10(b) and "control person" liability under § 20(a) of the Exchange Act or misrepresentation under §§ 11 and 12 of the Securities Act.

Defendants encompass individuals and institutions whose involvement in the underlying events ranges across a spectrum of conduct. Arranged concentrically by corporate structure, at the center are Livent's chief management executives who masterminded the alleged wrongs, along with their inside accomplices, some willing and actively engaged, while others remained passive. Next in the hierarchy are the members of Livent's Audit Committee, followed by other outside directors, divided in time by old and new Livent regimes in recognition of their varying roles in different episodes as Livent's drama progressed. In the ring beyond are the company's external auditors, securities sellers and financial advisors who rendered financial services in connection with the securities transactions here in question.

From some Plaintiffs' perspective, the involvement and liability of these actors in the losses Plaintiffs claim are practically undifferentiated. All stand accused of occupying the same culpable inner circle, and of having played substantial roles as knowing or reckless or as only careless participants whose conduct regarding the transactions at issue directly or indirectly caused Plaintiffs' alleged injuries.

In the Court's construction of the pleadings and of the parties' submissions in favor of and against defendants' multiple motions to dismiss the complaints, resolution of each dispute lies at a critical point on a continuum. That juncture occurs where the quantum of defendants' knowledge of and sufficient involvement in the relevant transactions would support Plaintiffs' theory of liability, or, conversely, where the extent of relevant matters objectively known to Plaintiffs at the time they purchased Livent securities would undermine their theory of recovery.

For the reasons indicated, the Court concludes that some Plaintiffs in these actions plead facts sufficiently demonstrating that they cross the threshold entitling them to relief while others do not. Similarly, a fair reading of the pleadings demonstrates that the roles and states of mind of defendants vary. As to some, Plaintiffs assert facts that, if proven true, would be sufficient to constitute fraud or recklessness. As to other defendants, while the extent of scienter Plaintiffs allege may be inadequate to warrant a finding of extreme conduct satisfying the elements of fraud under § 10(b) of the Exchange Act, their participation in the events suffices to make out a case of misrepresentation under the Securities Act. Relative to yet another defendant group, the pleadings do not support any determination that the accusations fall within the bands of culpable conduct at all. Accordingly, defendants' motions are granted in part and denied in part.

II. THE PARTIES

A. PLAINTIFFS

Plaintiffs here are all purchasers of the Notes. The lead plaintiffs in the Noteholders' Action, Dorian and Diane King (the "Kings"), purchased Livent Notes at the face amount of $100,000 for $102,750 during the Class Period. See Noteholders' Action Second Amended Consolidated Class Action Complaint ("NH SAC") ¶ 12. Plaintiffs to the Noteholders' Action are referred to here as the "Noteholders."

The Rieger Action plaintiffs are (a) Cerberus Capital Management, L.P. ("Cerberus"), an institutional investment firm which purchased $15.75 million (U.S.) face value Notes for $8.93 million from September 2 to November 6, 1998, (b) Tri-Links Investment Trust ("Tri-Links"), which purchased $21.777 million face value Notes for $8.88 million from December 8, 1998 to April 2, 1999, and (c) Alice F. Rieger, added as a plaintiff in the first amended complaint, who purchased $25,000 in Livent Notes for $25,096 on July 21, 1998. See Rieger Action First Amended Class Action Complaint ("RC") ¶¶ 11-13. Collectively, Tri-Links, Cerberus, and Rieger are referred to here as the "Rieger Noteholders." The Noteholders and the Rieger Noteholders are referred to collectively as "Plaintiffs."

B. DEFENDANTS

The various defendants,*fn3 subdivided into several groups, are individuals who served as Livent officers or directors, and corporations and institutions that played a role in Livent's financing or accounting.

1. Inside Directors/Management Defendants

Garth A. Drabinsky ("Drabinsky") served as chair of Livent's board of directors (the "Board") and chief executive officer from December 1989 to June 1998, and then as vice chair and chief creative director until August 1998. On August 10, 1998, he was suspended, and on November 18, 1998, he was fired. N.H. SAC ¶ 13.

Myron Gottlieb ("Gottlieb") served on the Board from 1993 to 1998, and was Livent's president and chief operating officer from December 1989 to June 1998, and executive vice-president of Canadian administration from June to August 1998. Along with Drabinsky, he was suspended on August 10, 1998 and fired on November 18, 1998. On January 13, 1999, both Drabinsky and Gottlieb were indicted in this District for securities fraud, and the United States Securities and Exchange Commission ("SEC") instituted a civil action against them for securities fraud. N.H. SAC ¶ 14.

Gordon Eckstein ("Eckstein") was Livent's senior vice president of finance and administration from February 1990 until his resignation in July 1998. In January 1999, Eckstein pleaded guilty to one felony count of federal securities violations. N.H. SAC ¶ 15; RC ¶ 18.

Robert Topol ("Topol") was Livent's executive vice president from 1989 until 1994, when he became senior executive vice president. He became chief operating officer in 1996 until his resignation in February 1998. Topol signed the Registration Statement filed with the SEC in the public offering of the Notes. N.H. SAC ¶ 16; RC ¶ 20.

Collectively, Drabinsky, Gottlieb, Eckstein, and Topol, along with the other Livent management defendants, are sometimes referred to here as the "Inside Directors".

Maria Messina ("Messina"), sued here by the Noteholders but not by the Rieger Noteholders, was vice president of finance and chief financial officer of Livent. Prior to joining Livent in 1996, Messina was the engagement partner from Deloitte & Touche, Chartered Accountants for the audit of Livent's financial statements. Messina signed the Registration Statement filed with the SEC in the public offering of the Notes. On January 13, 1999, Messina was indicted in this District for securities fraud and pleaded guilty. N.H. SAC ¶ 17; RC ¶¶ 23-24.

Daniel D. Brambilla ("Brambilla") was first employed by Livent as a managing director in 1992 and was an executive vice president with Livent since 1993, and during the Class Period. Brambilla signed the Registration Statement filed with the SEC in the public offering of the Notes. N.H. SAC ¶ 21.

Lynda Friendly ("Friendly") was first employed by Livent as an executive vice president in December 1989 and became a director in May 1993. Friendly signed, by a power of attorney, the Registration Statement filed with the SEC in the public offering of the Notes. N.H. SAC ¶ 22.

Christopher Craib ("Craib") was, during the relevant period, Livent's senior controller. Craib joined Livent in June 1997 from Deloitte & Touche. During the Class Period, Craib prepared schedules comparing the actual and budgeted results, which quantified certain of the accounting irregularities that are a subject of this action. N.H. SAC ¶ 27.

Diane J. Winkfein ("Winkfein") was, during the relevant period, Livent's senior corporate controller. During the Class Period, Winkfein made adjustments to various accounts in the balance sheet and income statement, including expense categories to achieve overall levels of adjustments as part of the scheme to inflate Livent's profits. N.H. SAC ¶ 28; RC ¶ 24.

D. Grant Malcolm ("Malcolm") was, during the relevant period, Livent's senior production controller. During the Class Period, Malcolm made adjustments to various accounts in the balance sheet and income statements, including expense categories to achieve overall levels of adjustments as part of the scheme to inflate Livent's revenues. N.H. SAC ¶ 29.

Tony Fiorino ("Fiorino") was, during the relevant period, Livent's theater controller. During the Class Period, Fiorino created dummy accounts to conceal costs that were fraudulently shifted from shows to theater cost accounts. His purpose was to inflate Livent's profits by reducing recorded costs. He also inflated ticket sales for "Ragtime" and arranged for ticket purchases by vendors and handled payments to vendors. N.H. SAC ¶ 30; RC ¶¶ 29-30.

2. Outside Directors

H. Garfield Emerson ("Emerson") was a member of Livent's Board and chaired the Audit Committee at all relevant times during the Class Period. N.H. SAC ¶ 18.

Martin Goldfarb ("Goldfarb") was a member of Livent's Board and served on the Audit Committee at all relevant times during the Noteholders Class Period. N.H. SAC ¶ 19.

A. Alfred Taubman ("Taubman") was a member of Livent's Board and served on the Audit Committee from April 1997 to August 1998. N.H. SAC ¶ 20.

Emerson, Goldfarb and Taubman collectively are sometimes referred to here as the "Audit Committee".

Thomas H. Lee ("Lee") became a director in February 1995 and served on Livent's Compensation Committee. He signed, by a power of attorney, the Registration Statement filed with the SEC in the public offering of the Notes. N.H. SAC ¶ 23.

James A. Pattison ("Pattison") was a director of Livent and a member of its Compensation Committee from May 1997. On October 1, 1998 Pattison was added to Livent's Audit Committee. He signed, by a power of attorney, the Registration Statement filed with the SEC in the public offering of the Notes. N.H. SAC ¶ 24.

Joseph L. Rotman ("Rotman") was a director of Livent from May 1995 and served on Livent's Executive Committee. He signed, by a power of attorney, the Registration Statement filed with the SEC in the public offering of the Notes. N.H. SAC ¶ 25.

Scott Sperling ("Sperling") was a director and member of Livent's Executive Committee from February 1995, when Thomas H. Lee Equity Partners, L.P. and THL-CCI Limited Partnership acquired $15 million of 8.95% Subordinated Convertible Notes due February 29, 2000, issued for 763,636 shares of Livent stock. He signed, by a power of attorney, the Registration Statement filed with the SEC in the public offering of the Notes. N.H. SAC ¶ 26.

Along with the three members of the Audit Committee defendants Lee, Pattison, Rotman and Sperling collectively are sometimes referred to here as the "Outside Directors".

3. Securities Sellers

CIBC Wood Gundy Securities, Inc. ("CIBC Wood Gundy") is a wholly-owned subsidiary of Canadian Imperial Bank of Commerce ("CIBC"), headquartered in Toronto, Canada and served as Livent's principal banker. N.H. SAC ¶ 31.

CIBC Oppenheimer Securities Corp. ("CIBC Oppenheimer") (known until December 31, 1997 as CIBC Wood Gundy Securities Corp.) is a wholly-owned subsidiary of CIBC Wood Gundy and serves as its broker/dealer for securities transactions in the United States. N.H. SAC ¶ 32.

Plaintiffs allege that CIBC Wood Gundy served as an underwriter of the Notes that were sold pursuant to the Registration Statement and Prospectus and that it sold those notes directly to investors in the United States, through its agent CIBC Oppenheimer, pursuant to the Prospectus. N.H. SAC ¶ 33.

Furman Selz, Inc. ("Furman Selz"), an indirect wholly-owned subsidiary of ING Group, N.V., is an investment bank headquartered in New York. Plaintiffs allege that Furman Selz was an underwriter of the Notes and that it "offered and sold the Notes directly to the investing public, pursuant to the Prospectus contained in the Registration Statement." N.H. SAC ¶ 34.

PaineWebber Inc. ("PaineWebber"), a wholly-owned subsidiary of the Paine Webber Group Inc., has headquarters in this District. Plaintiffs allege that PaineWebber was an underwriter of the Notes and that it offered and "sold the Notes directly to the investing public, pursuant to the Prospectus contained in the Registration Statement." N.H. SAC ¶ 35.

4. Auditors

Deloitte & Touche, Chartered Accountants ("D & T" or "Deloitte") is a Canadian firm of certified public accountants, auditors and consultants, and is affiliated with Deloitte & Touche, LLP ("D & T U.S."), a United States limited liability partnership, which offers similar services as its Canadian counterpart. Deloitte served as Livent's outside auditor and accounting firm at all relevant times during the Class Period. Deloitte acted in that capacity pursuant to the terms of contracts it had with Livent which required Deloitte, among other things, to audit Livent's financial statements in accordance with Generally Accepted Auditing Standards ("GAAS") and to report the results of those audits to Livent and its Board. Deloitte consented to the inclusion of its Auditor's Report in the Registration Statement and Prospectus for Livent's Notes, which Plaintiffs contend falsely and/or misleadingly stated that the consolidated financial statements present fairly, in all material respects, the financial position of Livent. N.H. SAC ¶ 36.

5. Nominal Defendants

Nominal defendant Livent is a Canadian corporation. On November 19, 1998, Livent filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. Prior to liquidation of its primary assets, Livent owned and operated the Ford Theater in New York City and the Oriental Theater in Chicago, Illinois. N.H. SAC ¶ 37.

Nominal defendants Livent (U.S.) Inc., Livent Capital, Inc., Livent Int'l, Inc., Livent Realty (New York), Inc., and Livent Realty (Chicago), Inc. (the "Livent Affiliates") are wholly-owned subsidiaries of Livent. Each of the Livent Affiliates signed the Registration Statement and are Guarantors of the Notes. The Livent Affiliates filed for Chapter 11 protection concurrently with the bankruptcy filing of Livent in November 1998. N.H. SAC ¶ 38.

6. Additional Rieger Action Defendants

By reason of the overlap of time periods covered by the two actions, the Rieger Noteholders sued most of the defendants listed above, and added the following.

Conrad Black ("Black") was a member of the Livent Board beginning in 1993. Black, together with Rotman, Sperling, Lee, and Pattison, who are also named in the Noteholders Action, are referred to herein as the "Old Directors." RC ¶ 39.

Lynx Ventures, L.P. acquired 2.5 million common shares of Livent stock for $20 million on June 12, 1998. Lynx Ventures, L.L.C. is the general partner of Lynx Ventures, L.P. Lynx Ventures, L.P. and Lynx Ventures, L.L.C. are collectively referred to here as "Lynx." RC ¶ 45-46.

Michael S. Ovitz ("Ovitz"), a managing member of Lynx Ventures, L.L.C., served on Livent's board from June 12, 1998. RC ¶ 47.

Ronald Burkle ("Burkle") is the managing partner of the Yuciapa Companies and served on the Livent Board starting on June 12, 1998 until his resignation on December 1, 1998. RC ¶ 48.

Robert M.D. Cross ("Cross") is the chairman and CEO of Yorktown Securities, Inc. and served on the Livent Board starting on June 12, 1998. RC ¶ 49.

Quincy Jones ("Jones"), president of Quincy Jones Productions, served on the Livent Board from June 12, 1998 until his resignation on November 25, 1998. RC ¶ 50.

Heather Munroe-Blum ("Munroe-Blum"), a professor at the University of Toronto, served on the Livent board from June 12, 1998 until her resignation on December 1, 1998. RC ¶ 51.

Jerry Speyer ("Speyer"), president and CEO of Tishman Speyer Properties, Inc, served on the Livent Board from June 12, 1998 until his resignation on December 1, 1998. RC ¶ 52.

Roy Furman ("Furman") retired from Furman Selz in April 1998 to become chairman and CEO of Livent, serving from June 12, 1998, until June 25, 1999, when he resigned. RC ¶ 53.

Ovitz, Burkle, Cross, Jones, Munroe-Blum, Speyer, and Furman are collectively referred to as the "New Directors."

III. LIVENT'S BACKGROUND AND DEMISE

A. PUBLIC FINANCINGS AND LOSSES

Livent was formed in 1989 as a partnership between Drabinsky and Gottlieb. In May 1993, Livent made an initial offering of stock in Canada. Two years later, in May 1995, Livent filed a registration statement with the SEC that sought to sell Livent common stock in the United States and to list that stock on the NASDAQ exchange. That application was accepted and, in August 1995, Livent's stock began publicly trading in the United States. Livent often sought financing from U.S. and Canadian investors, sometimes by selling notes and debentures and sometimes with additional stock offerings.

The public financing in contention here began in October 1997, when Livent issued an offering memorandum (the "Offering Memorandum") for the sale of the Notes in the United States and Canada. On October 10, 1997, Livent formally announced that the debt offering had closed and had netted proceeds of $121 million (U.S.). On October 16, 1997, as contemplated in the Offering Memorandum, Livent entered into an Indenture, with Wilmington Trust Company as Trustee, to exchange the original Notes for publicly traded Notes to be issued in December 1997. On November 6, 1997, Livent filed a Registration Statement with the SEC regarding this exchange offer (the "Registration Statement"); and, on December 10, 1997, Livent filed its completed exchange offer Prospectus with the SEC (the "Prospectus"). N.H. SAC ¶ 2.

On April 13, 1998, Livent announced that it had suffered a net loss in 1997 of $44.1 million. RC ¶ 244. Livent also announced a $27.5 million write-off of production costs and a $12.2 million charge consisting primarily of costs associated with the refinancing of Livent's debt in the fourth quarter of fiscal year 1997. See Declaration of Peter J. Beshar (counsel to Deloitte) in support of motion to dismiss the RC, dated April 17, 2000 ("Beshar Decl."), Ex. C (Livent's Form 6-K for the month of April, 1998, attaching Livent's Press Release dated April 13, 1998).

During the same period Lynx conducted due diligence on Livent with the assistance of KPMG Investigation and Security, Inc. ("KPMG"). After KMPG completed its due diligence, Lynx agreed to invest $20 million in return for a 12% ownership stake in Livent. Robert Webster ("Webster") was then appointed executive vice president of Livent.

On May 29, 1998, Livent disclosed a loss in the First Quarter of 1998 of $29.9 million. Livent also announced a further $23.6 million write-off of preproduction and other assets, of which $20.4 million related to "Show Boat". Beshar Decl. Ex. D (Livent's Form 6-K for the three months ended March 31, 1998). As the Noteholders characterize it, at that time "Livent was losing money at an alarming rate." N.H. SAC ¶ 126.

B. LIVENT'S FRAUD UNCOVERED

In early August 1998, Webster learned that Livent had entered into a "secret side agreement" with CIBC in connection with a particular transaction. N.H. SAC ¶ 131. On August 6, 1998, several Livent employees approached Webster and disclosed that there were substantial financial irregularities at Livent. N.H. SAC ¶ 132.

On August 10, 1998, after conducting a brief investigation, Livent issued a press release (the "August 10 Press Release" or "Initial Press Release") entitled "Investigation at Livent Inc. Reveals Accounting Irregularities." RC ¶¶ 162-171, 388; Beshar Decl., Ex. A (Livent's Form 6-K, dated August 11, 1998, incorporating Livent's August 10 Press Release). This release disclosed that significant financial irregularities had been uncovered and that a restatement of Livent's 1996, 1997, and first quarter 1998 financial results would be necessary. Id. The Initial Press Release also announced that KPMG had been retained to conduct "a comprehensive review of [Livent's] financial records" and that Drabinsky and Gottlieb had been suspended pending KPMG's investigation. Id.

The press release further stated that the accounting irregularities "are not expected to have a significant adverse effect on [Livent's] current cash flow or its operations" and that "[Livent] expects shortly to engage investment advisors to assist in addressing these issues and believes that it should be possible to resolve these issues satisfactorily." Id. at 3-4.

At the same time, the Initial Press Release cautioned that the accounting irregularities "could give rise to an event of default or trigger obligations under [Livent's] outstanding indebtedness and other agreements" and warned that the views expressed

are subject to various known and unknown risks and uncertainties including, but not limited to, the outcome of the investigation referred to herein: the profitability of [Livent's] present and planned productions and other projects; competition in [Livent's] existing and potential future lines of business; [Livent's] ability to address its financing requirements in light of its existing debt obligations; [Livent's] ability to attract and retain key executive and creative personnel; and other factors. These and other factors and assumptions not identified above could cause actual results to differ materially from those projected.

Id. at 4.

Following the August 10 Press Release, NASDAQ and the Toronto Stock Exchange halted all trading in Livent stock.

On August 18, 1998, Livent issued another press release, entitled "Livent Outlines Current Status of Investigation and Ongoing Business Operations" (the "August 18 Press Release" or "Second Press Release"). Beshar Decl., Ex. B (Livent's Form 6-K, dated August 20, 1998, incorporating Livent's August 18 Press Release). This Second Press Release reported that Livent was targeting late October to restate its financials, and warned that the adjustments "will be material in the aggregate for 1996, 1997, and for the first quarter of 1998" and that "earlier years might be affected" as well. Id. at 1. The August 18 Press Release provided more information about the accounting irregularities:

It still appears that the irregularities generally involve two areas: (1) expense recognition issues involving the failure to record expenses in proper periods due to improper capitalization of costs and ...

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