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IN RE LIVENT
June 29, 2001
IN RE LIVENT, INC. SECURITIES LITIGATION. THIS DOCUMENT RELATES TO ALL ACTIONS.
The opinion of the court was delivered by: Marrero, District Judge.
II. THE PARTICULARS OF THE ALLEGED FRAUD 336
A. FRAUDULENT "REVENUE-GENERATING" TRANSACTIONS ..................... 336
1. Pace Theatrical Group ......................................... 336
2. American Artists .............................................. 336
3. CIBC Wood Gundy Capital ....................................... 337
4. Dundee Realty Corporation ..................................... 337
5. Pantages Theatre Naming Rights ................................ 339
6. Dewlim Investments Limited .................................... 340
B. FRAUDULENT MANIPULATION OF LIVENT'S BOOKS AND RECORDS ............ 341
C. OTHER FRAUDULENT CONDUCT ......................................... 344
1. The Undisclosed Kickbacks ..................................... 344
2. Materially False and Misleading Statements to Analysts ........ 344
3. Fraudulent Ticket Purchases ................................... 344
D. ALLEGATIONS OF MISCONDUCT SPECIFIC TO D & T ...................... 345
E. ALLEGATIONS OF MISCONDUCT SPECIFIC TO CIBC ....................... 345
F. LIVENT'S BANKRUPTCY .............................................. 346
III. THE SECURITIES LAWS 347
A. SECTION 10(b) AND SEC RULE 10b-5 ................................. 347
B. SECTION 20(a) .................................................... 351
C. THE 1995 REFORM ACT .............................................. 355
1. Pleading Standards ............................................ 355
2. Policy and Procedural Objectives .............................. 360
A. CIBC's MOTION .................................................... 364
1. Statute of Limitations ........................................ 364
2. Failure to Plead Loss Causation ............................... 365
B. D & T'S MOTION ................................................... 366
1. Scienter ...................................................... 366
2. The Magnitude of the Fraud .................................... 367
3. Livent's Fraudulent Revenue-Generating Transactions ........... 368
a. The Dundee Transaction ..................................... 369
b. CIBC Wood Gundy Transaction ................................ 369
4. Livent's Manipulation of Its Books and Records ................ 370
C. OUTSIDE DIRECTORS' MOTION ........................................ 371
1. Section 10(b) Claims .......................................... 371
2. Section 20(a) Claims .......................................... 372
This case is one of numerous securities class actions that
arose out of the events surrounding the collapse of Livent, Inc.
("Livent"). The particular action now before the Court is brought
on behalf of Livent stockholders who purchased or otherwise
acquired Livent common stock between March 5, 1996 and August 7,
1998 (the "Class Period") and has been the subject of a prior
published decision of this Court, In re Livent Sec. Litig.,
78 F. Supp.2d 194 (S.D.N.Y. 1999) (Sweet, J.) ("Livent Shareholders
I"), familiarity with which is assumed.*fn1
In August 1998, the first of many shareholder actions was
brought against Livent and associated individuals and entities.
In December 1998, Judge Sweet consolidated the pending actions
and approved lead plaintiffs and counsel. In February 1999,
plaintiffs herein ("the Shareholders") filed an amended class
action complaint against several groups of defendants: Livent's
two highest officers, Garth Drabinsky and Myron Gottlieb (the
"Inside Directors"); three directors who served on Livent's audit
committee, H. Garfield Emerson, A. Alfred Taubman, and Martin
Goldfarb (the "Outside Directors" or "Audit Committee"); and
Livent's accounting firm, Deloitte & Touche Chartered Accountants
("D & T").
The defendants moved to dismiss on various grounds. In December
1999, Judge Sweet held that: (1) dismissal of the action on forum
non conveniens grounds was not warranted; (2) allegations of
fraudulent conduct by Drabinsky and Gottlieb were sufficiently
particular to state securities fraud claims; (3) the magnitude of
alleged accounting fraud was insufficient to infer scienter on
the part of D & T; (4) the allegations that the Outside
Directors, who as members of the Audit Committee failed to
discover various fraudulent schemes by the Inside Directors, were
insufficient to plead scienter; and (5) the fact that the Outside
Directors were members of the Audit Committee was insufficient to
establish that such directors had the control required to satisfy
the criteria for "control person" liability under § 20(a) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78t(a) (the
"Exchange Act" or "1934 Act").
Judge Sweet granted leave to re-plead, and in February 2000,
the Shareholders filed the Second Amended Consolidated Class
Action Complaint ("SH SAC") now before the Court. Among its
changes, the SH SAC for the first time named Canadian Imperial
Bank of Commerce ("CIBC"), a major Livent lender and investment
banker, as a defendant.
II. THE PARTICULARS OF THE ALLEGED FRAUD
The circumstances upon which the Shareholders' claims of fraud
are grounded generally fall into two categories; first, certain
transactions Livent executed, the accounting for which overstated
income; and second, manipulation of Livent's books and records
that understated expenses. Some of the claims target the roles of
particular defendants in the underlying the events.
A. FRAUDULENT "REVENUE-GENERATING" TRANSACTIONS
In 1996 and 1997, Livent purported to sell Pace Theatrical
Group, Inc. ("Pace"), a Texas-based theatrical company, the
exclusive rights to present "Show Boat" and "Ragtime" in various
theaters in North America for fees totaling $11.2 million (U.S.).
SH SAC ¶ 50. These agreements, contained in contracts or letters,
were dated June 15, 1996 and August 8, 1997, with respect to
"Show Boat," and December 18, 1996 and August 8, 1997, with
respect to "Ragtime." SH SAC ¶ 50. In return for payment of the
fees, Pace was to be reimbursed for all theater expenses to
present the shows and was entitled to a limited percentage of
adjusted gross ticket sales as profit participation. SH SAC ¶ 50.
All of these agreements purported to make the fees nonrefundable,
even if Livent never made the shows available to Pace.*fn2
The Shareholders allege that pursuant to the terms of the
agreements, Livent would not commence staging "Show Boat" until
July 1997 and would be responsible for all production costs,
running costs and moving costs throughout the tour. SH SAC ¶ 52.
Similarly, according to the Shareholders, Livent assumed
obligations with respect to the "Ragtime" agreement for
substantial performance that would extend beyond 1996 and 1997.
SH SAC ¶ 53.
Nevertheless, on the basis of these agreements, and allegedly
in violation of Generally Accepted Accounting Principles
("GAAP"), Livent recognized the present value of the fees as
revenue in its financial statements in the amounts of $12.2
million for fiscal 1996 and $1.6 million for fiscal 1997. SH SAC
¶ 51. For purposes of Livent's year-end 1996 reconciliation to
U.S. GAAP, Livent deferred recognition of $6 million related to
the sale of rights to "Ragtime." SH SAC ¶ 51. Livent subsequently
improperly recognized that amount in fiscal 1997. SH SAC ¶ 51.
In 1997, pursuant to an agreement dated September 9, 1997,
Livent sold American Artists Limited Inc. ("American Artists"), a
Massachusetts-based theater owner and operator, the right to
present "Ragtime" in three theaters for a fee of $4.5 million
(U.S.). SH SAC ¶ 86. The agreement purported to make the fee
nonrefundable, regardless of whether Livent made "Ragtime"
available to American Artists. SH SAC ¶ 86.
3. CIBC Wood Gundy Capital
In December 1997, Gottlieb negotiated an agreement purporting
to memorialize the sale of an interest in the production rights
of "Show Boat" and "Ragtime" in the United Kingdom and other
countries to CIBC Wood Gundy, an investment bank and subsidiary
of CIBC, Livent's principal banker. SH SAC ¶ 87. In return, CIBC
Wood Gundy was entitled to certain royalty payments from the
shows. SH SAC ¶ 87. Valued at $4.6 million (Can.) or £ 2 million,
the agreement also gave Livent the right, until June 30, 1998, to
repurchase the production rights. SH SAC ¶ 87. Based on this
agreement, Livent recorded revenue of approximately $4.6 million
(Can.) in its financial statements for fiscal 1997. SH ¶ 87.
According to the Shareholders, the CIBC Wood Gundy contract was
reviewed by D & T as part of its 1997 audit of Livent. Although
fully aware that the contract required Livent to perform over a
period of years, D & T allegedly acquiesced to Livent's
insistence that all revenue be booked in 1997 — so long as a
corresponding amortization liability was also recorded. SH SAC ¶
87. Thus, the transaction inflated revenue and earnings before
interest, taxes, depreciation and amortization (EBITDA), but not
earnings, net interest, taxes, depreciation and amortization. SH
SAC ¶ 87.
Gottlieb purportedly negotiated a side letter with CIBC Wood
Gundy. SH SAC ¶ 90. The side letter provided two mechanisms for
CIBC Wood Gundy to recoup its fees and make significant profits.
If Livent exercised the repurchase option, Livent would repay all
fees, plus £ 112,500, plus any unpaid royalties; if Livent did not
exercise the repurchase option, Livent would pay CIBC Wood Gundy
an additional royalty equal to 10 percent of the adjusted gross
weekly ticket sales of the Broadway production of "Ragtime." SH
SAC ¶ 90. Under this arrangement, CIBC Wood Gundy was guaranteed
a minimum of an annualized 33 percent return on its original
investment, regardless of which option Livent chose. SH SAC ¶ 90.
The transaction was designed to provide Livent with "bridge"
financing until it could sell the production rights to a U.K.
investor after "Ragtime" opened on Broadway in early 1998. SH SAC
¶ 91. When it became clear in early August 1998 that Livent's new
management did not know about the side agreements, Gottlieb asked
the managing director of CIBC Wood Gundy who negotiated the
transaction not to disclose the side agreements to new management
so that Gottlieb could cause Livent to repurchase the rights from
CIBC Wood Gundy. SH SAC ¶ 91.
4. Dundee Realty Corporation
In May 1997, Livent acquired from the City of Toronto title to
lands adjoining the Pantages Theater (the "Pantages Place
Lands"). SH SAC ¶ 66. A portion of the Pantages Place Lands were
to be used for a new theater, an underground parking garage, and
retail space (collectively the "Pantages Place Project"). SH SAC
Under the master agreement for the project, dated June 30,
1997, Livent and Dundee created a joint venture company. SH SAC ¶
68. However, the parties entered into a related "Put" agreement
(the "Put Agreement") that entitled Dundee to withdraw from the
project and cause the joint venture, and therefore Livent, to
repay Dundee's investment. SH SAC ¶ 68.
In August 1997, the Audit Committee questioned Gottlieb about
the timing of the transactions and whether revenue had been
properly recognized for the second quarter of FY 1997. SH SAC ¶
70. According to the Shareholders, under GAAP, the Put Agreement
created a material contingency preventing recognition of the $7.4
million as income in 1997. SH SAC ¶ 77. Over Drabinsky's
objections, D & T was asked for an opinion with respect to
revenue recognition. SH SAC ¶ 70. Peter Chant ("Chant") of D & T
reviewed the contract and opined that, because the contract
contained a "put" agreement that would require Livent to buy back
the same rights at Dundee's request, the sale was not final and
revenue should not be recognized. SH SAC ¶ 70.
Gottlieb then represented to the Board and D & T that the Put
Agreement had been cancelled. SH SAC ¶¶ 71, 77. On this basis, D
& T informed Gottlieb that because the Put Agreement had been
removed in August 1997, revenue should be recognized only in the
third quarter. Gottlieb ignored this advice, and issued a press
release stating revenue for the second quarter which included the
development rights revenue. SH SAC ¶ 71.
When Bob Wardell ("Wardell") of D & T learned of the press
release, he contacted Gottlieb and demanded a meeting with
Livent's Audit Committee. SH SAC ¶ 72. At the meeting, Gottlieb
explained that in his opinion the Dundee contract had been
finalized in the second quarter, and he would procure
confirmation from Dundee and an opinion of counsel supporting his
position. SH SAC ¶ 72.
A few days later, at a second special meeting of the Audit
Committee with D & T present, Gottlieb presented the legal
opinion and purported confirmation from Dundee. SH SAC ¶ 73.
Nonetheless, D & T initially refused to accept the accounting
treatment and threatened to resign. The D & T representatives
then stepped out of the room. SH SAC ¶ 73.
Gottlieb then told the Audit Committee that D & T should
resign. Goldfarb said that would be unacceptable and that D & T's
resignation would cause too much damage to Livent's reputation.
SH SAC ¶ 74. After further discussion, the Board members agreed
that they would be willing to reverse the revenue recognition,
provided some of the revenue could be made up for in the second
quarter, and that a corrective press release could be issued in a
manner that saved face. SH SAC ¶ 74.
Chant and Wardell then came back in the room and the parties
agreed that Livent would reverse the $6 million revenue line, but
would also increase other revenue by $1.2 million, by reversing
an assortment of accrued liabilities. SH SAC ¶ 75. Livent then
issued a press release, which, according to the Shareholders, D &
T "accepted," and which stated in part that "Livent, Inc. . . .
has adjusted its accounting treatment for non-theatre real estate
transactions to be consistent with U.S. GAAP." SH SAC ¶ 75.
The Put Agreement issue rose again in discussion with the Audit
Committee during the year-end audit in April 1998. SH SAC ¶ 77.
On April 9, 1998, Gottlieb expressly stated to the Audit
Committee that no such agreement or arrangement existed and
provided a letter from the Chairman of Dundee as confirmation. SH
SAC ¶ 78-79. However, in a letter dated April 6, 1998 to Dundee's
President, Drabinsky and Gottlieb confirmed to Dundee that the
Put Agreement was in place and effective as between Livent and
Dundee. SH SAC ¶ 79. The letter read in pertinent part as
follows: "[W]e wish to confirm that notwithstanding [Dundee's
Chairman's] letter to me of April 4, 1998, a copy of which is
attached hereto, the "PUT" agreement referred to in [Dundee's
Chairman] letter is binding and effective and remains so in favor
of Dundee . . . as if it had never been cancelled." SH SAC ¶ 79.
The Shareholders allege that revenue recognition from this
transaction violated GAAP. First, according to the Shareholders,
any oral agreement to cancel the Put Agreement was contingent
upon Gottlieb renegotiating the joint venture agreement to ensure
to Dundee's satisfaction that Dundee's rights remained secure. SH
SAC ¶ 80. Thus, even if the Put Agreement was cancelled,
recognition of revenue was improper because the contract was not
a final, consummated sale. Second, On May 27, 1998, Gottlieb and
Dundee executed a new Put agreement. SH SAC ¶ 80. Gottlieb and
Drabinsky's April 6, 1998 letter "reinstating" the Put Agreement,
and the new May 27, 1998 Put agreement confirm that Gottlieb and
Drabinsky considered it to be binding on Livent. SH SAC ¶ 80.
Accordingly, the existence of the Put Agreement made the
transaction an investment that did not qualify for revenue
recognition under GAAP. SH SAC ¶ 80.
5. Pantages Theatre Naming Rights
Livent sought to recognize as revenue $12.5 million for a
purported sale of naming rights to the Pantages Theatre to AT & T
for the third quarter of fiscal 1997. SH SAC ¶ 81. Livent
purportedly sold AT & T the right to add its name on two
theaters, one of which had not yet been built. SH SAC ¶ 81.
Although there had not been any firm contract by the end of the
third quarter, Livent wanted to record the revenue immediately
based on its plans to allow the name change to the Pantages. SH
SAC ¶ 81.
In October 1997, Livent vice-president Maria Messina
("Messina") discussed the transaction with D & T's Wardell and
Chant, and all three agreed that the revenue could not be
recognized in the third quarter of 1997. Gottlieb, an accountant
by profession, retained Ernst & Young ("E & Y") for the purpose
of receiving an independent opinion on the naming revenue. SH SAC
¶ 82. While E & Y would not opine that the revenue could be
recognized in the third quarter of 1997, it did state that the
transaction could be considered within the third quarter. SH SAC
¶ 83. Gottlieb provided D & T with E & Y's opinion regarding the
transaction and asked that it be included in the accounting for
the third quarter. SH SAC ¶ 83.
D & T retained another accounting firm, Price Waterhouse, for
another professional opinion. Price Waterhouse met with Gottlieb
and AT & T and concluded that an oral contract could be
considered to have occurred in the third quarter of 1997. SH SAC
¶ 84. Price Waterhouse did not opine on the specific issue of
revenue recognition with respect to the oral contract. SH SAC ¶
After receiving this information, D & T acquiesced to recording
the naming revenue in the third quarter. SH SAC ¶ 85. The written
contract for the name change was thereafter signed in November
1997. SH SAC ¶ 85.
6. Dewlim Investments Limited
In 1996, Gottlieb negotiated the sale of an interest in the
production rights to "Show Boat" in Australia and New Zealand to
Dewlim Investments Limited ("Dewlim"), a British Virgin Islands
company, for $4.5 million. SH SAC ¶ 54. The original agreement
was dated October 21, 1996, and revised by agreement dated
November 3, 1997. SH SAC ¶ 54.
In October 1996, Gottlieb and Drabinsky orally promised
Dewlim's then owner, Andrew Sarlos, that Livent would repay the
fee Dewlim advanced for the production rights, plus 10 percent
interest. SH SAC ¶ 55. This arrangement is memorialized in a June
9, 1998 memo from Gottlieb to Drabinsky. SH SAC ¶ 55. It states
that as "an inducement" for the "Show Boat" transaction, "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." SH SAC ¶ 55. As a result
of this concealed arrangement, Livent improperly recorded as
revenue the present value of the fee, $4.2 million, in fiscal
1996; no revenue was recorded under U.S. GAAP in fiscal 1996 or
1997. SH SAC ¶ 55.
This was a related party transaction in two respects. First, at
the time of the transaction, Sarlos was a director of Livent and
chairman of Livent's Audit Committee. SH SAC ¶ 56. Additionally,
in October 1996, Gottlieb had pledged his personal Livent stock
to Dewlim as security for the $4.5 million loan. SH SAC ¶ 56.
Neither of these related party transactions was disclosed in
Livent's annual report for fiscal 1996 or 1997. SH SAC ¶ 56.
According to the Shareholders, even a cursory examination of
the Dewlim agreement — even without the side agreement — raised
red flags that Livent could not complete its terms of the
agreement to justify the recognition of $4.2 million in 1996.
The Audit Committee reviewed the contents of the Dewlim and
Pace agreements. SH SAC ¶ 59. During one Audit Committee meeting
Goldfarb and Emerson stated that the revenue recognition in the
agreements was improper, and some revenues should be amortized
over several years. SH SAC ¶ 59. However, based on a report by D
& T and representations of management, they agreed that the
revenue could be recognized in 1996. SH SAC ¶ 59.
D & T also reviewed the terms of the Dewlim and Pace
agreements, and knew that Messina opposed recognizing all the
revenue on the agreements. SH SAC ¶ 60.
D & T's United States affiliate initially refused to permit D &
T to file its Audit Opinion on Livent's 1996 U.S. GAAP financial
statement with the SEC, because it agreed with Messina that
revenue recognition had been improper with respect to those
transactions. SH SAC ¶ 60. A meeting was held in New York in
early 1998 to consider the proper accounting. Livent was
represented by Drabinsky, Gottlieb, and Livent vice-presidents
Robert Topol ("Topol"), Gordon Eckstein ("Eckstein"), and Messina
and D & T Canada was represented by Wardell and Chant. SH SAC ¶
61. D & T New York was represented by four partners. SH SAC ¶ 61.
B. FRAUDULENT MANIPULATION OF LIVENT'S BOOKS AND RECORDS
The Shareholders allege that beginning in 1994 and continuing
through the first quarter of 1998, Drabinsky and Gottlieb and
several of the other Livent officials engaged in a deliberate
manipulation of Livent's books and records, thereby understating
expenses in each fiscal quarter in order to inflate earnings, and
violating GAAP. By redacting expenses on losing shows, Drabinsky
and Gottlieb were able to portray the productions and Livent as
financially successful. SH SAC ¶ 105. In quarterly periods, this
enabled Drabinsky, Gottlieb and Topol to meet the earnings and
operating projections provided to Wall Street analysts. SH SAC ¶
Specifically, the Shareholders claim that Livent's managers
engaged in three manipulative devices to falsify Livent's books:
(a) transferring preproduction costs for shows to fixed asset
accounts, which materially understated expenses; (b) physically
erasing expense and liability entries from the Company's general
ledger; and (c) transferring costs from a currently running show
to another show with a longer amortization period, which again
materially understated expenses. SH SAC ¶¶ 96-114.
Livent transferred preproduction costs for shows to fixed asset
accounts. SH SAC ¶ 96. Preproduction costs, such as costs for
advertising, sets and costumes, were incurred prior to the
opening of a production. SH SAC ¶ 96. According to Livent's
accounting policies, preproduction costs were amortized, and thus
expensed, once a production begins and only for a period not to
exceed five years. SH SAC ¶ 96. Fixed assets, in contrast, were
depreciated over their useful life, not to exceed forty years. SH
SAC ¶ 96. As a result, Livent significantly decreased expenses,
and thus inflated its reported income, by improperly depreciating
preproduction costs over a much longer period of time. SH SAC ¶
96. For example, in 1997 Livent transferred preproduction costs
and certain show operating expenses totaling $15 million,
representing six different shows in 30 different locations, to
three different fixed asset accounts. SH SAC ¶ 96. By this
manipulation, Livent violated GAAP and its own accounting policy.
SH SAC ¶ 96.
Livent also physically erased expense and liability entries
from its general ledger, moving these entries from the current
quarter to future periods. SH SAC ¶ 97. Livent maintained a
separate set of books, called the "Expense Roll," that internally
tracked the amount of these eliminated entries. SH SAC ¶ 98. This
manipulation allowed Livent to falsely report significant
reductions in show expenses, with attendant increases in profits.
SH SAC ¶ 98. For example, expenses rolled from the first to the
second quarter of fiscal 1997 totaled $6.5 million. SH SAC ¶ 98.
According to the Shareholders' theory, any auditor or Audit
Committee member who reviewed Livent's production schedule, or
even read the trade publications or Variety magazine, would
have noticed clear red flags of this accounting manipulation. The
Shareholders maintain that: D & T and the Audit Committee surely
were aware of Livent's announced policy that costs of cancelled
shows would be expended at the time of cancellation; the fact
that particular shows had ended their runs was well known; and
absence of any writedown at the time of the show's end
necessarily meant that Livent was not following its own stated
accounting policy, let alone complying with GAAP. SH SAC ¶ 100.
As had been done with the "Expense Rolls," Livent maintained a
separate sets of books called the "Amortization Roll," to
internally track the amount of amortization moved from current to
future periods. SH SAC ¶ 101.
The cumulative impact of these accounting irregularities caused
Livent to understate expenses by $3.5 million in fiscal year
1995, $18 million in fiscal year 1996, and $8.5 million in fiscal
year 1997, and to overstate expenses by $2.7 million in the first
quarter of fiscal year 1998. SH SAC ¶ 102.
The Shareholders assert that each of the manipulations
described above was carried out by Livent's senior management and
accounting department personnel. SH SAC ¶ 104. On a quarterly
basis, Diane Winkfein ("Winkfein") and D. Grant Malcolm
("Malcolm") — Livent senior controllers — produced a general
ledger showing quarterly financial results to Eckstein and
Christopher Craib ("Craib"), another senior controller who had
joined Livent from D & T in June 1997. Craib then placed this
information into summary format for Drabinsky, Gottlieb,
Eckstein, and Topol. SH SAC ¶ 105. This group, along with
Messina, then met to review the results. SH SAC ¶ 105.
During these meetings, Drabinsky, Gottlieb, Eckstein, Topol,
and Messina agreed on the quantity of top-line adjustments to be
made to Livent's books to achieve the results they desired. SH
SAC ¶ 102. Generally, Drabinsky directed that certain adjustments
be made. SH SAC ¶ 106. Eckstein noted the desired adjustments,
and communicated the adjustments to Winkfein and Malcolm,
instructing them to make the adjustments in such a way as to give
the appearance that they were original entries. SH SAC ¶ 106.
Beginning in 1996, Malcolm communicated the transfers to fixed
asset accounts to Tony Fiorino ("Fiorino"), Livent's theater
controller, who recorded the adjustments in dummy theater cost
accounts. SH SAC ¶ 106.
Due to the sheer magnitude of the manipulations, it was
necessary to track results both before and after the top-line
adjustments were made. SH SAC ¶ 108. At Eckstein's direction,
Malcolm maintained computer files of the adjustments that tracked
details of expense capitalization, expense rolls, and
show-to-show cost transfers from 1995 to the first quarter of
1998. SH SAC ¶ 108. Fiorino also separately tracked the expenses
that had been improperly transferred to theater construction
accounts by creating a range of accounts in the general ledger
and thereby measuring the true costs of Livent's theater
construction program. SH SAC ¶ 108.
To make the adjustments, Malcolm identified individual invoices
to alter. SH SAC ¶ 111. Then, on an invoice-by-invoice basis, he
and Winkfein changed the distribution dates or account codes of
these invoices, deleting the original entries from Livent's
general ledgers and reposting fraudulent information. SH SAC ¶
111. This process had the effect of making the adjusted entries
appear as original transaction figures. SH SAC ¶ 111.
Beginning in mid-1997, Eckstein directed Craib to prepare
quarterly schedules containing a comparison of actual and
budgeted results. SH SAC ¶ 109. These schedules, which contained
the "Expense Roll" and the "Amortization Roll," quantified
certain of the accounting manipulations. SH SAC ¶ 109. Drabinsky,
Gottlieb, Topol, Eckstein, and Messina met to review these
schedules. SH SAC ¶ 109. Beginning by at least October 1997,
Messina prepared pre- and post-adjustment charts reflecting
transferred amounts in detail, which she distributed to
Drabinsky, Gottlieb, Topol, and Eckstein. SH SAC ¶ 109. After
these meetings, Winkfein, Malcolm and Fiorino made adjustments to
various accounts in the balance sheet and income statement,
including expense categories, specific shows and fixed asset
accounts. SH SAC ¶ 110.
The amount and magnitude of the adjustments eventually grew so
great that it was not possible to make individual changes to
Livent's general ledger. SH SAC ¶ 112. Eckstein directed Malcolm
to instruct Livent's information services department to write a
computer program that would allow the accounting staff to
override Livent's accounting system. SH SAC ¶ 112. Livent's
information services manager wrote computer programs to enable
the accounting staff to execute adjustments on a batch basis. SH
SAC ¶ 112.
With respect to the transferral of expenses from one show to
another, Livent's policy was to expense costs of canceled shows
at the time of cancellation, and it was well known when a
particular show had ended its run. SH SAC ¶ 100. That no
writedown was taken at the end of a show's run meant, the
Shareholders contend, that Livent was not following its own
accounting policy, and that D & T either knew it or was reckless
in failing to recognize it. SH SAC ¶ 100. With respect to all of
the accounting manipulations, the magnitude of the top-end
adjustments was so great, and the existence of red flags so
clear, that the misconduct should have been detected through
independent confirmation procedures carried out in an audit
conducted in accordance with Generally Accepted ...