Court upholds $118 million award against Livent auditor Deloitte

TORONTO -- The corporate auditor to the once high-flying Livent theatre company run by disgraced mogul Garth Drabinsky was partly responsible for the hundreds of millions of dollars creditors ended up losing, Ontario's top court ruled Friday.

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In upholding an $85.6-million award against Deloitte and Touche -- $118 million with interest -- the Court of Appeal sided with a judge who found the auditor had been negligent in failing to detect, and act on, the fraudulent behaviour of Drabinsky and his partner, Myron Gottlieb, in the 1990s.

After all, there had been numerous red flags for several years that Deloitte essentially ignored, the court found.

"Deloitte knew that Drabinsky and Gottlieb were aggressive entrepreneurs who pushed the envelope in terms of accounting and financial measures," the Appeal Court said in a 100-page judgment.

"It is more likely than not that a careful and objective investigation into Livent's financial statements, pursued with 'an attitude of professional skepticism,' would have revealed the fraud."

Under the flamboyant Drabinsky, Livent Inc. brought popular shows like "Phantom of the Opera," "Show Boat," "Kiss of the Spider Woman," and "Joseph and the Amazing Technicolor Dreamcoat" to stages across North America. But the apparent success was based on a massive sleight of hand that included cooking the books, kickbacks and manipulated expenses.

The shenanigans were discovered in mid-1998 when a new management team took over. Within months, Livent went bust -- leaving investors and banks about $500 million out of pocket. Drabinsky and Gottlieb went to prison for fraud and forgery.

Livent's bankruptcy receiver sued Deloitte -- which had audited the company's books from 1989 through to 1998 -- on behalf of those owed money.

In a novel ruling that followed a 68-day trial in April 2014, Superior Court Justice Arthur Gans found Deloitte largely liable for Livent's losses after August 1997, saying company creditors had been hapless victims of a fraud the auditor should have brought to their attention had it done a proper job.

Barring such a claim, Gans said, would deprive innocent parties a remedy for an auditor's negligence in those cases where the services of an auditor are most critical -- namely, the detection of wrongdoing by high-level management.

Deloitte appealed, arguing among other things that it should not have been held responsible for the fraud, or for the fact investors lost money.

The Appeal Court disagreed, siding with the judge's finding the auditor was liable for most of the post-August 1997 losses.

Deloitte knew the impresarios were using Livent's financial statements to help them raise money but failed miserably in scrutinizing those statements, the Appeal Court found. In addition, the court rejected Deloitte's argument that Livent's losses all flowed from the "inherent vicissitudes" of its risky business rather than from its failure do to a proper audit.

"The trial judge distinguished between losses generated from Livent's unprofitable but legitimate theatre business, operating within the changed environment, and those losses attributable to Deloitte's negligence," the Appeal Court ruled.

The court also dismissed a Livent cross-appeal that sought to extend the period of losses for which Deloitte should have been liable.

In a statement, a spokeswoman for Deloitte said it needed time to review the decision before deciding on any next steps.

"The audit and legal issues in this case are exceptionally complex and important -- not only to the audit profession but to the broader business community," Emily Richardson said.


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