AN UGLY REAL-LIFE DRAMA FOR PRODUCER GARTH DRABINSKY

Garth Drabinsky's torturous fall from grace at Broadway production company Livent Inc. over the past four months has been one of the theater world's most spectacular declines. The wunderkind who brought the current hit Ragtime to the elegantly refashioned Ford Center in New York City had long been known as a lavish spender. But his indefinite suspension in August as Livent's creative director and vice-chairman -- amid allegations of "serious" accounting irregularities -- stunned theater insiders. Lately, it has spawned frenetic legal action.

Now, the tale is getting really nasty, as some of that court action is affording a peek behind the curtain on Drabinsky's disturbing final days at Livent. Papers filed in recent days in provincial court in Toronto, and obtained by Business Week, allege duplicity among supposed friends and deliberate deception and coverup of financial results by trusted executives. They depict a Drabinsky who, in his own words, was left "completely besieged, violated, humiliated and distraught." But they also portray a relentless financial sleuth, newly appointed Livent Executive Vice-President Robert B. Webster, who drew crucial hidden financial information out of reluctant staffers. And the papers allege that Drabinsky is now laboring to keep more information from coming to light.

The claims and counterclaims appear in affidavits filed by Drabinsky and Webster in a case Drabinsky has brought against accounting firm KPMG and its financial probing firm, KPMG Investigation & Security Inc. Drabinsky's core claim in the complaint is that KPMG should be stopped from investigating Livent further because it has a conflict of interest: The firm for nearly 20 years has handled Drabinsky's personal accounting needs. Further, Drabinsky is seeking some $17 million in damages from the outfit for grief it has allegedly caused him already.

Drabinsky fired the first salvo in a Sept. 20 affidavit that suggested his feeling of being betrayed by a friend of 17 years, Roy Furman. The Wall Street financier had been brought into Livent in June, at the behest of investor Michael Ovitz and Livent director Thomas Lee, to take the chief executive officer's post from Drabinsky. Publicly, at least, Drabinsky had warmly welcomed Furman, whom he says he had counted as a friend since 1981. While yielding the CEO's post to Furman, Drabinsky framed the change as one that would let him concentrate on what he loved most, the creative side of the business. For his part, Furman had warmly welcomed Drabinsky's continuing role at the company.

But soon, according to Drabinsky, Furman took a far cooler stance toward him. On Sunday, Aug. 9, the two men attended the opening performance of Fosse, a new musical dance show debuting in Toronto before its move into the U.S. They even attended a cast party afterward. Drabinsky says Furman at the time told him that the production would be "a spectacular asset" for Livent. By Drabinsky's account, there was no hint of the trouble brewing between the men. The trouble came clear only at 5:30 a.m. the next morning when, Drabinsky says, Furman phoned him at home to say he was going to be suspended.

Later that morning, Drabinsky says he was formally given the bad news at the office of Livent's new law firm in Toronto, Stikeman Elliott. According to Drabinsky, Furman told him there that he had been suspended pending the outcome of an investigation of Livent's financial records. (Furman has yet to answer Drabinsky's claims.) Drabinsky, Livent's founder, says he was also told he should not try to enter Livent's offices or talk with any company staffers about the firm's business, pending the outcome of the probe.

Embarrassingly, the news of Drabinsky's suspension, along with that of Vice-President and longtime Drabinsky associate Myron Gottlieb, was made public promptly that morning. A Livent press release damningly reported that "an internal investigation has revealed serious irregularities" in company records that had been uncovered late the prior week. The release, which made news across North America, said "millions of dollars" were involved and added that it was "virtually certain" that results for 1996, 1997, and early 1998 would have to be restated.

The prior week, apparently unknown to Drabinsky, was filled with unsettling allegations. Webster, the newly minted executive vice-president and former KPMG partner from Los Angeles, detailed the closed-door revelations in his countering affidavit, filed on Sept. 25. Webster had been brought in by Hollywood powerhouse Ovitz in July, after Webster's firm had conducted a due-diligence review of Livent's books in the spring. Ovitz demanded that review before pumping an emergency $20 million into the company in exchange for equity.

Webster lays out an unseemly tale. When he was preparing the second-quarter financial results for Livent, for instance, he says he found staffers reluctant to deal with him. He got answers that "seemed incomplete or somewhat evasive." And he says he was told by members of Livent's accounting department that Drabinsky was repeatedly telling them not to provide certain information until Drabinsky had reviewed it. Then, on Aug. 6, he says, came the bombshell: Five members of the Livent accounting staff came forward to say they had information that "cast doubt" upon the veracity of Livent's numbers. He and Livent lawyers questioned the five in depth on Aug. 7 and 8, when, he says, "it became apparent that Livent's financial statements had been materially misstated."

Ironically, it was on the opening night of Fosse that directors of Livent met in person and by phone. They conspicuously left Drabinsky and Gottlieb out. After hearing details of the alleged financial misstatements, the directors agreed to suspend the two men the following morning. The men were then advised of the suspension and, according to Webster, given a chance to be heard about the alleged irregularities.

Stunningly, Webster claims that Drabinsky admitted to the irregularities. According to Livent, these problems involved improper recognition of revenue from shows and failures to record expenses. While no money is said to be missing, the accounting for the funds is at issue. Webster claims that Drabinsky, in meeting with him on Aug. 10, said he was aware of accounting irregularities but claimed that big write-downs taken by Livent in the fourth quarter of 1997 and the first quarter of 1998 were intended to make the books right. Webster says that the write-downs had nothing to do with the financial misstatements.

By Drabinsky's account, the weeks following the suspension were anguishing. Locked out of his office, his pay suspended, unable to promptly gain access to documents and personal artwork, he says he endured "the worst two weeks of my life." His standing in the theater world was in tatters. "Everyone I knew in the theatrical and business world was aware of the fact that I had been 'suspended,' he says.

But now Drabinsky is fighting back. His lawsuit against KPMG, for instance, not only demands compensation but also asks that KPMG be halted from its ongoing probe. The fact that KPMG has been his personal accounting firm for nearly 20 years, he says, makes for a fatal conflict of interest.

Webster, however, counters that the investigation must go forward. He says a "Chinese wall" separates the part of KPMG that handled Drabinsky's accounting and the investigative unit. The units will not share information, he maintains. And Webster says Drabinsky's bid to have KPMG stopped "is in reality, simply a self-interested attempt to frustrate and delay Livent's investigation into serious accounting irregularities which I believe... will ultimately be shown to have been known to and directed by him."

Almost certainly, the legal skirmishing is likely to accelerate and its nasty tone worsen. Livent and/or Drabinsky are both targets of at least 10 shareholder lawsuits already, since the company's stock remains suspended from trading until credible financial reports are filed. And Drabinsky's suspension is looking more and more like a termination, since a successor has been named to the creative role at the company. Drabinsky is expected to sue the company for abrogration of his employment contract.

Ugly as the fight has gotten, the final acts in the Livent story could prove still more vicious -- and theatrical. One Livent lawyer has already invoked Shakespeare in a letter about Drabinsky's attitude toward KPMG, quoting from Henry VI to say "Suspicion always haunts the guilty mind; The thief doth fear each bush an officer." Just who is guilty of what, however, has not been made clear yet.

By Joseph Weber in Toronto