Theater Impresario Accused of Financial Irregularities

Flamboyant theater impresario Garth Drabinsky and a top colleague were suspended Monday after “serious irregularities” were uncovered in the financial records of Livent Inc., one of Broadway’s top producers, now controlled by onetime Hollywood superagent Michael Ovitz.

Livent’s suspension of its founder and creative force shook the theater world, and came after a new Ovitz-picked management team began raising questions late last week about Livent’s financial practices. Livent said that improper accounting of revenue and expenses “appear to involve millions of dollars.” Also suspended was longtime Drabinsky lieutenant Myron Gottlieb, Livent’s former president.

The live entertainment business has been going through a period of change as Wall Street and major companies such as the Walt Disney Co. become enamored of its financial potential. The involvement of big financial players has brought about something of a culture clash between by-the-book managers and the more entrepreneurial styles of theater producers.

Under Drabinsky, Toronto-based Livent has emerged as a major force in North American theater with such productions as “Ragtime”--which had its U.S. launching in Los Angeles--”Show Boat” and “Kiss of the Spider Woman.”

Drabinsky, now Livent’s vice chairman, has become a major part of New York’s theater life, spending lavishly on the new Ford Center for the Performing Arts and bringing his blockbuster-scale productions to Broadway. “Ragtime” is now the highest-grossing production on Broadway, bringing in nearly $900,000 a week.

Showmanship and Creativity Lauded

Although he has been lauded for his creativity and showmanship, Drabinsky’s reputation as a businessman has for years been tarnished by his free-spending ways as well as questions about his financial methods.

In 1989, Drabinsky and Gottlieb were forced out of the Toronto-based movie theater chain Cineplex Odeon Corp. amid battles with entertainment conglomerate and major shareholder MCA Inc. in court documents, executives at MCA, now Universal Studios Inc., publicly questioned the financial reporting practices at Cineplex under Drabinsky.

Drabinsky was first confronted with the Livent probe and learned of his suspension at a meeting of company directors Monday in Toronto. The night before he attended the gala premiere of “Fosse: A Celebration in Song and Dance,” a new Broadway-bound musical that will play in Los Angeles at the Ahmanson Theatre in October.

Sources described the allegations as falling into three general categories, including cutting secret side deals in contracts that could substantially change the financial consequences for Livent. A second allegation, sources said, is improperly inflating profits by booking expenses that normally would have to be deducted from earnings immediately so that they could be written off over a longer period.

The third is shifting expenses from one production to another so that deducting those costs could be postponed, thus inflating profits.

Livent said “it seems virtually certain” that the company will have to restate its entire financial results for 1996, 1997 and the first quarter of 1998. The company also warned that the discovery could cause it to default on its debt.

Questions were first raised late last week as the company’s new managers--who took over June 12 in the wake of the Ovitz deal--were preparing the company’s second-quarter earnings report. Livent was suddenly in the awkward position of having to disclose the embarrassing problem just as it was unveiling “Fosse” to favorable reviews.

In a statement, Drabinsky and Gottlieb said they “are surprised and dismayed at concerns” raised. They added that the company’s accounting practices were reviewed earlier this year when the new management group led by Ovitz, Boston investor Thomas Lee and former Wall Street investment banker Roy Furman took control.

“New management was provided ample opportunity, prior to the closure of the transaction, to raise any accounting concerns,” the two said in a statement. Drabinsky and Gottlieb did not deny the allegations in the statement, but did say, “We have insufficient details to respond more fully.”

The chief question of entertainment executives Monday was why Livent’s new managers did not spot the financial problems when they reviewed Livent’s books during the spring before investing--especially when past questions had been raised about Drabinsky’s financial methods.

Livent executives declined to respond to the question, but sources say they believe that they were deceived and that they were not given access to all materials until they were on the inside of the company. Canadian regulators suspended trading in Livent’s stock, saying they wanted to question Livent executives further.

Major Setback for Ovitz

The development is a major setback for the plans of Ovitz, who could not be reached for comment. His investment in Livent drew considerable attention as Ovitz returned to the entertainment world after a 16-month hiatus. Ovitz was Hollywood’s top agent through the 1980s and early 1990s, leaving as head of the Creative Artists Agency for an unsuccessful 15-month stint as president of Disney under Michael Eisner that ended in 1996.

In April, Ovitz announced that he was getting back into the business by investing in Livent in a deal that would give him effective control of the company. Ovitz also persuaded Furman, a prominent entertainment investment banker, to leave Wall Street and run the company as chief executive.

In a statement, Furman said, “The board and I are obviously disturbed and upset about what we have uncovered, none of which was previously revealed to the company’s board or audit committee.”

Since Livent was essentially a company that carried out the creative vision of Drabinsky, some observers wondered what would be left without the Canadian producer. But one chief attraction of Livent to Ovitz, who invested $20 million in the company, was its lucrative real estate holdings in New York, Chicago and Canada.

Drabinsky still has many supporters in the theater community. Producer Jim Freydberg mourned the possible loss of Drabinsky to the theater.

“I think it’s premature to make any assumption that anything has gone on, but this is a serious blow to Broadway if it would mean that Garth would be silenced in any way. Men of his creative vision are rare,” he said.

Bates is a Times staff writer in Los Angeles. Pacheco is a writer in New York and a frequent contributor to The Times.