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Canadian Court Turns New Leaf with Livent Drabinsky May Seek Non-U.S. Jurisdiction

Following a court decision announced Oct. 22, Livent received a crucial report from the accounting firm KPMG Canada, which the Canadian theatre production company believes will provide an "objective account of the facts" in its effort to restate its financials. Livent is defending a class action suit in the United States filed by shareholders who claim that accounting irregularities attributed to former Livent executives had diminished their stock values.

The KPMG report was made available to Livent after Canada's Ontario Court (General Division) ruled against ousted Livent founder and chief executive Garth Drabinsky, who had sought to block the report's release. Drabinsky had argued on the grounds that the accounting firm was hopelessly conflicted because KPMG Canada's U.S. affiliate, KPMG Peat Marwick, has acted as Drabinsky's personal accountant for as long as 20 years.

In early October, Ontario Court Justice John Ground ruled in favor of Drabinsky, granting his request for an injunction. In keeping with that decision, the court allowed Drabinsky's camp a review of the report.

"The court let us review the report and comment on it," said Eddie Greenspan, attorney for Garth Drabinsky. Mr. Greenspan added that the court limited the distribution of thereport. "It cannot be released publicly," he said.

Livent was equally optimistic in its response.

"We are very pleased with the Court's decision enabling KPMG to deliver its report to Livent," reads a Livent statement. "This report is what the company has been seeking all along‹an objective account of the facts. With this information, Livent and the company's independent auditors, Deloitte & Touche, now can conclude their work of restating the company's financial results."

On Aug. 10, Livent co-founders Drabinsky and Myron Gottlieb were suspended. Reports indicated that there were serious accounting irregularities uncovered at the firm by its new owners, led by majority shareholder Michael Ovitz.

The media reported on Drabinsky's tendency to be a big spender, as well as on allegations of creative accounting practices: costs and income were said to be recorded in two separate sets of books, a practice described as "cooking the books."

Livent retained KPMG Canada later in August to conduct a comprehensive review of Livent's financial records. Soon afterward, the first of several class action lawsuits were filed.

The next development in the Livent story is expected to come when Judge Sweet, of the U.S. District Court in the Southern District, conducts a procedural hearing on Nov. 18. At that time, counsel for the various class action plaintiffs will be on hand when the court reviews such factors as which lawyers represent the plaintiffs with the greatest number of shares. Based on this information, Judge Sweet will choose a lead counsel in the class action lawsuit.

Last week's Canadian court decision in favor of Livent receiving the KPMG Canada report had some bearing on the U.S. lawsuits, though it was only peripheral.

"We're waiting to see the restated financials," said Arthur Stock, of the Philadelphia law firm, Berger & Montague. "If they had needed a new accounting firm, it would have taken a little longer."

Stock is not focusing too closely on Drabinsky's moves at present. "He doesn't have anything to do with my case now," Stock said, referring to Drabinsky's effort to block the KPMG report release in Canada. "He's Canadian and being Canadian he figured he stood a better chance there. After all, he chooses where he files his case as a plaintiff. He may make an argument that our case be dismissed so that he can argue in Canadian court, but I don't think he'd win. He may say the U.S. court has no connection to the case, but it does because Livent has U.S. operations and U. S. investors."

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