March 25 (Bloomberg) -- Garth Drabinsky and Myron Gottlieb, once Broadway moguls with hits like “Ragtime,” were convicted of defrauding investors of about C$500 million ($405 million) in the defunct theater producer Livent Inc.

Ontario Superior Court Judge Mary Lou Benotto delivered the verdict today in Toronto, more than 10 years after police began probing what they called one of the biggest fraud cases in Canadian history. She found both men guilty of two counts of fraud and one count of forging a document.

“The creative success you achieved through your companies was spectacular, but the trial wasn’t about that,” Benotto told the defendants. “You knew what was happening” when Livent was misrepresenting its finances, she said.

Drabinsky, 58, and Gottlieb, 65, were charged by police in October 2002 and accused of lying about Livent’s finances for nine years as they raised money to buy theaters in Toronto, Chicago and New York and paid for increasingly lavish productions, including “Fosse” and “Phantom of the Opera.”

Each fraud count carries a maximum jail term of 14 years, and the maximum prison sentence for forgery is 10 years. Lawyers and Benotto plan to meet April 8 to discuss a sentencing date.

“It’s been an 11-year struggle, so it takes a little time to react,” David Roebuck, one of Drabinksy’s lawyers, said following the verdict. Drabinsky declined to comment as he left the court house.

Relief to Law Enforcement

The successful prosecution may embolden Canadian prosecutors and securities regulators to press ahead with other cases, after having been criticized for inefficient enforcement of securities law, Alan Mark, chairman of the Toronto Litigation Group at Ogilvy Renault, said in a telephone interview.

“This comes as a relief to law-enforcement authorities,” he said. “They would’ve felt embarrassed” had the defendants been acquitted.

Drabinsky and Gottlieb founded Livent in 1990, growing it into North America’s biggest theater producer.

Hillary Clinton, the former U.S. first lady and now Secretary of State, wrote Drabinsky in 1998 complimenting him for helping stage a celebration weekend for the 150th anniversary of the Democratic National Committee where “Ragtime” was the theme, Benotto noted in her 84-page ruling.

‘Deceitful, Dishonest’

Livent “reflected favorably on all of us in Canada,” Benotto said. In running the company though, “they were deceitful, they perpetrated a falsehood and reasonable people would consider them dishonest,” she said.

Drabinsky and Gottlieb are fugitives from U.S. law, having being indicted in 1999 on similar fraud charges by a federal grand jury in New York. They have refused to appear in a U.S. court. The U.S. had put an extradition request for them on hold, pending the outcome of the trial in Toronto.

Drabinsky and Gottlieb illegally pocketed millions of dollars by faking invoices and hiding production costs, prosecutor Robert Hubbard told Benotto. The men chose to be tried by a judge, rather than a jury.

The trial began May 5 and, after a midyear break, concluded Nov. 3, when lawyers for Drabinsky and Gottlieb announced they wouldn’t present any evidence. Neither of the accused testified.

Gordon Eckstein, former vice president of finance at Livent, testified that he was aware of the fraud and worked under orders from the two accused.

19 Tony Awards

Another lawyer for Drabinsky, Edward Greenspan, and Gottlieb’s lawyer, Brian Greenspan, argued that Eckstein directed the fraud on his own and the criminal case was based on false testimony of former executives.

Drabinsky productions were nominated for 61 Tony Awards, winning 19 times, according to American Theatre Wing, the awards’ founder. “Kiss of the Spider Woman,” produced by Drabinsky, won three Tonys, including Best Musical.

Drabinsky was also producer and executive producer of the 2007 television miniseries “Triple Sensation,” in which he played himself as a panelist judging Canadians who were taking part in a singing, acting and dancing competition.

Livent, an acronym for Live Entertainment, sold shares in an initial public offering on the Toronto Stock Exchange in 1993. The stock peaked at C$18.25 in 1996, giving the company a market value of C$287 million. Two years later, police started investigating allegations of accounting irregularities and the production company went bankrupt.

Falsifying Finances

Drabinsky and Gottlieb were convicted of falsifying Livent finances from 1989 to 1998, while they sold shares, warrants, debentures and senior notes worth C$460 million.

They also obtained lines of credit worth as much as C$60 million from the Royal Bank of Canada, Bank of Nova Scotia and the Canadian Imperial Bank of Commerce.

Investors, represented by Dorian King and Diane King, sued in New York in 1998, alleging misrepresentation in a 1997 registration statement filed with the U.S. Securities and Exchange Commission in support of the sale of unsecured notes.

A year later, Livent restated financial results, reducing net income by $85 million. The company became insolvent and the unsecured notes were worthless.

U.S. District Judge Victor Marrero ordered Drabinsky and Gottlieb to pay $36.6 million in 2005 to the noteholders who lost their investments. The judgment was upheld by courts in Ontario, and Canada’s Supreme Court last month dismissed Drabinsky’s appeal of the rulings.

Drabinsky quit as chief executive officer in April 1998, saying he wanted to serve as chief creative officer. Two months later, Michael Ovitz, former president of Walt Disney Co., bought a 12 percent stake in Livent and a new management team took over. Drabinsky and Gottlieb were fired in November 1998.

SFX Entertainment Inc., a unit of Clear Channel Communications Inc., bought Livent’s theaters and rights to productions in 1999 for $98 million. The Clear Channel unit was spun off and is now part of Live Nation Inc.

The case is between Her Majesty the Queen and Garth Drabinsky. Ontario Superior Court of Justice (Toronto). P592/06.

To contact the reporter on this story: Joe Schneider in Toronto at jschneider5@bloomberg.net.

Last Updated: March 25, 2009 15:23 EDT