July 6 (Bloomberg) -- Garth Drabinsky and Myron Gottlieb, once Broadway producers with hits like “Ragtime,” deserve an 8- to 10-year prison sentence for defrauding investors of millions of dollars, prosecutor Alex Hrybinsky said today at the start of a hearing in Toronto.

Drabinsky, 59, and Gottlieb, 65, were charged by police in October 2002 with lying about finances at the defunct theater producer Livent Inc. for nine years as they raised about C$500 million ($431 million) to buy theaters in Toronto, Chicago and New York and paid for increasingly lavish productions, including “Fosse” and “Phantom of the Opera.”

“This is an enormous fraud,” Hrybinsky said at the hearing. “A sentence of 8 to 10 years is merited.”

Ontario Superior Court Judge Mary Lou Benotto found both men guilty of two counts of fraud and one count of forging a document on March 25, more than 10 years after police began investigating what they called one of the biggest fraud cases in Canadian history. Each forgery count carries a maximum jail term of 14 years, and the maximum prison sentence for fraud is 10 years.

Drabinsky’s lawyer Edward Greenspan urged the judge to consider his client’s contribution to Canadian theater, Toronto’s economy and to use compassion in sentencing considering Drabinsky has suffered from the effects of polio since the age of 4 that left him partially disabled and in pain.

“It makes incarceration more difficult,” Greenspan said. “In a practical sense, it makes it more punitive.”

Conditional Sentence

Greenspan suggested that Drabinsky should be given a conditional sentence of two years, less a day, of which a year could be served under house arrest and three years probation.

The two men are unlikely to get lengthy prison terms, though the judge must impose some jail time to show that fraud is a serious offense and deter people from doing the same in the future, said Richard Powers, a lawyer and executive director of MBA programs at the University of Toronto’s Joseph L. Rotman School of Management.

“If it doesn’t include jail, it’ll be considered a joke,” Powers said in a telephone interview. “To expect anything over four years is unrealistic.”

The judge may show leniency because Drabinsky and Gottlieb haven’t been convicted previously of a crime, Powers said.

Some people may find a request for a conditional sentence ridiculous, Greenspan said. He urged the judge to consider it.

Pleasing the Mob

“It’s not a matter of pleasing someone in the mob,” he said at the conclusion of today’s hearing. “You have the discretion.”

Gottlieb’s lawyer, Brian Greenspan, told reporters he would ask for a conditional sentence for his client tomorrow, when he makes his submissions. Brian and Edward Greenspan are brothers who practice with Greenspan Humphrey Lavine and Greenspan White, respectively.

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

“The creative success you achieved through your companies was spectacular, but the trial wasn’t about that,” Benotto told the defendants on March 25. The judge said the men didn’t enrich themselves personally in the fraud.

Edward Greenspan spent more than two hours reading excerpts from 48 letters sent to the judge, citing Drabinsky’s contributions to the entertainment industry, Toronto and society.

Praise from Actors

Actor Christopher Plummer described Drabinsky as “exceedingly generous” and an “optimist, inventor, achiever,” in a letter.

Actress Martha Henry said of Drabinsky: “He will, and should, live to flourish again.”

Others who praised the theater producer were ballerina Karen Kain, architect Moshe Safdie and former Toronto mayor David Crombie.

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. has an extradition request on hold, pending the outcome of the trial in Toronto.

Their case has been compared with that of Conrad Black, the former chairman of newspaper publisher Hollinger International Inc. Black was sentenced to 6 1/2 years in prison following a trial in Chicago where he was convicted of defrauding company shareholders of $6.1 million and obstructing justice.

Black’s Sentence

“Conrad Black’s sentence would have been somewhat more lenient if he were prosecuted in Canada,” said Alan Mark, chairman of the Toronto Litigation Group at Ogilvy Renault, who wasn’t involved in the Livent case. “There was a lot of tension between sentencing practices in Canada and the U.S. in Hollinger.”

Black’s conviction will be reviewed by the U.S. Supreme Court. He has asked to be freed on bail pending the high court hearing, having spent the last 16 months in a Florida jail.

“This is not America where you look at sentencing guidelines and as a judge all you use is a calculator,” Greenspan said. “We recognize here that sentencing is a human process and there is nothing wrong with compassion.”

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.

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 Financial Statements

Drabinsky and Gottlieb were convicted of falsifying Livent financial statements 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.

Drabinsky quit as chief executive officer in April 1998, saying he wanted to concentrate on his duties 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 now is part of Live Nation Inc.

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

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

Last Updated: July 6, 2009 17:59 EDT