The co-founders of Livent Inc. have been found guilty of two counts of fraud and one of forgery in their business dealings with the now-defunct company.

The guilty verdict against Garth Drabinsky and Myron Gottlieb was handed down Wednesday morning after a trial that lasted nearly 11 months.

The theatre impresarios had pleaded not guilty to all three charges.

In handing down the verdict, Justice Mary Lou Bennotto called the men's creative work and contribution to the country's entertainment industry and artistic community "spectacular," saying their work "reflected favourably on all of us in Canada."

However, she was quick to point out that the trial was not about their contributions but about the "fraudulent" accounting practices at Livent.

A written verdict explaining the reasons behind the convictions was also distributed. It said the duo "systematically manipulated" the books in order to increase profits.

"The accounting system was fraudulent," Benotto told the packed courtoom just after 10 a.m. "You knew what was happening."

Family members of the accused wept and hugged the men after the verdict was read out. The men, who were grim-faced, left court in silence after spending some moments with their family.

Eddie Greenspan, who represented Drabinsky in court, exited the courtroom into an awaiting car without commenting to the horde of reporters waiting outside.

Greenspan later told The Canadian Press that he would not comment until after reading Benotto's 80-page decision.

"We have not read it and we need an opportunity to review it carefully," he said. "We have to do that before we can make any comment."

David Roebuck, who was also part of the team of lawyers representing the men, paused briefly in front of the media, but only to say that he needed time to reflect after what has been an 11-year affair -- a legal battle that began when Livent's books were audited in 1998.

Inflated profit reports

The business partners were accused of directing accounting staff to improperly record expenditures in an effort to boost the company's financial health.

The Crown argued that as a result of the inflated profit reports, investors and lending institutions contributed more than $500 million to the company.

Defence lawyers for the two men argued that their clients had no idea records were being improperly recorded and blamed their former vice-president of finance Gord Eckstein and other senior executives for making the changes without their consent.

Eckstein took the stand at the trial to testify against his former bosses after reaching a plea bargain agreement with the Crown.

Benotto agreed that Eckstein was an "unsavoury witness" but she said she believed he was telling the truth in "some respects."

In her ruling she concluded that the defendants "were so devoted to the continuation of Livent that they directed the falsification of the financial statements in order to continue the flow of money to the company.

"They were deceitful, they perpetrated a falsehood and reasonable people would consider them dishonest," she added.

Steven Skurka, CTV legal analyst, said that past fraud cases show that rulings are not generally favourable to leaders of a company who blame staff for misreporting, especially when there is no apparent motive for staff to work behind their bosses back.

"Why did they do it? What was their motive? That's the answer they could never give in this case," Skurka said on CTV Newsnet soon after the verdict was announced.

Livent's history

Livent, which became a publicly-traded company in 1993,  has seen enormous success in Broadway, bringing hit plays such as "The Phantom of the Opera," "Joseph and the Amazing Technicolour Dreamcoat," "Showboat," and "Ragtime" to Toronto.

However, as the company experienced a loss of revenue, Livent shareholders decided to sell the company and agreed to a deal in 1998 that would put former Disney executive Michael Ovitz at the helm of the company.

Almost immediately, Ovitz ordered an audit of the company's books.

The new management team clashed with Drabinsky and Gottlieb and the two men left the company in August 1998.

Drabinsky, 59, is a Tony award-winning theatre producer and a member of the Order of Canada.

He and Gottlieb, 65, face a maximum of 10 years for each fraud conviction and 14 years in prison on the forgery count. The sentencing process is scheduled to begin on April 8.

Skurka said that the judge's introductory comments about Livent and the duo's "spectacular" work will likely play a role in sentencing.

"Obviously she's impressed with (Drabinsky) and his exemplary background," he said. "The notion that he will come close to the maximum sentence is nonsense. You can be sure that the defence is going to be arguing for house arrest in this case."

The fallout from the Livent scandal is still far from over.

A representative of a Livent creditor group told The Canadian Press on the condition of anonymity that creditors may now receive additional payouts as a result of the guilty verdict.

The duo is also still facing fraud and conspiracy charges in New York and Drabinsky and other executives are also facing charges that were filed by the Ontario Securities Commission.

With files from The Canadian Press