Brian Leonard

Livent Inc., through its Special Receiver, sued its former auditors, Deloitte & Touche, for negligence and breach of contract in failing to detect massive corporate fraud perpetrated by Livent's directing minds, Garth Drabinsky and Myron Gottlieb.

The court found that Deloitte failed to conduct its 1996 and 1997 audits in accordance with generally accepted auditing standards (GAAS), particularly regarding preproduction costs and complex revenue transactions.

The court rejected Deloitte's defences based on the corporate identification doctrine and ex turpi causa, holding that the fraud of the directing minds could not be attributed to the company to shield the negligent auditors.

Damages were assessed at $84,750,000, representing the increase in Livent's liquidation deficit caused by the delayed discovery of the fraud, discounted by 25% for business contingencies.

The moving party sought an order permitting it to call and cross-examine certain current and retired partners of the defendant accounting firm at trial under Rule 53.07(5) of the Rules of Civil Procedure.

The court considered whether such individuals could be treated as adverse parties or partners of an adverse partnership for the purpose of cross-examination.

The court held that current partners of the defendant partnership clearly fell within the rule and could be called and cross-examined.

The court further concluded that retired partners could also qualify as adverse parties due to potential personal liability for partnership obligations incurred before retirement under the Partnerships Act.

The motion was granted in part, permitting cross-examination of specified partners and recognizing the applicability of the rule to retired partners.

The defendant auditor brought motions to compel answers to written discovery questions, to compel production of the plaintiff's expert files, and to increase the quantum of security for costs.

The court dismissed the motion to compel discovery answers, finding the requests for summaries of evidence and lists of documents to be relied upon at trial were overly broad and disproportionate.

The court ordered reciprocal production of prior expert report drafts but otherwise upheld litigation privilege over the experts' files.

The court granted the motion to increase security for costs, adding $577,995 to the previous order due to an extended trial estimate and the plaintiff's new litigation financing arrangement.