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Goldman Loses Bid to Avoid Trial Over Dragon Systems Sale

Goldman Sachs Group Inc. (GS) lost a bid to avoid trial in a lawsuit over the 2000 sale of Dragon Systems Inc., a pioneer in voice-recognition software, to a Belgian competitor that collapsed following an accounting scandal.

U.S. District Judge Patti Saris in Boston yesterday declined Goldman Sachs’s request to throw out claims by James and Janet Baker, Dragon System’s founders, that Goldman Sachs failed to provide adequate advice in the sale of their $600 million company for stock in Lernout & Hauspie Speech Products NV. Goldman Sachs was paid $5 million for advising Dragon.

The Bakers, who owned 51 percent of Dragon Systems at the time of the transaction, claim they lost about $300 million and the rights to patents they developed as voice-recognition researchers, when Lernout & Hauspie failed months after it was sold. The Belgian company filed for bankruptcy protection in November 2000 after public disclosure of improper accounting forced it to restate $373 million in earnings.

The Bakers claim Goldman should have warned Dragon about deficiencies in Lernout & Hauspie’s accounting. Saris’s ruling yesterday clears the way for a trial in the case, which is set to begin Dec. 10.

The U.S. Securities and Exchange Commission said that Lernout & Hauspie created bogus customers, booked circular transactions with shell companies and recorded loans as sales from 1996 to 2000.

“The court has denied all of Goldman Sachs’s efforts to prevent a trial,” said Alan Cotler, the Bakers’ lawyer.

Michael DuVally, a Goldman spokesman, declined to comment on the ruling.

The case is Baker v. Goldman Sachs & Co., 09-cv-10053, U.S. District Court, District of Massachusetts (Boston).

To contact the reporter on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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