Dragon Systems Founder Says ‘Part of Me Died’ After Sale

Dragon Systems Inc. co-founder Jim Baker told a jury in his lawsuit against Goldman Sachs Group Inc. that it “felt like part of me had died” when the Belgian firm that bought his company dissolved in an accounting scandal.

Baker, his wife, Janet, and two other Dragon co-founders claim in a lawsuit filed in federal court in Boston that New York-based Goldman Sachs gave faulty advice which led to the disastrous $580 million all-stock sale of Dragon, a maker of computer speech-recognition products, to Lernout & Hauspie Speech Products NV.

“We put our whole life into it, and it was more than that,” Baker testified on the third day of trial. “It was the dream we had for 25, 30 years.”

Dragon’s founders claim that a four-man team of Goldman Sachs bankers assigned to the transaction failed to pursue questions about Lernout & Hauspie’s finances that should have led them to avoid the deal.

They say they lost their company and access to the technology they had spent their careers developing, including Dragon NaturallySpeaking dictation software, when Lernout & Hauspie filed for bankruptcy protection in November 2000.

Goldman Sachs claims its team gave Dragon competent advice and says it urged company management to press their accountants, at Arthur Andersen LLP, to probe Lernout & Hauspie’s finances.

Fabricated Customers

A later investigation of the firm, which was based in Ieper, Belgium, found that it had fabricated customers, used related-company transactions to artificially inflate revenue and reported phony sales figures.

U.S. District Judge Patti Saris said the trial, which began Dec. 10, may last until Jan. 25.

Baker, who took the stand for a second and final day today, described his unsuccessful attempt to buy back some of Dragon’s technology at a bankruptcy sale. Dragon NaturallySpeaking is now sold by Nuance Communications Inc., based in Burlington, Massachusetts.

Baker and his wife owned about 51 percent of Dragon when it was sold to Lernout & Hauspie, he said. The Bakers’ lawyer, Alan Cotler of Reed Smith LLP, showed him copies of memos and e-mails relating to Goldman Sachs’s due diligence efforts on the transaction. The investment bank was paid $150,000 a quarter for its work for Dragon, with a $5 million payment for bringing about a sale.

Due Diligence

In a Feb. 17, 2000, e-mail, Dragon Chief Financial Officer Ellen Chamberlain said, “I am expecting GS to drive and analyze” due diligence, according to Baker.

Questions for Lernout & Hauspie included the identity of major customers and the nature of the business contracts with them, according to Baker. The Goldman Sachs team never recommended against the sale and never told Baker they needed to pursue more due diligence before going forward with the sale, he testified.

“They were positive about it,” Baker said.

Baker also said Dragon officials had a telephone conference with a Goldman Sachs analyst who, they were falsely told, covered Lernout & Hauspie. A different Goldman Sachs analyst had covered the company and left before the Dragon transaction, Baker said he learned after suing the bank. Goldman Sachs had discontinued coverage of the Belgian firm by that time, the Dragon founders claim.

Customers Contacted

Baker told jurors about reading a Wall Street Journal story in August 2000, after the sale had closed, in which reporters contacted customers claimed by Lernout & Hauspie in South Korea, where the company had reported it made much of its revenue. Some of the purported customers said they had no business with Lernout & Hauspie. Others said they bought much less than the company claimed.

“I thought, in fact, that this is part of what Goldman Sachs had analyzed, so I began to have doubts,” Baker testified.

In October 2000, Baker, who had been forced to hold his Lernout & Hauspie shares under the agreement, sold what he could for about $7 million. He said lost the rest of the sale price.

Citing the value of Dragon at the time of the deal, the Bakers claim to have lost as much as $288.8 million in the sale and its aftermath. Dragon co-founders Paul Bamberg and Robert Roth have said they lost as much as $50 million.

In court filings, Goldman Sachs said the damages are less than what the plaintiffs have already recovered in settlements. The Bakers, who sued parties including Lernout & Hauspie’s principals, its investment bankers and accountants, have recovered about $70 million in settlements.

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

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