Goldman Jury Reviews Testimony Bank Not at Fault on Deal

A jury deliberating whether Goldman Sachs Group Inc. was negligent in helping arrange the doomed $580 million sale of speech-recognition pioneer Dragon Systems Inc. asked to see testimony by a former Dragon president who said the bank wasn't at fault for the deal's failure.

The former executive, John D. Shagoury, testified on Jan. 9 in federal court in Boston that he didn’t blame the bank for the 2000 all-stock deal that was rendered worthless months later when buyer Lernout & Hauspie Speech Products NV collapsed in an accounting fraud and filed for bankruptcy. U.S. District Court Judge Patti Saris said yesterday that the jury can review a transcript of Shagoury’s testimony.

Dragon founders Jim and Janet Baker and two other shareholders, Robert Roth and Paul Bamberg, are suing for gross negligence and intentional misrepresentation. The four sold a small part of their Lernout & Hauspie stock for $11 million before the fraud was exposed. The Bakers lost the technology they spent decades developing.

Goldman Sachs argued at trial that Dragon’s leaders ignored its advice to hire an accounting firm to take a closer look at Lernout & Hauspie. Shagoury, who went to work for Lernout & Hauspie after the deal and is now president of Eliza Corp., agreed with a Goldman Sachs attorney that Dragon’s board was focused on “speed and certainty” in the months leading to the deal.

‘Getting Worse’

“The company’s financial situation was getting worse instead of better, and at the same time we felt it was creating a huge distraction for the employees,” he said. “We needed to get something done, or decide how the company was going to continue.”

“Do you blame Goldman Sachs that the stock options became worthless in the merger with L&H?” Paul Vizcarrondo, an attorney for the New York-based bank, asked him.

“No,” said Shagoury.

Jurors began deliberating Jan. 18. They are scheduled to resume deliberations today.

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

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