Goldman Sachs Not Liable for Failed $580 Million Deal

Goldman Sachs Group Inc. defeated a $580 million negligence suit over its role as adviser to speech-recognition pioneer Dragon Systems Inc. in a doomed merger, one of its biggest victories in a string of claims by dissatisfied clients since the financial crisis.

A federal jury in Boston yesterday rejected the claims of Dragon’s founders Jim and Janet Baker and two other shareholders that Goldman Sachs failed to properly vet Belgium-based Lernout & Hauspie Speech Products NV. The all-stock deal in June 2000 was rendered worthless months later when the fraud at Lernout & Hauspie was exposed and the company filed for bankruptcy.

The verdict relieves Goldman Sachs of responsibility for a sale that left its clients with worthless shares in a failed company. The four Dragon founders sold some Lernout & Hauspie shares for $11 million before the stock collapsed and the Bakers lost the technology they spent decades developing.

“This was the most important business decision of our lives,” Janet Baker had said in an interview in May in the couple’s home in West Newton, Massachusetts. “We chose Goldman because of their global reach and their reputation as the world’s most important investment bank.”

As she left the courthouse yesterday, Janet Baker said “we’re disappointed. I’d like to know what the jury saw that we didn’t.” Several members of the jury declined to comment as they left the courthouse.

Mishandled Roles

The jury found Goldman Sachs proved that the Bakers mishandled their roles in the negotiation. The jury said the Bakers breached their fiduciary duty to Dragon co-founders Paul G. Bamberg and Robert Roth and made negligent representations about the deal that went before Dragon’s board of directors. The jury wasn’t asked to assess damage on those claims.

“We are pleased the jury rejected these claims,” Tiffany Galvin, a spokeswoman for New York-based Goldman Sachs, said in an e-mailed statement. “We fulfilled all our advisory duties to Dragon Systems.”

“It is regrettable the plaintiffs went to such lengths to unfairly and publicly attack the reputations of the Goldman Sachs bankers who advised Dragon Systems,” the bank said. “Those bankers have our full support.”

Goldman Sachs’s lawyers said during the trial that Dragon’s leaders ignored the bank’s advice to conduct a comprehensive accounting of the suitor and that Dragon rushed to sign the deal amid declining sales and cash-flow problems.

‘Speed, Certainty’

The bank’s witnesses during 19 days of evidence included Dragon’s former president John Shagoury, who said the company was focused on “speed and certainty” when the deal closed. He said he didn’t blame Goldman Sachs for the worthless stock options he was left holding. Deliberations began Jan. 18.

Lawyers for the Bakers, who started the company in their suburban Boston home in the 1980s, said Goldman Sachs used an unsupervised, inexperienced team of four bankers on the transaction. Members of the banking team testified that their work on the deal was good. Dragon paid Goldman $5 million for the advice.

The leader of the banking team, Richard Wayner, who has since left Goldman Sachs, never revealed to Dragon that the bank no longer had an analyst devoted to following Lernout & Hauspie, Dragon’s lawyers argued. Wayner duped Dragon into believing another analyst was closely monitoring the company, they said.

Wayner and other members of the banking team testified they did good work brokering the deal and weren’t hired to render an opinion on the sale.

Earnings Report

One of the clues to the fraud came in an earnings report in February 2000, when Lernout & Hauspie reported revenue gains in Asia of 1,500 percent, according to attorneys for the Bakers and Dragon co-founders Bamberg and Roth, who held minority stakes in the company.

Lernout & Hauspie created bogus customers, booked circular transactions with shell companies and recorded loans as sales from 1996 to 2000, according to a separate U.S. Securities and Exchange Commission probe. Four executives were sentenced to prison for fraud.

During the trial against Goldman Sachs, Jim Baker testified that it “felt like part of me had died” when he learned about the scandal. He said he and his wife lost the technology they had spent 30 years developing.

He tried to buy back some of the Dragon’s intellectual property during Lernout & Hauspie’s bankruptcy proceedings. ScanSoft Inc. bought the technology.

The Dragon founders sued other companies involved in the Lernout & Hauspie deal and received more than $70 million in settlements, according to court records.

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

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