Goldman Is the Scapegoat in Dragon’s Death

July 23 (Bloomberg) -- After three years of the most terrible publicity this side of Jerry Sandusky, things have been looking up recently for Goldman Sachs Group Inc.

Thanks in large part to an evolving media strategy by Jake Siewert, Goldman’s new head of communications, we have been treated to the softer side of Chief Executive Officer Lloyd Blankfein. He has recently made himself available for television and newspaper interviews and has delivered talks at the St. Petersburg International Economic Forum, the Chicago Club and the Economic Club of Washington. He even wrote an op-ed article for Politico and endorsed large swaths of the Dodd-Frank law, admitting that “we were a little mysterious and that was a big problem.”

The emergence of the New Goldman has coincided with the spotlight finally moving onto its competitors. There’s been the “tempest in a teapot” at JPMorgan Chase that resulted in a $6 billion trading loss, momentarily denting the Valyrian armor of Jamie Dimon, the firm’s chief executive officer. There’s been the scandal at Barclays Plc involving the manipulation of the London interbank offered rate, which may yet snare more victims at the U.S. banks that have a role in setting Libor. And there’s been the particularly shameful behavior of HSBC Holdings Plc, which is accused of abetting terrorists and money-launderers.

Say what you will about Goldman Sachs, but it rarely suffers substantial trading losses, had no role in setting Libor and has not been accused of laundering money for terrorists.

Computer Speech

And that’s what makes a New York Times article from July 14 so puzzling. Seemingly out of the blue, the newspaper published a 3,500-word indictment of the firm for the advice -- or seeming lack of it -- that four Goldman mergers and acquisitions bankers provided to Dragon Systems Inc., a voice-recognition software company, on its $580 million sale to the Belgian firm Lernout & Hauspie 12 years ago.

Using court filings, the Times’s Loren Feldman meticulously pieced together a tale of how James and Janet Baker, a married couple who were pioneers in computer speech, sold Dragon in exchange for L&H stock and then lost it all when L&H turned out to be a fraud. Feldman mined the lawsuits the Bakers filed against many of the deal’s participants and, “based on a trove of legal filings -- e-mails, motions and roughly 30 depositions, more than 8,000 pages of sworn testimony in all,” he wrote that he opened up “a rare window on Goldman Sachs and the mystique that surrounds it.”

Not really. It is true that Feldman dug up some disturbing facts about the alleged behavior of the “Goldman Four,” as the M&A bankers have come to be known in court documents -- for instance, Richard Wayner was on vacation at two crucial moments during the deal and later testified that “lingering issues” of due diligence about L&H were not resolved “to his satisfaction.” Yet for the most part the article showed a misunderstanding 0f the specific roles that bankers play on merger assignments, and of what exactly Goldman had agreed to do for the Bakers. (Both Feldman and Alan Colter, the Bakers’ attorney, declined to comment for this column.)

It was the Dragon board of directors, not Goldman, that made the fateful decision to take nothing but L&H stock as consideration for the company, even though Dragon shareholders had been offered a mixture of cash and stock. (Janet Baker was chairman of the board and presided over the March 27, 2000, board meeting approving the sale to L&H.) It was also the Bakers’ decision not to hedge the L&H stock they took after rejecting advice from Goldman to consider that option.

In the end, the Times article, although riveting, was a journalistic case study in choosing from among many facts those that suit your argument.

Another Side

The point being, there is often another side to a complex story, assuming you are open to exploring it. For instance, according to court documents I reviewed, the heavily negotiated engagement letter between Dragon and Goldman specifically excluded Dragon shareholders -- including the Bakers and Seagate Technology Plc, Dragon’s largest shareholder -- as parties. Rather, it expressly stated that Goldman would only advise Dragon, the company, and that Dragon’s “shareholders would not hold Goldman liable.”

Goldman had initially sought to advise not only Dragon but also the Bakers and Seagate, while requiring these shareholders to “personally guarantee payment” of Goldman’s $5 million fee. But Janet Baker wanted that provision taken out of the final agreement, and it was.

Furthermore, the engagement letter did not call for Goldman to give the Dragon board a “fairness opinion,” wherein a banker opines to a board about the “fairness” of the consideration being received. The Times’s article fingered Goldman for not making a presentation to the board about the L&H stock shareholders would get, but didn’t mention that Goldman had not been requested to do so in the engagement letter.

Minutes of the March 27 meeting reveal that the board of directors, on its own, determined that the consideration being offered -- the L&H stock -- was “fair to and in the best interests of” Dragon and its shareholders. (Wayner was away on vacation during this meeting, although he called in and spoke.)

The Times’s expose made much of the fact that Goldman failed to perform sufficient due diligence on L&H to uncover the fraud. First, this charge is absurd -- M&A bankers are not forensic accountants. Second, Goldman holds that in previous lawsuits the Bakers brought against 30 separate defendants including L&H’s auditor (KPMG LLP), investment banker (SG Cowen & Co.), and officers and creditors, the Bakers “swore under oath” and “represented to this court” that Dragon’s due diligence on “L&H was exhaustive, that verification of L&H’s accounting was not Goldman’s job, and that no amount of due diligence could have detected the fraud.”

Mysterious Memo

The Times also pointed to a “mysterious” unsigned Feb. 29, 2000, memo from Goldman to Dragon urging that “additional due diligence” on L&H be performed by “accounting professionals on both sides” and noted that “experience shows that companies like Lernout & Hauspie, which grow via acquisition, necessitate an extra level of care at this stage of the process.” The memo further stated that this extra level of forensic due diligence is important when the seller is thinking of taking the buyer’s stock as consideration. The Bakers ignored this recommendation, and the forensic due diligence was not done. Since when is it the bankers’ fault when a client doesn’t take their advice?

The article also mentioned that Goldman’s private-equity arm had earlier considered making an investment in L&H but passed because of the very concerns that later felled the company. In retrospect, the Bakers thought Goldman’s private-equity arm should have told its bankers that it was skeptical of L&H. But guess what? There is a Chinese wall between the two parts of the bank, and this time -- at least -- it seemed to work.

The Times also didn’t mention that as a result of the lawsuits the Bakers brought against the other professionals involved in the deal, they have already reaped some $70 million. They are suing Goldman in order to add to their legal winnings.

Yes, it’s extraordinarily important to hold powerful institutions such as Goldman Sachs to account for reckless or unethical behavior. As I wrote in my book about the firm, in 2007, it was unacceptable for Goldman Sachs to continue to sell mortgage-backed securities at par to investors around the globe at the same time it was making a huge proprietary bet against the mortgage market.

But enough is enough. The news media can’t continue to take one-sided potshots at Goldman Sachs just because it makes for a good story.

(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase, against which he lost an arbitration case over his dismissal. The opinions expressed are his own.)

To contact the writer of this article: William D. Cohan at

To contact the editor responsible for this article: Tobin Harshaw at