The bank was paid $5 million for advice that led to Dragon’s demise
Janet and Jim Baker, founders of the speech recognition software developer Dragon Systems, are locked in a legal battle with Goldman Sachs over the deal that lost them $580 million.
The Wall Street bank advised the couple to sell Dragon Systems to Belgian company Lernout & Hauspie in an all-stock deal in August 2000. However, the Bakers didn’t see any money or shares, because L&H declared bankruptcy later that year.
The couple has sued the bank for over $1 billion in damages, interest and legal fees.
Wall Street greed
The Bakers, now in their 60s, spent almost 20 years developing the Dragon speech recognition engine, basing it on a unique mathematical model. By 2000, the company employed 400 people and brought in $70 million in revenue.
Goldman chose Lernout & Hauspie as the best candidate to buy Dragon Systems, even though the bank had pulled out of a financing deal with the company several years earlier. According to New York Times, Goldman Sachs was tasked with investigating prospective buyers, including sources of revenue, major customers, license and royalty agreements, expected growth, partnerships and financial statements.
Initially, the Bakers were offered $580 million, half in cash and half in stock. But after several delays, countless meetings and news reports that had questioned L&H’s revenue, the couple agreed for an all-stock deal.
New York Times journalist Loren Feldman said that Richard Wayner, the senior banker overseeing the merger, was absent from the meeting where this decision was made, because he was “on holiday”. No other Goldman Sachs staff replaced him. Two weeks later, Wayner took another holiday, this time missing an important conference call with L&H’s accounting firm, KPMG.
The deal closed in June. The bank collected its $5 million in fees, and in August, Lernout & Hauspie were accused of accounting fraud. In simple terms, the company was inventing its sales figures in Asia. By November, L&H was bankrupt, its shares were worthless and the Bakers had lost everything.
Dragon Systems was later sold at a bankruptcy auction, and the bulk of proprietary technology eventually came to be owned by Nuance Software – the main competitor of the company founded by Bakers.
The couple claims that Goldman Sachs were familiar with the conditions of the deal, but failed to raise an alarm. On the contrary, when the Bakers asked the bank about the unpredictable fluctuations of the L&H’s share price, its staff assured the Bakers that it was the result of investors worrying about the market in general, and did not point to any shortcomings of L&H.
“The Goldman Four [the employees overseeing the deal] were unsupervised, inexperienced, incompetent and lazy investment bankers who were put on a transaction that in the scheme of things was small potatoes for Goldman,” said Bakers’ lawyer Alan Cotler in court.
Goldman Sachs has argued that the bank was under no obligation to conduct a financial analysis of L& H, and under the circumstances, its staff performed well. They also say that since the bank was employed by Dragon Systems, and the company no longer exists, the Bakers have no rights to sue.
The case is scheduled to go to trial in Boston federal court on November 6.
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