Published December 10, 2012
BOSTON – Goldman Sachs bankers failed to raise red flags about Lernout & Hauspie's accounting irregularities more than a decade ago, costing speech recognition software pioneers at Dragon Systems nearly all of their life's work and about $600 million, a lawyer told a jury on Monday in federal court.
"They were relying on Goldman to take care of them and whether or not they should be worried about these questions," plaintiffs' lawyer Alan Cotler said in his opening statement.
He kicked off what is expected to be a two-month courtroom battle in U.S. District Court in Boston.
The trial pits Janet and James Baker, a suburban Boston husband-and-wife team that launched Dragon from the living room of their home with $30,000, against Goldman Sachs, the iconic Wall Street bank whose reputation has been tarnished in more recent years on allegations it has treated some clients shabbily.
In the case brought by the Bakers, Goldman Sachs Group Inc denies civil claims that include gross negligence and breach of fiduciary duty. Opening statements from Goldman's legal team could come later on Monday or early Tuesday when the trial resumes.
In 2000, just months after Belgium-based Lernout & Hauspie acquired Dragon for $580 million in an all-stock deal, the company collapsed in an accounting scandal that sent it reeling into bankruptcy.
The Bakers owned 51 percent of Dragon, but only sold a few million dollars worth of their stock because of restrictions, Cotler told a jury. He added that the couple later received a $70 million settlement from a group of companies that advised Lernout & Hauspie in the transaction with Dragon.
The Bakers and two other early Dragon employees are seeking at least several hundred million dollars in damages.
In 1999, Dragon Systems hired Goldman as its financial adviser. The company, started in 1982 in West Newton, Massachusetts, was struggling and Lernout & Hauspie emerged as a buyer when another suitor decided not to pursue a deal, according to Goldman's defense in the case.
Cotler said a team of four Goldman bankers, led by Richard Wayner, gave favorable and positive advice about Lernout & Hauspie in the weeks before the deal closed. Goldman was about to earn $5 million for its work, court papers show.
Goldman's team, however, had concerns about L&H's exponential revenue growth in Asia. Cotler said Goldman did not even take one of most preliminary steps in vetting L&H's revenue claims -- contacting L&H customers in Asia.
In fact, the Goldman team internally was not satisfied with the answers it was getting from L&H on deal-critical red flag issues, particularly the company's Asia revenue growth, Cotler said.
Still, during a conference call with Goldman's Lernout & Hauspie expert in London, further positive assurances were given to Dragon's leadership, Cotler said.
Only years later did the Goldman analyst from that call admit he wasn't aware of the extent of Lernout & Hauspie's Asian revenue growth. Had he known, he would have been skeptical, Cotler said.
"These were salt of the earth people who are geniuses at what they do," Cotler said, describing the key figures at Dragon. But the world of Wall Street and high finance was unfamiliar terrain for them. It was the reason why they put their faith in Goldman, the best and biggest investment bank in the world, he added.
(Reporting By Tim McLaughlin; Editing by Nick Zieminski)