Goldman lawyer says bank not liable for Dragon founders' losses

BOSTON Tue Dec 11, 2012 11:38am EST

A Goldman Sachs sign is seen over their kiosk on the floor of the New York Stock Exchange, April 26, 2010. REUTERS/Brendan McDermid

A Goldman Sachs sign is seen over their kiosk on the floor of the New York Stock Exchange, April 26, 2010.

Credit: Reuters/Brendan McDermid

BOSTON (Reuters) - A Goldman Sachs Group Inc (GS.N) attorney argued on Tuesday that the bank cannot be liable for the losses of a husband and wife pair who sold their company to a Belgian software firm that collapsed in an accounting fraud, since Goldman had not been hired to seek out a fraud.

The Wall Street giant is facing off in U.S. District Court in Boston against the founders of speech-recognition software company Dragon Systems, who contend they lost their life's work and about $600 million after selling their company to Lernout & Hauspie in an all-stock deal months before L&H collapsed.

"There is no question that Dragon and its stockholders were also defrauded," said John Donovan, an attorney with Boston law firm Ropes & Gray, in his opening remarks defending Goldman in the civil suit. "Goldman's job was not to detect fraud. When you hire a banker, you ask it to do certain things but delving into the books, doing accounting and finding fraud is not one of them."

A day earlier, the attorney for Janet and James Baker, who founded Dragon in 1982 in their suburban Boston home with $30,000, had argued that the couple relied on Goldman's advice in agreeing to sell their firm.

The Bakers owned 51 percent of the company but only were able to sell a few million dollars worth of L&H stock before the company collapsed in an accounting fraud. The Bakers and two other early Dragon employees are seeking several hundred million dollars in damages.

Goldman's reputation has been tarnished in recent years amid allegations that it has treated clients shabbily. Earlier this year one executive leaving the bank published a resignation letter calling the bank a "toxic" place where managing directors referred to their clients as "muppets."

In the months leading up to Dragon's decision to sell to L&H, Dragon management and owners were under intense financial pressure, facing falling sales and a cash crunch, Donovan said.

He said that Goldman had urged Dragon's board to slow the pace of negotiations with L&H and to commission more active accounting reviews of the buyer's results. Instead, Dragon management pushed aggressively ahead, with Janet Baker and a counterpart at their suitor writing out a deal on a piece of paper that changed L&H's offer from cash and stock to all stock, Donovan said.

They pushed ahead with the deal because after a failed 1999 initial public offering, Dragon needed cash to continue, Donovan argued.

"If Goldman had told them to walk away, as they now say Goldman should have, they would have been left with tears in their eyes," he said.

Goldman denied civil claims that include gross negligence and breach of fiduciary duty. The jury trial is expected to last two months.

The Dragon software is now owned by Nuance Communications Inc (NUAN.O).

(Reporting by Scott Malone; Editing by Tim Dobbyn)