* Goldman on trial for its advice to Dragon Systems
* Speech recognition pioneers accuse bank of shoddy work
* Dragon lawyer: Goldman bankers had concerns about Lernout
By Tim McLaughlin
BOSTON, Dec 10 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
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
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
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
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,
"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.