Lawyers for Goldman Sachs said Tuesday the investment bank was not at fault for the losses owners of a Boston area tech firm, Dragon Systems Inc., incurred after the Belgium company that bought their business in 2000 collapsed from fraud just months after the acquisition.
The bank’s lawyers opened their defense of a lawsuit brought by the founders of Dragon in US Court in Boston. James and Janet Baker, along with two other co-founders, sued Goldman Sachs, which they hired to assist in the acquisition, for allegedly misleading them into accepting an all-stock transaction worth $580 million with Lernout & Hauspie Speech Products. When the company went bankrupt, its stock became worthless and the Bakers and other Dragon shareholders lost millions of dollars.
“Lernout & Hauspie was a fraud. They cooked the books and it was a highly sophisticated scheme that took years to unravel,” said John Donovan of the Boston firm of Ropes & Gray who is representing Goldman Sachs in the trial. But, he said, “Goldman’s job wasn’t to detect fraud.”
The suit against Goldman is the culmination of years of litigation over the sale of Dragon Systems, which pioneered the speech recognition technology that today is produced by Nuance Communications Inc. of Burlington.
Goldman’s role in the merger that closed in June 2000 was to structure a deal and determine the terms of the transaction, said Donovan. “Financial accounting diligence was not Goldman’s job,” he said.
Goldman advised Dragon to have accountants to look closer at Lernout & Hauspie’s books, he said. But Donovan also noted that at the time of the sale Dragon had been losing money and its executives were desperate to accept the Lernout offer.
While Dragon co-founder James Baker admitted in testimony Tuesday the company was having financial problems, he said Goldman should be held liable for his losses because it was among many financial advisers and accountants that were in a position to stop the deal.
On Monday, the Bakers’ attorney Alan Cotler, a Philadelphia lawyer, said Goldman Sachs was in fact in a position to uncover trouble at Lernout & Hauspie. “Goldman Sachs was supposed to have been advising and doing due diligence on Lernout & Hauspie,” he said. But instead, said Cotler, it remained positive about the deal and hid skepticism.
The Bakers, who started Dragon Systems in their West Newton home in 1982, have already collected $70 million in legal settlement from other suits related to the merger with Lernout & Hauspie. The couple and the other co-founders, Paul Bamberg and Robert Roth, are asking for as much as $264 million in damages from Goldman Sachs.