Goldman Avoids Damages in Dragon System’s Merger Negligence Claim

By | June 12, 2013

Sachs Group Inc.’s missteps advising speech-recognition pioneer Dragon Systems Inc. in a merger weren’t egregious enough under the law to warrant damages, a federal judge ruled.

U.S. District Judge Patti B. Saris in Boston let stand a jury verdict for Goldman in January that rejected a $580 million negligence suit filed by Dragon founders Jim and Janet Baker and two other shareholders.

The judge called the investment banking team assigned to the all-stock sale of Dragon to a Belgium competitor in 2000 “professionally negligent” because they didn’t fully vet buyer Lernout & Hauspie Speech Products NV, which collapsed in an accounting fraud rendering the deal worthless.

“The reasons why small startup companies like Dragon go to a place like Goldman to assist with hatching their golden eggs is because they don’t have their own expertise to analyze revenue projects by asking tough questions to potential merger partners,” the judge said.

“Still, I give weight to the fact that the jury found for the defendant on this claim and there was sufficient evidence to support that finding even if I conclude otherwise,” Saris said in her ruling.

The Bakers’ attorney, Alan Cotler of Reed Smith LLP, said in an e-mail that his firm is still studying the ruling.

Goldman Sachs said in a statement it was pleased the judge respected the jury’s unanimous verdict.

Jury’s Conclusion

“The evidence showed, and the jury concluded, that the banking team satisfactorily performed its role for Dragon Systems in all respects,” the bank said.

The Bakers, who started Dragon in 1982 in their Newton, Massachusetts, home, along with shareholders Robert Roth and Paul Bamberg, lost about $300 million along with the intellectual property, the judge found.

“Plaintiffs may have been brilliant mathematicians and scientists, but they had no financial experience with mergers and acquisitions,” Saris said.

The Goldman team was lead by Richard Wayner, then 31, and included two bankers in their 20s, and a technology strategist.

The judge found Wayner should have spoken up at a key Dragon board meeting and told members that Goldman Sachs wanted further review of L&H’s revenue figures in Asia, which were later revealed as a fraud. Instead, Wayner deferred to Janet Baker, who was eager to complete the sale and made positive comments about the pending deal, the judge said.

Due Diligence

“At the very least, in my view, the Goldman team should have disclosed their continuing due diligence concerns,” Saris said. “However, there is no evidence that their failure to do so was egregious.”

Plaintiffs argued Goldman Sachs should have told Dragon that the bank’s own Principal Investment Area considered an investment in L&H in the late 1990s and decided against risking the bank’s money.

The judge found none of the bankers on the Dragon deal knew about the work known as “Project Sermon,” and no one at Goldman withheld information about why the bank never invested.

L&H created bogus customers, booked circular transactions with shell companies and recorded loans as sales from 1996 to 2000, according to a U.S. Securities and Exchange Commission probe. Four executives were sentenced to prison for fraud in a criminal investigation.

The case is Baker v. Goldman Sachs & Co., 09-cv-10053, U.S. District Court, District of Massachusetts (Boston).

With assistance from Bob Van Voris in New York. Editors: Michael Hytha, Peter Blumberg

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