Dragon team opens case against Goldman Sachs

File image of Goldman Sachs. (March 15, 2012)

File image of Goldman Sachs. (March 15, 2012) Photo Credit: AP

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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 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.

Goldman Sachs Group Inc. denies the civil claims that include gross negligence and breach of fiduciary duty.

In 1999, Dragon Systems hired Goldman as its financial adviser. The company, started in 1982 in West Newton, Mass., was struggling, and Lernout & Hauspie emerged as a buyer. 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, who owned 51 percent of Dragon, and two other early Dragon employees are seeking at least several hundred million dollars in damages.

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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. Cotler said Goldman did not vet L&H's revenue claims by contacting L&H customers in Asia, and the 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.

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