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A Goldman Sachs Group Inc. (GS) lawyer argued to jurors that the founders of speech-recognition pioneer Dragon Systems Inc. are scapegoating the investment bank for their own mistakes in a $580 million all-stock sale rendered worthless when the buyer was exposed as a fraud.
In closing arguments yesterday in Boston federal court in a lawsuit accusing Goldman Sachs of negligence, the attorney said Dragon co-founder Janet Baker and Chief Financial Officer Ellen Chamberlain ignored the bank’s advice to hire accountants to further vet Belgium-based suitor Lernout & Hauspie Speech Products NV and rushed the deal amid Dragon’s cash-flow problems in 2000.
“They are making Goldman Sachs into the guarantor of this transaction when no one suspected fraud,” the bank’s lawyer, John Donovan Jr., said. “That’s not turning Goldman into a guarantor. That’s turning Goldman into a scapegoat.”
Donovan blamed Baker, also Dragon’s former chief executive officer, for negotiating a change from a half-cash/half-stock deal to an all-stock deal without consulting the banking team.
“Look, if you decide to play investment banker by yourself, you’re in no position to criticize the investment banker you hired in the process,” Donovan said.
Lawyers for Dragon argued New York-based Goldman Sachs committed gross negligence, committed misrepresentation through key omissions and should have stopped the deal because of unanswered questions about Lernout & Hauspie’s revenue.
“Goldman can dress this up as much as they can, but the bottom line is these guys didn’t do anything,” Alan Cotler, a lawyer for Janet Baker and her husband, Jim, told the jury.
Goldman Sachs’s four-man investment team, which included a 22-year-old banker and a 25-year-old, was inexperienced, unsupervised and unfocused on a small client such as Dragon, he said.
“They were so busy they didn’t have enough bankers to do deals,” Cotler said, describing a time of voluminous mergers and acquisitions. “Dragon was small potatoes and that’s what they got, small potatoes from Goldman Sachs.”
Dragon paid Goldman Sachs $5 million.
Goldman Sachs intentionally misrepresented that the bank had an analyst monitoring Lernout & Hauspie’s earnings when it had stopped covering the company at the end of 1999, Cotler said. L&H posted a suspicious 1,500 percent increase in Asian revenue in February 2000.
He said Janet Baker, who with her husband developed the technology that started the company in their suburban Boston home in 1982, and Chamberlain became frustrated with the Goldman Sachs team for not doing due diligence in the deal.
“This case is not about accounting. Goldman Sachs wants to use the word accounting a thousand times because they don’t want you to think about investment banking,” Cotler said.
Jurors began hearing the case in December before U.S. District Judge Patti Saris.
In addition to the Bakers’ claims, the jury is weighing negligence claims lodged by Paul G. Bamberg and Robert Roth, two other Dragon founders who held minority shares in the company.
Jurors were scheduled to receive instructions yesterday and begin deliberations.
“The evidence shows Goldman failed as a professional team,” said attorney Jack R. Pirozzolo, who represents Bamberg and Roth.
Donovan, Goldman Sachs’s attorney, repeatedly highlighted a Feb. 29, 2000, memo from the bank to Dragon advising the company to hire Arthur Andersen LLP to do comprehensive accounting of Lernout & Hauspie.
Dragon didn’t tap Arthur Andersen for the work and CFO Chamberlain maintained Goldman Sachs should do more due diligence, he said. Witnesses for Goldman Sachs testified that Chamberlain told Dragon’s board due diligence was completed and they signed the deal.
“Here’s Goldman screaming ‘Do the work!’ and they’re being sued because they didn’t scream louder?” Donovan said.
Goldman Sachs could have saved Dragon from the disastrous deal if the bank had an analyst monitoring Lernout & Hauspie in 2000, Dragon’s lawyers argued.
Instead, the bank put Charles Elliott, its London-based international, European technology research analyst, on a conference call with Dragon leaders in February, in which he was bullish on how the deal might affect the technology market.
In a videotaped deposition played for the jury, Elliott said he didn’t know about the soaring L&H Asian revenue, later proved a fraud, and would have been suspicious of it if he had.
Elliott learned of the revenue for the first time when Cotler showed him an old newspaper article during a deposition.
Cotler blamed the head of the Goldman Sachs team, Richard Wayner, for not talking to Elliott about media reports on L&H’s revenue before the conference call and sending Elliott to do research.
“Charles Elliott could have prevented this. Rich Wayner could have prevented this,” Cotler told the jury.
Goldman Sachs’s lawyer argued that Dragon’s leader knew about the suspicious Asia revenue. The company was in such tough financial shape that Dragon would have gone forward with the deal anyway, Donovan said.
Dragon has already collected $70 million in settlements with other companies involved in the deal. If the jury finds Goldman negligent and awards damages, $70 million will be deducted from the total.
The case is Baker v. Goldman Sachs & Co., 09-cv-10053, U.S. District Court, District of Massachusetts (Boston).
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