Sunday, July 15, 2012

Goldman Walks Over a Client

Reading the Sunday New York Times is usually a pleasant, innocuous experience, since I generally skip the news and editorials, and go straight to Sports, Business and the Book Review. Reporter Loren Feldman has written a story about how two "two computer speech revolutionaries," Dr. Jim and Dr. Janet Baker hired Goldman Sachs to sell their company, Dragon Systems and its path breaking speech recognition technology to one of the many suitors who were peppering the couple with offers. 

Goldman came to the conclusion that Belgium's Lernout and Hauspie, a publicly traded company, was the best fit and offered $580 million.  I had to search the memory banks for this one, because couldn't find a Wall Street Journal story by a  reporter who actually went to one of Lernout's foreign sales offices; the reporter found a brass plate downstairs, and upstairs a receptionist sitting in an empty office filled with cardboard boxes.  At this point in time, the stock was an institutional darling and rated "strong buy" by a number of brokerage companies. 

At the same time, several financial analysts, not on the Wall Street buy or sell sides, were openly contemptuous of Lernout's accounting practices.  Most prominent among these was David Rocker, of Rocker Partners, which became Copper River Management. Rocker was short the stock and not shy talking about it. I have been a long time reader and admirer of Howard Schilit and his early book, "Financial Shenanigans."  Here is a chapter from one of Schilit's publications in which he talks about Lernout's accounting. Wall Street's sell side remained blindly committed to "the story."

In November 2000, the auditor for Lernout and Hauspie withdrew their clean opinion on the company's 1998 and 1999 financials, which it had previously blessed.  This, however, came about only after the company itself admitted prior accounting errors.  Meanwhile, based on the Journal reporter's story, Korean companies who had been said to be doing significant business with Lernout stated that they had never deakt with the company.

Lernout's offer for Dragon Systems was originally a half cash and half stock offer, which the Times reports was changed to an all stock offer.  Apparently, Goldman raised no questions about Lernout as a qualified buyer.  This came despite the fact that another arm of Goldman had refused in invest in Lernout after doing its own due diligence.  Goldman did not question the risks and inferiority of an all stock offer for a controversial company.  Bottom line, the Bakers got nothing, and their technology was trasferred in bankruptcy to Nuance Communications and subsequently transferred again. The Bakers and technology experts suggest that their inventions are part of Apple's Siri personal assistant app for their devices.

In 2010, the founders of Lernout and Hauspie were finally convicted in a Ghent court to five years in prison, of which they actually served little time. The Bakers are suing Goldman for about $1 billion.  The objections by Goldman attorneys and spokespeople reported in the Times are arrogant and infuriating.  The excuses are laughable.

Again, for this industry, we have FINRA, the SEC, and all manner of Federal agencies, and we can't get simple justice and fairness for entrepreneurs who were left high and dry by their bankers.  Oh yes, but we now have Dodd Frank.  I'll bet that's comforting to the Bakers.

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