Janet Baker et al. v. Goldman, Sachs & Co. et al.

Share

Counsel for Goldman Sachs retained Cornerstone Research and Professor Paul Gompers of the Harvard Business School to value Dragon Systems at the time it was acquired by Lernout & Hauspie.

A federal jury in Boston found Goldman Sachs not liable in the aftermath of the all-stock sale of speech-recognition software company Dragon Systems to Lernout & Hauspie (L&H). The plaintiffs, led by Dragon co-founders Janet and James Baker, sought several hundred million dollars in damages. Ropes & Gray and Wachtell, Lipton, Rosen & Katz, co-counsel for Goldman Sachs, retained Cornerstone Research and Professor Paul Gompers of the Harvard Business School to value Dragon at the time it was acquired by L&H.

The jury found in favor of the defendants and awarded no damages to the plaintiffs.

Dragon hired Goldman Sachs to serve as financial advisor in connection with the potential sale to L&H. Dragon subsequently agreed to be acquired for L&H stock then worth $580 million. Within a few months of the acquisition, L&H declared bankruptcy amid an accounting fraud scandal. The plaintiffs accused Goldman Sachs of negligence for failing to conduct sufficient due diligence that would have uncovered the fraud and stopped the acquisition. The Bakers claimed that Goldman’s actions effectively prevented Dragon from retaining control of the company and its allegedly valuable research and development pipeline known as the “golden eggs.”

Professor Gompers opined that at the time the acquisition closed, Dragon was a troubled company that was losing money and had regularly missed its own financial projections. It was highly uncertain whether Dragon could survive as a stand-alone entity. Professor Gompers also showed that technology stocks were on a downward trend, and L&H was the only buyer willing to pay the steep price Dragon demanded. Thus, he concluded that if the company had not accepted the L&H deal, Dragon likely would have declared bankruptcy. The jury found in favor of the defendants and awarded no damages to the plaintiffs.

Case Expert

Paul A. Gompers

Eugene Holman Professor of Business Administration,
Harvard Business School,
Harvard University;
Senior Advisor, Cornerstone Research