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Boston Capital

Still battling over a sale gone bad

James and Janet Baker spent nearly two decades building a remarkable technology company in Newton, only to see their fortune disappear in a puff of fraudulent smoke. They’ve spent the last decade in court trying to get it back.

The Bakers built the voice recognition software company Dragon Systems from scratch and eventually sold it for $580 million to a Dutch company, Lernout & Hauspie, in 2000. Just two months later, news accounts detailed bogus international sales that had boosted the buyer’s financial statements. Soon, the entire business collapsed in a bankrupt heap.

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The Bakers, who took their $300 million share of proceeds entirely in Lernout & Hauspie stock, lost everything when the company failed.

Ever since, the couple and others have sued everyone in sight: accountants, commercial bankers who did business with Lernout & Hauspie and the Dutch company’s investment banker. They’ve recovered about $70 million settling those lawsuits.

Now a jury is about to hear the Bakers’ last big case — perhaps their biggest — against the investment bank Goldman Sachs. Jury selection is scheduled to start Monday in US District Court in Boston for a trial expected to last about five weeks.

The complaint in a nutshell: You should have figured out those guys were crooks.

Goldman acted as the adviser to Dragon Systems in its merger negotiations and — by the Bakers’ account — did a stunningly bad job. Alan Cotler, a Philadelphia lawyer representing the Bakers, says the couple — true pioneers in voice recognition technology — lost more than just money.

“Jim and Janet Baker spent about 25 years of their lives creating Dragon to realize their dream of having millions of people use computers and other devices that understand human speech,” says Cotler, who was in Boston Thursday preparing for the trial.

“Goldman Sachs played a fundamental role in the Bakers losing all that,” he says.
“Today, speech recognition is being used throughout the world, and its best and most productive applications are still to come.’’

As you would expect, the investment bank doesn’t see it that way. Goldman says it “performed its assignment satisfactorily in all respects.” It said the Baker claims “are completely without merit.”

I don’t know who has the better legal case, and the Bakers certainly made some odd, regrettable decisions along the way. But their Wall Street advisers fell far short in advising Dragon Systems on a sale to a buyer that newspaper reports uncovered as a fraud just months after closing (The Wall Street Journal simply called purported L&H customers and discovered they weren’t doing business with the company).

Surely no one familiar with Dragon Systems in its earliest days could have ever imagined how the story would unfold.

The Bakers were serious technology professionals who became bootstrap entrepreneurs in the 1980s, building a company around their voice recognition technology without the help of venture capitalists. Later, when they needed money to grow a successful business, they sold stock to disk drive maker Seagate Technology.

In fact, voice recognition was starting to attract the attention of much bigger technology companies. As the 1990s came to an end, conversation at Dragon Systems shifted from selling shares to selling the company.

The company hired Goldman in December of 1999 as an adviser. The transaction was small potatoes for Goldman, worth $5 million in fees. But it was the deal of a lifetime for the Bakers, and it went south in a hurry.

I don’t know why Dragon Systems’ directors didn’t get a formal fairness opinion about the sale proposal from Goldman — a point the investment bankers raise in their legal defense. I also don’t know if it would have mattered.

Handed a pile of stock, I can’t explain why the sellers didn’t use common financial strategies to hedge some of the risk. The Bakers still would have lost control of their technology, but much or all of their fortune might have been preserved.

The voice recognition technology acquired by Lernout & Hauspie was sold with other ­assets in bankruptcy. Today, it is owned by Nuance Communications Inc. of Burlington, which sells a line of software products bearing the Dragon name.

It took Dragon Systems years to get its groundbreaking technology to market. It’s taking almost as long to sort out responsibility for the company’s disastrous end.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
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