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Goldman Sachs defends conduct in Dragon deal

A lawyer for Goldman Sachs said Tuesday that the investment bank was not at fault for losses the owners of a Boston-area technology firm, Dragon Systems Inc., incurred after the Belgian company that bought their business in 2000 collapsed from fraud, just months after the ­acquisition.

The bank’s lawyers opened their defense in a lawsuit brought by the founders of Dragon in US District Court in Boston. James and Janet Baker, along with two other cofounders, sued Goldman Sachs, which they hired to assist in the acquisition, for allegedly misleading them into accepting an all-stock transaction worth $580 million with Lernout & Hauspie Speech Products. When the company went bankrupt, its stock became worthless. The Bakers and other­ Dragon shareholders lost millions of dollars.

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“Lernout & Hauspie was a fraud. They cooked the books, and it was a highly sophisticated scheme that took years to unravel,” said John Donovan of the Boston firm Ropes & Gray, representing Goldman Sachs in the trial. But, he said, “Goldman’s job wasn’t to detect fraud.”

The suit against Goldman is the culmination of years of litigation over the sale of Dragon Systems, which ­pioneered the speech-recognition technology that today is produced by Nuance Communications Inc., of Burlington.

Goldman’s role in the merger that closed in June 2000 was to structure a deal and determine the terms of the transaction, Donovan said. “Financial accounting diligence was not Goldman’s job,” he said.

Goldman advised Dragon to have accountants look closer at Lernout’s books, he said. But Donovan also said that at the time of the sale Dragon had been losing money, and its executives were desperate to accept the Lernout offer.

Dragon cofounder James Baker admitted in testimony Tuesday that the company was having financial problems, but said Goldman should be held liable for his losses because it was among many financial advisers and accountants in a position to stop the deal.

On Monday, the Bakers’ attorney, Alan Cotler, of Philadelphia, said Goldman Sachs was, in fact, in a position to uncover trouble at Lernout & Hauspie. “Goldman Sachs was supposed to have been advising and doing due diligence on Lernout & Hauspie,” he said. But instead, Cotler said, it remained positive about the deal and hid its skepticism.

The Bakers, who started Dragon Systems in their West Newton home in 1982, have already collected $70 million in legal settlements from other suits related to the merger with Lernout & Hauspie. The couple and the other cofounders, Paul Bamberg and Robert Roth, are asking for as much as $264 million in damages from Goldman Sachs.

Michael B. Farrell
can be reached at
michael.farrell@globe.com.
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