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Jury clears bank in lawsuit

It says Dragon woes not Goldman’s fault

A federal jury determined Wednesday that Goldman Sachs was not to blame for the multimillion-dollar loss the owners of Dragon Systems Inc. incurred after selling their Boston-area speech recognition company to a company that collapsed in a massive fraud soon after the acquisition.

The verdict came in a three-week trial in US District Court in Boston that capped off years of litigation over the sale of Dragon Systems in 2000 to Belgium-based Lernout & Hauspie Speech Products for $580 million in stock. Goldman had acted as adviser to Dragon and its executives.

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The jury cleared Goldman Sachs of accusations from Dragon founders James and Janet Baker that its bankers were negligent for not warning them against going through with the deal. The jury cleared Goldman of multiple claims related to negligence, breach of contract, and misrepresentation.

Several months after Lernout & Hauspie closed on the Dragon sale, the company went bankrupt after reports surfaced that it was making up customers and inflating revenue and sales figures. Top Lernout & Hauspie executives were eventually jailed over the fraud.

The stock that the Bakers, the majority owners of Dragon, and other shareholders received in the sale became worthless when Lernout & Hauspie went out of business.

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The speech recognition technology the Bakers created was eventually sold off and today is produced by Nuance Communications Inc. of Burlington.

The Bakers and their lawyer, Alan Cotler of Philadelphia, claimed that because Goldman was hired to advise the couple, it should have detected the fraudulent practices of Lernout & Hauspie.

Dragon’sfounders had hoped to recoup $250 million from Goldman for losses related to the sale.

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Cotler also attempted to portray the Goldman team the Bakers hired for $5 million as inexperienced and unqualified to execute the sale of a sophisticated tech company such as Dragon.

But Goldman attorney John Donovan of the Boston firm Ropes & Gray said the Goldman bankers did the job they were hired to do, which was to oversee the sale of Dragon. He said it wasn’t their job to uncover a criminal conspiracy at Lernout & Hauspie.

“We are pleased the jury rejected these claims. We fulfilled all of our advisory duties to Dragon Systems,” said Tiffany Galvin, a spokeswoman for Goldman Sachs. “It is regrettable that the plaintiffs went to such lengths to unfairly and publicly attack the reputations of the Goldman Sachs bankers who advised Dragon Systems. Those bankers have our full support.”

Cotler, the Bakers’ lawyer, did not return a call for comment.

The Bakers had hoped to recoup more than $250 million from Goldman for losses associated with the sale. The couple, who started the pioneering speech technology company in their West Newton home in 1982, have collected about $70 million in legal settlements of other cases related to the acquisition.

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