It was an American success story gone horribly wrong.
A married couple started a software business in their Massachusetts home and eventually sold it to a Belgian company for $580 million. Just a few months after the sale, the Belgian company, which paid for the purchase with its stock, collapsed in an accounting fraud, wiping out the couple's newly minted fortune.
And like so many American success stories gone wrong, this one ended up in court. The couple, James and Janet Baker, sued the investment bank that represented them in the sale — Goldman Sachs — contending that the bank had failed to uncover that their acquirer, Lernout & Hauspie, was a fraud.
Goldman battled back, arguing that detecting fraud was not its job. And late Wednesday, in a resounding victory for the bank, a jury rejected all of the Bakers' legal claims.
"When you hire a banker, you ask it to do certain things, but delving into the books, doing accounting and finding fraud, is not one of them," John D. Donovan, one of Goldman's lawyers, said during the monthlong trial, which was heard in Federal District Court in Boston.
The case brought by the Bakers was among a spate of legal problems and public relations headaches that have been distractions for Goldman in recent years. A former Goldman director was convicted of leaking boardroom secrets to a hedge fund manager last spring.
A Goldman vice president publicly quit with an opinion article in The New York Times, "Why I Am Leaving Goldman Sachs," that criticized the bank's business practices. In 2010, Goldman paid $550 million to settle civil accusations that it had defrauded investors in the sale of subprime mortgage securities.
Goldman and other large banks typically settle lawsuits rather than engage in costly and protracted litigation. But several attempts to mediate the dispute with the Bakers failed, and Goldman dug in for a fight. The bank took the case to trial, despite the real risk that a jury of ordinary citizens might be predisposed to punishing a Wall Street bank in the post-financial-crisis era.
"We believed we were right on the facts, and while you can never predict what a jury will decide, we were confident that with a fair hearing we had a substantial chance of prevailing," said Paul Vizcarrondo of Wachtell, Lipton, Rosen & Katz, a member of Goldman's trial team.
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The origins of the case date back more than a decade to the dot-com boom, when highflying technology companies dominated Wall Street. In the early 1980s, the Bakers founded Dragon Systems, a company that invented a pioneering voice-recognition technology. Large corporations like Sony and Intel expressed interest in the company, as did Lernout, an ambitious, fast-growing European outfit.
Bombarded with offers, the Bakers retained Goldman to advise them on a sale. The terms of engagement were explicit: Goldman would help structure a deal and negotiate its terms, but not do the financial analysis. Lawyers for the bank established during the trial that the Bakers had disregarded a Goldman memo that advised them to conduct a comprehensive accounting of Lernout.
Goldman's lawyers also told the jury that the Bakers, faced with rapidly deteriorating financial results at their company, rushed to do a deal with Lernout. A failed 1999 initial public offering had increased the pressure to get a deal done, Goldman argued. A former Dragon president testified during the trial that the Bakers were in a hurry to get the highest price possible for their company.
In March 2000, with the tech bubble cresting, Lernout agreed to acquire Dragon for about $580 million. Lernout, taking advantage of a near tripling of its stock price in just four months, paid for Dragon entirely with newly issued stock. The deal was not without risk; for months, Wall Street analysts and the media had raised questions about Lernout's accounting practices.
By the summer, those questions erupted into a full-blown financial scandal with cooked books, phantom customers and shell companies. Lernout sought bankruptcy protection and its stock sank to zero.
"These people lost their life's work," said Mr. Donovan, Goldman's outside lawyer at Ropes & Gray, during his closing argument. "But that's not what this case is about. They sold their life's work. They freely decided to part with it in exchange for a price."
The Bakers turned to the courts for redress, filing a flurry of lawsuits against Lernout's bankers and auditors, including the accounting firm KPMG. Those actions resulted in more than $70 million in settlements for the Bakers, according to court records.
After securing those settlements, nearly a decade after the deal, the Bakers took aim at Goldman.
"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," Alan K. Cotler, a lawyer for the Bakers, said in a previous statement. "Goldman Sachs played a fundamental role in the Bakers' losing all that."
The jury disagreed. Not only did it find in Goldman's favor, it also found that the Bakers had mishandled their roles in the transaction. The jury determined that the Bakers had breached their fiduciary duty to their co-founders in failing to advise them about potential problems with the deal.
Mr. Cotler did not respond to requests for comment on Thursday.
Throughout the trial, the lawyers for the Bakers maligned the Goldman bankers, portraying them as unsupervised, lazy neophytes. The bankers on the deal — all in their 20s and 30s — were mockingly referred to as "the Goldman four" and derided as "the bottom of the barrel" and "the 'D' team."
Goldman rebutted these claims. The jury heard testimony from Gene Sykes, the head of the bank's mergers-and-acquisitions business and one of Wall Street's most powerful bankers. Mr. Sykes said his role was to advise clients and negotiate transactions, but ultimately the decision to sell was the client's own.
"I make sure I try to give them the right advice so that they can make good decisions about the various options they have," Mr. Sykes said.
One of the Goldman bankers on the deal, Richard Wayner, also testified in Boston. During direct examination, Mr. Wayner, who left Goldman in 2002 but who still works in finance, broke down on the witness stand while discussing how the lawsuit had tarnished his name.
"It is regrettable the plaintiffs went to such lengths to unfairly and publicly attack the reputations of the Goldman Sachs bankers who advised Dragon Systems," a Goldman spokeswoman said. "Those bankers have our full support."