Goldman Sachs and the $580 Million Black Hole

THE business deal hell began to crumble even the Champagne corks were popped.

The deal, the $580 million sale of a highflying technology , Dragon Systems, had just been approved its board and congratulations were exchanged. But even , at that moment of celebration, there was a sense that something amiss.

The chief of Dragon had received a congratulatory bottle the investment bankers representing the acquiring company, a Belgian competitor Lernout & Hauspie. But he hadn’t heard from Dragon’s own bankers Goldman Sachs.

“I still have received anything from Goldman,” the executive wrote in an e-mail the other bank. “Do they know something I should ?”

More than a decade , that question is still reverberating in a brutal legal battle Goldman and the founders of Dragon Systems — along a host of other questions that to the heart of how financial giants Goldman operate and what exactly they owe clients.

James and Janet Baker spent nearly two decades building Dragon, a voice technology company, a successful, multimillion-dollar enterprise. It was, they say, “third child.” So in late 1999, when offers to buy Dragon began rolling , the couple made what seemed a smart : they turned to Goldman Sachs advice. And why not? Goldman, all, was the leading dealmaker on Wall Street. The Bakers wanted best.

This, of , was before the scandals of the subprime mortgage era. It was the bailouts, before Occupy Wall Street, before ordinary Americans began complaining “banksters” and “muppets” and “the vampire squid.” In , before Goldman Sachs became, for many, synonymous Wall Street greed.

And yet, today what happened next to the Bakers seems remarkable. With Goldman Sachs the job, the corporate of Dragon Systems in an all-stock deal went terribly . Goldman collected millions of dollars fees — and the Bakers lost everything when Lernout & Hauspie was revealed to a spectacular fraud. L.& H. had founded by Jo Lernout and Pol Hauspie, had once been hailed as stars of 1990s tech boom. Only later the Bakers learn that Goldman Sachs itself had at one considered investing in L.& H. but had walked after some digging into the company.

This being Wall Street, a lot of money is now at . In federal court in Boston, the Bakers are demanding damages, interest and legal fees, that could top $1 billion. That figure is nearly twice Goldman paid to claims that it misled investors about subprime mortgage investments the financial crisis of 2008.

This account is based a trove of legal filings — e-mails, motions and roughly 30 depositions, more than 8,000 pages of testimony in all — that open a rare window Goldman Sachs and the mystique that surrounds it.

JAMES AND JANET BAKER, now in their 60s, are computer speech revolutionaries. Both Ph.D.’s, they became interested voice-recognition technology in the 1970s, when a personal assistant like Apple’s Siri would have seemed more science than scientific fact.

They are widely credited advancing speech technology far faster anyone thought possible, primarily because of an epiphany Mr. Baker had doing his doctorate research. He figured that speech recognition could, in , be reduced to math. You didn’t have to teach a computer recognize accents or dialects, Mr. Baker realized — you just had to calculate the mathematical probability of one sound following . His algorithms proved remarkably accurate and eventually the industry standard.

The Bakers founded Dragon Systems in 1982 in an old Victorian house in West Newton, Mass. At that , despite having two school- children and a big mortgage, they were determined to take no venture and to finance the company’s growth its own revenue — once they had a product. They figured could last 18 months, maybe 24.

Their first product was a software for a British-made PC called the Apricot that let users open files and run programs voice command. Then came DragonDictate, a groundbreaking speech--text system for dictation that still required the speaker to pause. Between. Every. Word.


Adapted and abridged from: CNBC, July 14, 2012.