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The New York Times Magazine called it "the business deal from hell." A husband-and-wife team in suburban Boston, Janet and Jim Baker, spent two decades building an award-winning speech recognition software company called Dragon Systems. With the help of investment bankers at Goldman Sachs Group Inc., they finally sold Dragon to Belgium-based Lernout & Hauspie Speech Products N.V. in 2000, in exchange for $580 million in Lernout stock. But Lernout collapsed just a few months later, after The Wall Street Journal unearthed massive fraud at the company, and the Bakers' big payday evaporated in a flash.
As you might expect, the Bakers were quick to point fingers at Goldman Sachs, which staffed the Dragon deal with four bankers ranging in age from 21 to 42. And as you might also expect, the media gleefully parroted the Bakers' claims. The Times's compelling account, "Goldman Sachs and the $580 Million Black Hole," made it seem like a foregone conclusion that Goldman shirked its responsibilities to the couple.
On Wednesday, a federal jury in the Bakers' hometown of Boston forcefully rejected that conclusion. Siding with Goldman's lawyers, John Donovan of Ropes & Gray and Paul Vizcarrondo of Wachtell, Lipton, Rosen & Katz, the jury returned a verdict that Goldman's work on the deal wasn't negligent. After alleging $300 million in damages (which could have been trebled under Massachusetts law), the Bakers and two other plaintiffs went home empty-handed.
The Bakers have been mired in litigation pretty much ever since the ill-fated sale to Lernout & Hauspie, including winning roughly $70 million in settlements from the likes of KPMG, Lernout's auditor, and Dexia S.A, Lernout's investment bank. The centerpiece of the legal battle over the Dragon deal has always been the lawsuit the Bakers brought in U.S. district court in Boston in 2009, accusing Goldman of negligence, gross negligence, and negligent misrepresentation. Two other Dragon shareholders who lost millions, Paul Bamberg and Robert Roth, joined in the suit. They were jointly represented by Jack Pirozzolo of Foley Hoag.
When the case against Goldman finally went to trial last month, the Bakers' longtime lawyer, Alan Cotler of Reed Smith, argued that Goldman had seen the Dragon sale as relatively small potatoes and therefore staffed the deal with four unsupervised, unseasoned, and incompetent bankers. During the first week of trial, Cotler described how Goldman failed to detect that Lernout was creating fake customers and pulling profit figures out of thin air. It wasn't until a Wall Street Journal reporter began calling Lernout's supposed customers that the fraud unravelled. (Lernout's founders were sentenced to prison in 2010.)
The turning point in the trial may have come during the second week, when Vizcarrondo cross-examined Janet Baker. She had testified that "the Goldman four," as they came to be called, failed to answer her questions about Lernout. To rebut that evidence, Vizcarrondo showed video clips of a deposition from 2004 in which Baker seemed to be saying that Goldman answered her questions but lied. Donovan later homed in on that seeming inconsistency during Goldman's closing argument. "In 2004 the Bakers, the Roths, and the Bambergs sued 30 other defendants, and. . .the theory of those lawsuits was, 'yeah you answered our questions, you answered all of our questions, but you lied,'" Donovan told jurors. "Now the theory is. . .that 'you didn't answer our questions. Someone didn't answer our questions.' Those two theories can't coexist."
Vizcarrondo also tried to put a human face on Richard Waynor, one of the "Goldman Four." Waynor, who is no longer at Goldman, lives in New York, so he's outside Massachusetts's subpoena power. But he agreed to take the stand in the bank's defense. When Vizcarrondo asked Waynor why he agreed to testify, he told jurors that his career had nearly been ruined by media coverage of the Dragon litigation, and he now wants to set the record straight. He broke down in tears on the witness stand, transfixing the jury.
After a month-long trial and three days of deliberation, Goldman come out on top on Wednesday. The jury not only rejected all of the Bakers' claims, but also sided the Goldman on its counterclaim that Janet Baker made negligent misrepresentations to Bamberg and Roth, the other shareholder plaintiffs, in violation of her fiduciary duties. The judge instructed the jury that they didn't even need to decide that counterclaim if they decided that Goldman acted properly. (Here's the verdict form.)
Donovan and Vizcarrondo may have lost in the court of public opinion before the trial ever started. But on Wednesday, they won the battle that really matters.
