10 ms·

Goldman Sachs and the $580 Million Black Hole

320 points by jbae29 14y ago

veyron 14y ago
There are a multitude of cases involving technology companies and shenanigans with Goldman Sachs, including Marvell Technologies: http://dealbook.nytimes.com/2011/04/11/marvell-co-founders-sue-goldman-sachs/ http://dealbook.nytimes.com/2011/04/11/marvell-co-founders-s...
- mkramlich 14y ago
  If I could use one word to make a generalization about the financial industry as a whole, including Wall Street, banking, etc., it would be this: shenanigans. You need to be very very careful when dealing with them, and I would also avoid their world as much as you reasonably can. Perhaps not a complete boycott is wise or possible, but as much as you can.
  - dasil003 14y ago
    When you're dealing with top investment bankers you have to realize you're playing the lottery. Goldman will always be hedged and you will always be carrying the risk, not the least of which is that they will mislead you in some subtle way that costs you big. They have more knowledge, more experience, and better lawyers than anyone, so good luck proving any misconduct on their part. Everyone in finance who is not a fish knows this, but they still deal with Goldman, why? Because they're making more money than anyone else, so you still have better odds with them than anyone else.
    - ryporter 14y ago
      While I don't blame the founders for choosing Goldman, I do think that they should have recognized that paying a flat fee was a bad idea. Incentives matter, and it's easy to see how even the most reputable investment bank would allocate fewer resources to your deal if there is no potential upside to them.
  - ktizo 14y ago
    So, can we declare shenanigans on Goldman Sachs then?
  - moron 14y ago
    Yeah. This is why I don't invest -- I don't really see it as investing, I see it as waiting to have your money taken away by someone who is really good at taking money from others.
    - twoodfin 14y ago
      You realize that historically U.S. markets have not worked that way, and putting your money under your mattress instead of investing it resulted in dramatically lower returns?
mrose 14y ago
Very interesting article with ties to Wall St as well as Siri. It should serve as a reminder that in business dealings, only -you- have your best interests in mind.
- georgemcbay 14y ago
  It should also serve as a reminder that stock is just a piece of paper (not even that anymore, just bits in a computer) until you can sell it.
  - deleted 14y ago
    [deleted]
  - coopdog 14y ago
    A piece of paper you can sell for numbers that represent pieces of paper
- Avitas 14y ago
  Virtually every business entity and sub-entity, large and small, have customers and vendors. Customers generally expect to receive a worthwhile expertise, product or service from a business. Along the same lines, vendors generally seek to provide worthwhile expertise, product and/or service to a business. The provision of these products and services at all levels may or may not involve: A) Either a vendor or customer of the business desiring or actively seeking to harm said business (i.e., the opposite of the businesses best interest) B) Either a vendor or customer of the business having no opinion or and no interaction whatsoever with said business outside of the provision of product and/or services (i.e., having no interest in the business) C) Either a vendor or customer of the business intending to help and/or provide worthwhile help to said business (i.e., having the businesses best interests in mind) It is quite possible that a businesses vendors and/or customers do have said businesses best interests in mind (example C above). Examples A and B are also possible. Saying that "only -you-" have your best interests in mind is certainly a possibility in some dealings, but my guess that other scenarios are also common. I agree that it may be wise to assume negligence and double check extremely important matters to a much greater degree than normal. The scenarios outlined in the linked article are a perfect example of negligence, inexperience and lack of communication at many levels. But, at some time, you simply must trust others and can only use your wits, experience and the expertise of even more parties to ensure that those involved in your dealings are doing what they should to the highest professional standards.
anigbrowl 14y ago
I made part of my living in the 90s from selling and installing Dragon's software, and was perplexed to see L&H buy the company and then implode. What an appalling story, though I wonder why it has taken so long to end up in litigation.
- aortega 14y ago
  Maybe because Dragon Systems was acquired by Lernout & Hauspie, that in turn was bought by Scansoft, that was bought by Nuance, that did a partnership with... Apple! to make Siri, and Siri tech is now worth millions/billions (Source: http://en.wikipedia.org/wiki/Scansoft http://en.wikipedia.org/wiki/Scansoft)
  - brown9-2 14y ago
    Minor but Scansoft bought Nuance and took the name.
kaykurokawa 14y ago
You have to feel bad the Baker's, but I have to say that they and Dragon's board did not do its job. In the end, they are the ones that approved the all stock deal with a shady company in the midst of a full blown tech bubble. And they are the ones that hired and fully trusted a middle man to do his job.
saumil07 14y ago
This makes me sick - I'm no M&A expert so it's unclear what Goldman's exact due diligence responsibilities should have been but clearly they screwed up if they helped execute a transaction against a company that basically didn't exist. The article lets the founders completely off the hook, however, which I believe is also unfair. A $580M all-stock deal at the height of the bubble? Signing away your life's work without calling your acquirer's customers? Come on. I hope the founders get paid (on Goldman's dime) but they have to carry some of the blame here.
- georgemcbay 14y ago
  I agree. I'm totally biased against Goldman to begin with and based on what I read in this article (assuming it is truth) I do think they should be on the hook for dropping the ball here (though I don't think they should be on the hook anywhere near $1 billion, maybe $100-200 million or so). However, it sounds like this was a clusterfuck across the board, and the founders and their then-CFO aren't totally blameless here.
  - Avitas 14y ago
    I agree too. I also realize that the Times article can't possibly delve into every detail. It's quite possible that the incompetence at Goldman Sachs was egregious and that Goldman really should be massively punished. But, like you, the article does not show the Dragon executives in a flattering light either.
- pyre 14y ago
  > Signing away your life's work without > calling your acquirer's customers The founders were PhD's whose expertise was in voice processing, I find it believable that they figured that the Goldman bankers were professionals that wouldn't "execute a transaction against a company that basically didn't exist." Places where I do think that they deserve some blame: 1. They seemed to have some reservations about the company. They questioned the Goldman Sachs' bankers about them. It doesn't seem like they got a very satisfactory answer, but instead of pushing for one, they just assumed that the bankers knew what they were doing. 2. They let that phantom memo fall between the cracks. No one followed up on finding out who sent it. No one followed up on this idea that the accountants need to do the due diligence instead of the bankers, even though the suggestion 'shocked' them. 3. They went to meetings, and made agreements without consulting the bankers. Sure the bankers probably should have warned them about (e.g.) taking the all-stock deal over the half-cash/half-stock deal, but I find it odd that they would make this agreement without consulting the bankers. They could have either gone over the possibilities prior to going into the meeting, or made the agreements contingent on a review by the bankers.
deleted 14y ago
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ChuckMcM 14y ago
This sort of story makes me feel the as horrified and disgusted as I do when I hear a story about how someone's child was molested by someone they trusted. I can only hope that if, in the course of the trial, it is established that these are the facts. That Goldman pays dearly for it.
- dabeeeenster 14y ago
  If you equate business malpractice with child abuse, you need to take a long, hard look at your priorities..
bickfordb 14y ago
There were a few things that were hard for me to follow in this article: 1. If the company was worth $1B before as X before selling it to Y, wouldn't Y+X be at least worth $1B? 2. If L&H made fraudulent claims, why not make a claim against L&H to recover the software, brand, intellectual property? According to the Wikipedia page (http://en.wikipedia.org/wiki/Lernout_%26_Hauspie http://en.wikipedia.org/wiki/Lernout_%26_Hauspie) their software ended up being bought by Nuance (Siri).
- blutonium 14y ago
  Bankruptcy is a laundromat for assets, it's pretty much impossible to get them back.
  - Daniel_Newby 14y ago
    The people holding Bernie Madoff paper had no trouble standing in line for a share of the recovery, and the people who had gotten too much out had no barrier to getting it clawed back.
- refurb 14y ago
  Here is a better example: X = acquiring company, worth $2B ($1B in debt, but future earnings valued at $3B) Y = acquired company, worth $1B ($0 debt, $1B future earnings) Merger: X+Y = $3B (+ some factor account for cost savings or new revenue streams) Company X was lying about their sales: X+Y = $0B ($0B from future earnings, $1B in debt + $1B from company Y) Company declares bankruptcy and debtors come in and get every asset with any value. Shareholders value = $0.
confluence 14y ago
Reminds me of 4 lessons I read about start-up exits: Don't swap your stock for another. Don't deal with anyone with a question mark over their head. Take the lower valuation with the company you trust more. Don't celebrate until the cash is in the bank. All 4 rules were broken here. Seller beware. Reasons? When someone swaps a stock - they implicitly value it less than what they get. Hence if you swap your stock with someone else, the buyer implicitly states that your stock is worth more than theirs. Losing deal. Would you marry someone you didn't trust? No. Then why would you swap your baby for theirs? Certain return with someone you trust is 10x better than a "certain" return from a flaky agent. Nullify any agreements that don't put cash in the bank and give you more risk than reward. Take the breaker clause. Or lose everything.
- damian2000 14y ago
  No. 4 reminds me of a sign I still see in small businesses everywhere - "In God we trust. Everyone else pays cash."
- ramchip 14y ago
  Don't deal with anyone with a question mark over their head. What does that mean?
  - confluence 14y ago
    If anyone has even the slightest doubt upon them - bad business dealings, shady companies, or just general concerns - do not deal with them. Life is too short to deal with shady characters - no matter how much money they give you. Not worth the risk.
  - bootload 14y ago
    "... 'Don't deal with anyone with a X...' What does that mean? ..." When there's doubt, there is no doubt.
    - gaius 14y ago
      That's the first thing they teach you.
maxidog 14y ago
When I sold my company, our own advisers (not Goldman but a famous name) did something which in my opinion is much worse -- I'm 99% sure they told the winning bidder that we'd been prepared to accept a 20% lower bid from their competitor. The winning bidder, of course, then suddenly reduced their bid by 20% on the planned day of completion. The reason our advisers did this is that it was much more important to them to get future business from the buyer, a large multinational, than future business from me and my colleagues. I feel sorry for the vendors in this case, but you don't do an all-share deal without being extremely cautious about the shares you're taking as payment. Even a pair of PhDs should have known that. What interests me here is that we have a lot of news stories floating around at the moment lambasting financial companies for relatively minor misdeeds, because that's all journalists can pin on them without getting sued. If the real truth about what goes on begins to leak out the public reaction could be very interesting.
- confluence 14y ago
  > don't do an all-share deal without being extremely cautious about the shares you're taking as payment. This. Cash is king. Unless your acquirer is Intel, Google, Apple, Microsoft, Amazon or anyone of the other big boys. One must remember: If someone is swapping their stock for yours - then they, by definition, value their stock less than they do yours. That's a losing deal in anyone's books. If they say they need the cash for growth - call BS - since if they grow that fast they should hold onto every last bit of their stock. Cash or big boy stock. Everything else is a lie.
- deleted 14y ago
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- Retric 14y ago
  That's when you call the SEC because they both committed a felony and go with the other bid if it's still on the table.
- ams6110 14y ago
  On the other hand that's a standard negotiating ploy. How many times, when buying a car, are you minutes from closing the deal when suddenly a new fee appears. Or suddenly an issue with your trade-in and it's not worth what they "thought" it was. It only changes your monthly payment by $10... do you really want to walk away after the effort you've put in to this point? So not necessarily anything nefarious going on (though not discounting the possibility entirely).
forgotmyuser 14y ago
I fount it really funny how Goldman counter-sued Ms. Baker knowing full well the Bakers were broke. What a bunch of dogs. Doesn't surprise me... with all the crap they pull these days and get away with. I hope they get taken for the full amount claimed by the Bakers. Even though they made some huge mistakes, a firm that's supposed to advise them and act in their best interest failed to do the most basic of tasks no matter what bs excuse they cooked up ie vacations.
ryanwaggoner 14y ago
To me, the lesson here is clear: trust your instincts! There are too many stories of founders who built a successful company and then let the "experts" run it into the ground. In almost every case, the founder(s) felt like something wasn't right, but they swept their concerns aside, because they had hired "experts" and felt compelled to listen to them. The reality is that no one has more expertise in your company than you do, and more importantly (particularly in this case), no one cares as much as you do. So yes, surround yourself with experts and seek as much wisdom as you can from them, but (almost) never go against your gut to follow their advice. Your instincts are usually what got you to that point in the first place.
- rudiger 14y ago
  I'm reminded of AOL vs. Time Warner, Steve Case vs. Ted Turner.
- ivancdg 14y ago
  Funny, when I read your 3rd paragraph, that made me think of the danger of putting too much faith in doctors. Doctors get really peeved at people who research online and self-diagnose. On the other hand no-one cares about your health as much as you do, and no-one has access to as much information about what the root causes of malady could be. Although Christopher Hitchens hated the expression 'X is battling with cancer', the phrase implies a personal engagement (as opposed to delegating) which can indeed make all the difference in the world.
  - urbanjunkie 14y ago
    > Doctors get really peeved at people who research online and self-diagnose Good doctors encourage patients to understand their condition. Let's not conflate that with exasperation over people who have a week old cough that they've decided is lung cancer because they've spent too much time on wrongdiagnosis.com.
    - ivancdg 14y ago
      The larger point about personal responsibility is more important than applying the metaphor to every possible case. No matter who you hire, in any context, it is up to you to make sure they do a good job with the tools available to you.
gojomo 14y ago
I feel for the Dragon founders, but with $580 million of L&H stock at one point, they also could have and should have done some prompt and serious hedging/collaring. Perhaps they did, but not nearly enough?
- ryanwaggoner 14y ago
  Was L&H public though?
  - gnufied 14y ago
    If I am reading the story correctly it was. "And Mr. Elliott assured Ms. Baker that investors were worried about the market in general, rather than L.& H. in particular"
  - gojomo 14y ago
    Statements in the article like "Dragon was wondering why L.& H.’s share price had been gyrating wildly" made me think L&H must have been public. (Before the recent emergence of pre-IPO secondary markets, a private company wouldn't even be commonly described as having a generally-known 'share price' unless/until it went public.) Wikipedia confirms L&H had gone public on NASDAQ in 1995: http://en.wikipedia.org/wiki/Lernout_%26_Hauspie http://en.wikipedia.org/wiki/Lernout_%26_Hauspie
  - deleted 14y ago
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joelrunyon 14y ago
Single page link here - http://www.nytimes.com/2012/07/15/business/goldman-sachs-and-a-sale-gone-horribly-awry.html?_r=1&hpw&pagewanted=all http://www.nytimes.com/2012/07/15/business/goldman-sachs-and...
einhverfr 14y ago
Horrifying story. I hope Goldman gets held liable for that billion in damages. At the same time I think that there are some important lessons here. The big one that comes to my mind is always have an exit strategy. For example, if I am able to make my business take off great. If it gets acquired and I end up not liking the new bosses, great, I can quit. But what can I take with me? What do I do after that? I am fortunate in this area to have a lot of people who, while not aware of the whole situation can still nonetheless provide some help with that question. And I am grateful to those who have pushed a greater open source angle here. And of course we can find how many missed opportunities there were to notice that this deal was bad on everyone's side. But the question for the rest of us not involved in litigation is what we take away from it. I take away from it: 1) Be very careful about M&A. If something doesn't look right, it probably isn't. 2) Always have an exit strategy.
- Variance 14y ago
  And, never, never, never, never, NEVER do a stock swap for a payout. In the finance world, holding $580 million in equity in a single position--a single company--is called flushing that cash down the toilet. The objective of anyone with a single position composing a majority of their value, or even anything much larger than a double-digit-percentage, should be to get out as quickly as possible. Why? Tail risk associated with your position introduces volatility cost into your portfolio, and the risk alone chips away at the value. That $580 million was probably already worth less than $500 million the instant that they decided to do a stock swap, just because of the volatility risk of being that undiversified. Lesson learned: get a third party financial adviser who will mediate with Goldman for you on your half-a-billion-dollar deal. Don't pay Goldman a flat fee disincentivized from performance. And NEVER leave all that equity tied into a single position. Yes, Goldman could be at fault here, but it would in the same capacity that a negligent driver is at fault for rear-ending someone who let their brake-lights burn out without replacement.
  - einhverfr 14y ago
    I mean for a deal like that, the immediate question is "why no cash?" Cash is operating capital and it requires business commitment to pay for it. Equity is an accounting entry, limited only by laws and bylaws of the organizations. The only reasons I can think of are: 1) The stock of the purchaser is overvalued and the purchaser knows it, 2) The purchaser doesn't want to spend operating capital on the acquisition...., or 3) The purchaser doesn't have the operating capital to spend on the acquisition..... 1 and 3 seem likely in this case.
andreyf 14y ago
But on Feb. 29, Dragon received an odd memo from Goldman. It wasn’t addressed to anyone in particular at Dragon, and it wasn’t signed by anyone at Goldman. The Goldman Four testified later that they had no idea who had sent it. But the memo referred to many of the same due diligence issues that Ms. Chamberlain raised. The memo asserted, however, that Dragon’s accounting firm, Arthur Andersen, should do the work, not Goldman. [...] To support the argument that Goldman was not obligated to perform due diligence, the firm points to that mystery memo of Feb. 29, 2000 — the memo that no one at Goldman has acknowledged sending — as establishing that Dragon Systems needed to push its accounting firm to explain any red flags or resolve outstanding worries. Given that GS is now using this memo to cover their asses, it makes me wonder whether someone there knew what was going on...
- bergerj 14y ago
  Exactly. Goldman is off the hook for sending it and the 4 bankers are off the hook because none of them officially sent it.
chernevik 14y ago
I don't think this happens if someone like Kleiner Perkins had a 10% or 20% stake in Dragon. A serious VC partner would have been more likely to realize that Goldmans sent out the junior varsity here, and would have the standing and confidence to insist they do better or be fired. They would have asked better questions about the due diligence and been more attentive to valuing the buyer -- valuation is what VC firms do -- and might have spotted the problems themselves. In the worst case, where this disaster still strikes, Goldmans would be far more likely to be reasonable about its responsibilities, lest it spoil its reputation with a well-connected VC. But maybe I exaggerate the business and financial knowledge of tech VC types? I don't much like the idea of allowing big VC firms to collect rents based on their reputation. But you cannot expect fee-based labor to be as careful and paranoid as you must be on this sort of thing. Only partnership brings that level of attention. When the stakes get this high, you need a partner capable of taking these responsibilities. If your financial partner or CFO isn't up to the task -- and Dragon's CFO was not -- then you have to fill that gap in the _partnership_. Another solution would be bringing in a CFO with an equity stake, but this raises the same problem of financial expertise evaluation that sank the founders here. None of which excuses Goldmans.
- mathattack 14y ago
  They had Seagate as a 25% partner. Where were they?
  - gabriel 14y ago
    Dragon CFO Ellen Chamberlain was from Seagate.
    - writetoalok 14y ago
      And they still lost 20% of $580 million ...
      - gojomo 14y ago
        Are we sure Seagate didn't sell or otherwise collar the value of their stake soon after the acquisition? According to the article, there were about 60 days before the scandal erupted: "The deal closed on June 7. By Aug. 8, the merged companies were in crisis amid reports that L.& H. had cooked its books."
snorkel 14y ago
I don't know if I entirely blame Goldman for this, Dragon bears some of the responsibility for accepting a bad deal from a shady company. Afterall Dragon's board of directors all voted to approve the deal without a clear signal from Goldman if that was safe or not. And sure, Goldman was clearly being unresponsive, but in that case Dragon should've fired Goldman for being unresponsive sought out another bank to perform the due diligence.
ams6110 14y ago
To the Dragon deal, Goldman assigned four bankers, two in their 20s and one in his early 30s. That wasn’t unusual. Although Dragon Systems was worth everything to the Bakers, the company — with $70 million in revenue and 400 employees — was small beer on Wall Street. Illustrating why you don't want to be a small fish in a big ocean. Should have gone with a smaller, hungrier firm.
mikecane 14y ago
“We guided them to a completed transaction.”
- gruseom 14y ago
  I noticed that too. It's a real-life "The operation was successful but the patient died".
- chestercheetaz 14y ago
  this could only work in finance....imagine the equivalent in R&D: "we're code complete and shipped!" (product doesn't work.) pure shenanigans.
deleted 14y ago
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tzs 14y ago
I don't understand why we don't require investment bankers to be licensed, the same way we require lawyers to be licensed, and require as a condition of obtaining and maintaining that license that they take a course in ethics, and they operate ethically in regard to their clients. If a big law firm did the kind of questionable things toward a client that Goldman Sachs did with Dragon, there would be people up for disbarment.
justin_vanw 14y ago
So, Goldman made $5M from fees due to this deal. They could have potentially made billions if they had known the extent of L&H's fraud during this period, by shorting stock or the options market, so there is absolutely no reason to think that this was intentional or knowingly done. It was far more valuable to Goldman to uncover the fraud than to just get this deal signed, they left hundreds of millions on the table by not doing this research. It's a heart breaking story, but the shareholders of Dragon did it to themselves, they went to the meeting (without Goldman advisors) and they signed the contracts which traded their valuable stock for stock that ended up being worthless (although nobody knew it at the time due to fraud). Why didn't Dragon insist on a thorough auditing of L&H's books before agreeing to a deal? They went ahead and traded what they had without even looking at what they were getting in return. They made a blunder out of greed, it's common, and it's not anyone's fault but theirs. If Goldman had certified that L&H was solid, then there might be a leg to stand on here, but they explicitly punted and said it wasn't the job of a banker to audit a companies books. This seems logical to me, and if Dragon didn't like that answer they could have gone and found another investment banking firm to advise them. What was the 'right' thing for Goldman to do here? Drive to the Dragon office and put a gun to their head, tell them they weren't allowed to go to a meeting with L&H that was set up directly between Dragon and L&H?
- bjornsing 14y ago
  > They made a blunder out of greed, it's common, and it's not anyone's fault but theirs. As the saying goes, "never attribute to malice what can be sufficiently explained by incompetence". The Bakers themselves say the worst part was not being able to complete their work on the technology... I'd rather schalk this one down to naiveté.
- damncabbage 14y ago
  This seems logical to me, and if Dragon didn't like that answer they could have gone and found another investment banking firm to advise them. Weren't they already in the hole for $5M at this point, though?

320 points by jbae29 14y ago

There are a multitude of cases involving technology companies and shenanigans with Goldman Sachs, including Marvell Technologies: http://dealbook.nytimes.com/2011/04/11/marvell-co-founders-sue-goldman-sachs/ http://dealbook.nytimes.com/2011/04/11/marvell-co-founders-s...

mkramlich 14y ago
If I could use one word to make a generalization about the financial industry as a whole, including Wall Street, banking, etc., it would be this: shenanigans. You need to be very very careful when dealing with them, and I would also avoid their world as much as you reasonably can. Perhaps not a complete boycott is wise or possible, but as much as you can.
- dasil003 14y ago
  When you're dealing with top investment bankers you have to realize you're playing the lottery. Goldman will always be hedged and you will always be carrying the risk, not the least of which is that they will mislead you in some subtle way that costs you big. They have more knowledge, more experience, and better lawyers than anyone, so good luck proving any misconduct on their part. Everyone in finance who is not a fish knows this, but they still deal with Goldman, why? Because they're making more money than anyone else, so you still have better odds with them than anyone else.
  - ryporter 14y ago
    While I don't blame the founders for choosing Goldman, I do think that they should have recognized that paying a flat fee was a bad idea. Incentives matter, and it's easy to see how even the most reputable investment bank would allocate fewer resources to your deal if there is no potential upside to them.
- ktizo 14y ago
  So, can we declare shenanigans on Goldman Sachs then?
- moron 14y ago
  Yeah. This is why I don't invest -- I don't really see it as investing, I see it as waiting to have your money taken away by someone who is really good at taking money from others.
  - twoodfin 14y ago
    You realize that historically U.S. markets have not worked that way, and putting your money under your mattress instead of investing it resulted in dramatically lower returns?

mrose 14y ago

Very interesting article with ties to Wall St as well as Siri. It should serve as a reminder that in business dealings, only -you- have your best interests in mind.

georgemcbay 14y ago
It should also serve as a reminder that stock is just a piece of paper (not even that anymore, just bits in a computer) until you can sell it.
- deleted 14y ago
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- coopdog 14y ago
  A piece of paper you can sell for numbers that represent pieces of paper
Avitas 14y ago
Virtually every business entity and sub-entity, large and small, have customers and vendors. Customers generally expect to receive a worthwhile expertise, product or service from a business. Along the same lines, vendors generally seek to provide worthwhile expertise, product and/or service to a business. The provision of these products and services at all levels may or may not involve: A) Either a vendor or customer of the business desiring or actively seeking to harm said business (i.e., the opposite of the businesses best interest) B) Either a vendor or customer of the business having no opinion or and no interaction whatsoever with said business outside of the provision of product and/or services (i.e., having no interest in the business) C) Either a vendor or customer of the business intending to help and/or provide worthwhile help to said business (i.e., having the businesses best interests in mind) It is quite possible that a businesses vendors and/or customers do have said businesses best interests in mind (example C above). Examples A and B are also possible. Saying that "only -you-" have your best interests in mind is certainly a possibility in some dealings, but my guess that other scenarios are also common. I agree that it may be wise to assume negligence and double check extremely important matters to a much greater degree than normal. The scenarios outlined in the linked article are a perfect example of negligence, inexperience and lack of communication at many levels. But, at some time, you simply must trust others and can only use your wits, experience and the expertise of even more parties to ensure that those involved in your dealings are doing what they should to the highest professional standards.

anigbrowl 14y ago

I made part of my living in the 90s from selling and installing Dragon's software, and was perplexed to see L&H buy the company and then implode. What an appalling story, though I wonder why it has taken so long to end up in litigation.

aortega 14y ago
Maybe because Dragon Systems was acquired by Lernout & Hauspie, that in turn was bought by Scansoft, that was bought by Nuance, that did a partnership with... Apple! to make Siri, and Siri tech is now worth millions/billions (Source: http://en.wikipedia.org/wiki/Scansoft http://en.wikipedia.org/wiki/Scansoft)
- brown9-2 14y ago
  Minor but Scansoft bought Nuance and took the name.

kaykurokawa 14y ago

You have to feel bad the Baker's, but I have to say that they and Dragon's board did not do its job. In the end, they are the ones that approved the all stock deal with a shady company in the midst of a full blown tech bubble. And they are the ones that hired and fully trusted a middle man to do his job.

saumil07 14y ago

This makes me sick - I'm no M&A expert so it's unclear what Goldman's exact due diligence responsibilities should have been but clearly they screwed up if they helped execute a transaction against a company that basically didn't exist. The article lets the founders completely off the hook, however, which I believe is also unfair. A $580M all-stock deal at the height of the bubble? Signing away your life's work without calling your acquirer's customers? Come on. I hope the founders get paid (on Goldman's dime) but they have to carry some of the blame here.

georgemcbay 14y ago
I agree. I'm totally biased against Goldman to begin with and based on what I read in this article (assuming it is truth) I do think they should be on the hook for dropping the ball here (though I don't think they should be on the hook anywhere near $1 billion, maybe $100-200 million or so). However, it sounds like this was a clusterfuck across the board, and the founders and their then-CFO aren't totally blameless here.
- Avitas 14y ago
  I agree too. I also realize that the Times article can't possibly delve into every detail. It's quite possible that the incompetence at Goldman Sachs was egregious and that Goldman really should be massively punished. But, like you, the article does not show the Dragon executives in a flattering light either.
pyre 14y ago
> Signing away your life's work without > calling your acquirer's customers The founders were PhD's whose expertise was in voice processing, I find it believable that they figured that the Goldman bankers were professionals that wouldn't "execute a transaction against a company that basically didn't exist." Places where I do think that they deserve some blame: 1. They seemed to have some reservations about the company. They questioned the Goldman Sachs' bankers about them. It doesn't seem like they got a very satisfactory answer, but instead of pushing for one, they just assumed that the bankers knew what they were doing. 2. They let that phantom memo fall between the cracks. No one followed up on finding out who sent it. No one followed up on this idea that the accountants need to do the due diligence instead of the bankers, even though the suggestion 'shocked' them. 3. They went to meetings, and made agreements without consulting the bankers. Sure the bankers probably should have warned them about (e.g.) taking the all-stock deal over the half-cash/half-stock deal, but I find it odd that they would make this agreement without consulting the bankers. They could have either gone over the possibilities prior to going into the meeting, or made the agreements contingent on a review by the bankers.

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ChuckMcM 14y ago

This sort of story makes me feel the as horrified and disgusted as I do when I hear a story about how someone's child was molested by someone they trusted. I can only hope that if, in the course of the trial, it is established that these are the facts. That Goldman pays dearly for it.

dabeeeenster 14y ago
If you equate business malpractice with child abuse, you need to take a long, hard look at your priorities..

bickfordb 14y ago

There were a few things that were hard for me to follow in this article: 1. If the company was worth $1B before as X before selling it to Y, wouldn't Y+X be at least worth $1B? 2. If L&H made fraudulent claims, why not make a claim against L&H to recover the software, brand, intellectual property? According to the Wikipedia page (http://en.wikipedia.org/wiki/Lernout_%26_Hauspie http://en.wikipedia.org/wiki/Lernout_%26_Hauspie) their software ended up being bought by Nuance (Siri).

blutonium 14y ago
Bankruptcy is a laundromat for assets, it's pretty much impossible to get them back.
- Daniel_Newby 14y ago
  The people holding Bernie Madoff paper had no trouble standing in line for a share of the recovery, and the people who had gotten too much out had no barrier to getting it clawed back.
refurb 14y ago
Here is a better example: X = acquiring company, worth $2B ($1B in debt, but future earnings valued at $3B) Y = acquired company, worth $1B ($0 debt, $1B future earnings) Merger: X+Y = $3B (+ some factor account for cost savings or new revenue streams) Company X was lying about their sales: X+Y = $0B ($0B from future earnings, $1B in debt + $1B from company Y) Company declares bankruptcy and debtors come in and get every asset with any value. Shareholders value = $0.

confluence 14y ago

Reminds me of 4 lessons I read about start-up exits: Don't swap your stock for another. Don't deal with anyone with a question mark over their head. Take the lower valuation with the company you trust more. Don't celebrate until the cash is in the bank. All 4 rules were broken here. Seller beware. Reasons? When someone swaps a stock - they implicitly value it less than what they get. Hence if you swap your stock with someone else, the buyer implicitly states that your stock is worth more than theirs. Losing deal. Would you marry someone you didn't trust? No. Then why would you swap your baby for theirs? Certain return with someone you trust is 10x better than a "certain" return from a flaky agent. Nullify any agreements that don't put cash in the bank and give you more risk than reward. Take the breaker clause. Or lose everything.

damian2000 14y ago
No. 4 reminds me of a sign I still see in small businesses everywhere - "In God we trust. Everyone else pays cash."
ramchip 14y ago
Don't deal with anyone with a question mark over their head. What does that mean?
- confluence 14y ago
  If anyone has even the slightest doubt upon them - bad business dealings, shady companies, or just general concerns - do not deal with them. Life is too short to deal with shady characters - no matter how much money they give you. Not worth the risk.
- bootload 14y ago
  "... 'Don't deal with anyone with a X...' What does that mean? ..." When there's doubt, there is no doubt.
  - gaius 14y ago
    That's the first thing they teach you.

maxidog 14y ago

When I sold my company, our own advisers (not Goldman but a famous name) did something which in my opinion is much worse -- I'm 99% sure they told the winning bidder that we'd been prepared to accept a 20% lower bid from their competitor. The winning bidder, of course, then suddenly reduced their bid by 20% on the planned day of completion. The reason our advisers did this is that it was much more important to them to get future business from the buyer, a large multinational, than future business from me and my colleagues. I feel sorry for the vendors in this case, but you don't do an all-share deal without being extremely cautious about the shares you're taking as payment. Even a pair of PhDs should have known that. What interests me here is that we have a lot of news stories floating around at the moment lambasting financial companies for relatively minor misdeeds, because that's all journalists can pin on them without getting sued. If the real truth about what goes on begins to leak out the public reaction could be very interesting.

confluence 14y ago
> don't do an all-share deal without being extremely cautious about the shares you're taking as payment. This. Cash is king. Unless your acquirer is Intel, Google, Apple, Microsoft, Amazon or anyone of the other big boys. One must remember: If someone is swapping their stock for yours - then they, by definition, value their stock less than they do yours. That's a losing deal in anyone's books. If they say they need the cash for growth - call BS - since if they grow that fast they should hold onto every last bit of their stock. Cash or big boy stock. Everything else is a lie.
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Retric 14y ago
That's when you call the SEC because they both committed a felony and go with the other bid if it's still on the table.
ams6110 14y ago
On the other hand that's a standard negotiating ploy. How many times, when buying a car, are you minutes from closing the deal when suddenly a new fee appears. Or suddenly an issue with your trade-in and it's not worth what they "thought" it was. It only changes your monthly payment by $10... do you really want to walk away after the effort you've put in to this point? So not necessarily anything nefarious going on (though not discounting the possibility entirely).

forgotmyuser 14y ago

I fount it really funny how Goldman counter-sued Ms. Baker knowing full well the Bakers were broke. What a bunch of dogs. Doesn't surprise me... with all the crap they pull these days and get away with. I hope they get taken for the full amount claimed by the Bakers. Even though they made some huge mistakes, a firm that's supposed to advise them and act in their best interest failed to do the most basic of tasks no matter what bs excuse they cooked up ie vacations.

ryanwaggoner 14y ago

To me, the lesson here is clear: trust your instincts! There are too many stories of founders who built a successful company and then let the "experts" run it into the ground. In almost every case, the founder(s) felt like something wasn't right, but they swept their concerns aside, because they had hired "experts" and felt compelled to listen to them. The reality is that no one has more expertise in your company than you do, and more importantly (particularly in this case), no one cares as much as you do. So yes, surround yourself with experts and seek as much wisdom as you can from them, but (almost) never go against your gut to follow their advice. Your instincts are usually what got you to that point in the first place.

rudiger 14y ago
I'm reminded of AOL vs. Time Warner, Steve Case vs. Ted Turner.
ivancdg 14y ago
Funny, when I read your 3rd paragraph, that made me think of the danger of putting too much faith in doctors. Doctors get really peeved at people who research online and self-diagnose. On the other hand no-one cares about your health as much as you do, and no-one has access to as much information about what the root causes of malady could be. Although Christopher Hitchens hated the expression 'X is battling with cancer', the phrase implies a personal engagement (as opposed to delegating) which can indeed make all the difference in the world.
- urbanjunkie 14y ago
  > Doctors get really peeved at people who research online and self-diagnose Good doctors encourage patients to understand their condition. Let's not conflate that with exasperation over people who have a week old cough that they've decided is lung cancer because they've spent too much time on wrongdiagnosis.com.
  - ivancdg 14y ago
    The larger point about personal responsibility is more important than applying the metaphor to every possible case. No matter who you hire, in any context, it is up to you to make sure they do a good job with the tools available to you.

gojomo 14y ago

I feel for the Dragon founders, but with $580 million of L&H stock at one point, they also could have and should have done some prompt and serious hedging/collaring. Perhaps they did, but not nearly enough?

ryanwaggoner 14y ago
Was L&H public though?
- gnufied 14y ago
  If I am reading the story correctly it was. "And Mr. Elliott assured Ms. Baker that investors were worried about the market in general, rather than L.& H. in particular"
- gojomo 14y ago
  Statements in the article like "Dragon was wondering why L.& H.’s share price had been gyrating wildly" made me think L&H must have been public. (Before the recent emergence of pre-IPO secondary markets, a private company wouldn't even be commonly described as having a generally-known 'share price' unless/until it went public.) Wikipedia confirms L&H had gone public on NASDAQ in 1995: http://en.wikipedia.org/wiki/Lernout_%26_Hauspie http://en.wikipedia.org/wiki/Lernout_%26_Hauspie
- deleted 14y ago
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joelrunyon 14y ago

Single page link here - http://www.nytimes.com/2012/07/15/business/goldman-sachs-and-a-sale-gone-horribly-awry.html?_r=1&hpw&pagewanted=all http://www.nytimes.com/2012/07/15/business/goldman-sachs-and...

einhverfr 14y ago

Horrifying story. I hope Goldman gets held liable for that billion in damages. At the same time I think that there are some important lessons here. The big one that comes to my mind is always have an exit strategy. For example, if I am able to make my business take off great. If it gets acquired and I end up not liking the new bosses, great, I can quit. But what can I take with me? What do I do after that? I am fortunate in this area to have a lot of people who, while not aware of the whole situation can still nonetheless provide some help with that question. And I am grateful to those who have pushed a greater open source angle here. And of course we can find how many missed opportunities there were to notice that this deal was bad on everyone's side. But the question for the rest of us not involved in litigation is what we take away from it. I take away from it: 1) Be very careful about M&A. If something doesn't look right, it probably isn't. 2) Always have an exit strategy.

Variance 14y ago
And, never, never, never, never, NEVER do a stock swap for a payout. In the finance world, holding $580 million in equity in a single position--a single company--is called flushing that cash down the toilet. The objective of anyone with a single position composing a majority of their value, or even anything much larger than a double-digit-percentage, should be to get out as quickly as possible. Why? Tail risk associated with your position introduces volatility cost into your portfolio, and the risk alone chips away at the value. That $580 million was probably already worth less than $500 million the instant that they decided to do a stock swap, just because of the volatility risk of being that undiversified. Lesson learned: get a third party financial adviser who will mediate with Goldman for you on your half-a-billion-dollar deal. Don't pay Goldman a flat fee disincentivized from performance. And NEVER leave all that equity tied into a single position. Yes, Goldman could be at fault here, but it would in the same capacity that a negligent driver is at fault for rear-ending someone who let their brake-lights burn out without replacement.
- einhverfr 14y ago
  I mean for a deal like that, the immediate question is "why no cash?" Cash is operating capital and it requires business commitment to pay for it. Equity is an accounting entry, limited only by laws and bylaws of the organizations. The only reasons I can think of are: 1) The stock of the purchaser is overvalued and the purchaser knows it, 2) The purchaser doesn't want to spend operating capital on the acquisition...., or 3) The purchaser doesn't have the operating capital to spend on the acquisition..... 1 and 3 seem likely in this case.

andreyf 14y ago

But on Feb. 29, Dragon received an odd memo from Goldman. It wasn’t addressed to anyone in particular at Dragon, and it wasn’t signed by anyone at Goldman. The Goldman Four testified later that they had no idea who had sent it. But the memo referred to many of the same due diligence issues that Ms. Chamberlain raised. The memo asserted, however, that Dragon’s accounting firm, Arthur Andersen, should do the work, not Goldman. [...] To support the argument that Goldman was not obligated to perform due diligence, the firm points to that mystery memo of Feb. 29, 2000 — the memo that no one at Goldman has acknowledged sending — as establishing that Dragon Systems needed to push its accounting firm to explain any red flags or resolve outstanding worries. Given that GS is now using this memo to cover their asses, it makes me wonder whether someone there knew what was going on...

bergerj 14y ago
Exactly. Goldman is off the hook for sending it and the 4 bankers are off the hook because none of them officially sent it.

chernevik 14y ago

I don't think this happens if someone like Kleiner Perkins had a 10% or 20% stake in Dragon. A serious VC partner would have been more likely to realize that Goldmans sent out the junior varsity here, and would have the standing and confidence to insist they do better or be fired. They would have asked better questions about the due diligence and been more attentive to valuing the buyer -- valuation is what VC firms do -- and might have spotted the problems themselves. In the worst case, where this disaster still strikes, Goldmans would be far more likely to be reasonable about its responsibilities, lest it spoil its reputation with a well-connected VC. But maybe I exaggerate the business and financial knowledge of tech VC types? I don't much like the idea of allowing big VC firms to collect rents based on their reputation. But you cannot expect fee-based labor to be as careful and paranoid as you must be on this sort of thing. Only partnership brings that level of attention. When the stakes get this high, you need a partner capable of taking these responsibilities. If your financial partner or CFO isn't up to the task -- and Dragon's CFO was not -- then you have to fill that gap in the _partnership_. Another solution would be bringing in a CFO with an equity stake, but this raises the same problem of financial expertise evaluation that sank the founders here. None of which excuses Goldmans.

mathattack 14y ago
They had Seagate as a 25% partner. Where were they?
- gabriel 14y ago
  Dragon CFO Ellen Chamberlain was from Seagate.
  - writetoalok 14y ago
    And they still lost 20% of $580 million ...
    - gojomo 14y ago
      Are we sure Seagate didn't sell or otherwise collar the value of their stake soon after the acquisition? According to the article, there were about 60 days before the scandal erupted: "The deal closed on June 7. By Aug. 8, the merged companies were in crisis amid reports that L.& H. had cooked its books."

snorkel 14y ago

I don't know if I entirely blame Goldman for this, Dragon bears some of the responsibility for accepting a bad deal from a shady company. Afterall Dragon's board of directors all voted to approve the deal without a clear signal from Goldman if that was safe or not. And sure, Goldman was clearly being unresponsive, but in that case Dragon should've fired Goldman for being unresponsive sought out another bank to perform the due diligence.

ams6110 14y ago

To the Dragon deal, Goldman assigned four bankers, two in their 20s and one in his early 30s. That wasn’t unusual. Although Dragon Systems was worth everything to the Bakers, the company — with $70 million in revenue and 400 employees — was small beer on Wall Street. Illustrating why you don't want to be a small fish in a big ocean. Should have gone with a smaller, hungrier firm.

mikecane 14y ago

“We guided them to a completed transaction.”

gruseom 14y ago
I noticed that too. It's a real-life "The operation was successful but the patient died".
chestercheetaz 14y ago
this could only work in finance....imagine the equivalent in R&D: "we're code complete and shipped!" (product doesn't work.) pure shenanigans.

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tzs 14y ago

I don't understand why we don't require investment bankers to be licensed, the same way we require lawyers to be licensed, and require as a condition of obtaining and maintaining that license that they take a course in ethics, and they operate ethically in regard to their clients. If a big law firm did the kind of questionable things toward a client that Goldman Sachs did with Dragon, there would be people up for disbarment.

justin_vanw 14y ago

So, Goldman made $5M from fees due to this deal. They could have potentially made billions if they had known the extent of L&H's fraud during this period, by shorting stock or the options market, so there is absolutely no reason to think that this was intentional or knowingly done. It was far more valuable to Goldman to uncover the fraud than to just get this deal signed, they left hundreds of millions on the table by not doing this research. It's a heart breaking story, but the shareholders of Dragon did it to themselves, they went to the meeting (without Goldman advisors) and they signed the contracts which traded their valuable stock for stock that ended up being worthless (although nobody knew it at the time due to fraud). Why didn't Dragon insist on a thorough auditing of L&H's books before agreeing to a deal? They went ahead and traded what they had without even looking at what they were getting in return. They made a blunder out of greed, it's common, and it's not anyone's fault but theirs. If Goldman had certified that L&H was solid, then there might be a leg to stand on here, but they explicitly punted and said it wasn't the job of a banker to audit a companies books. This seems logical to me, and if Dragon didn't like that answer they could have gone and found another investment banking firm to advise them. What was the 'right' thing for Goldman to do here? Drive to the Dragon office and put a gun to their head, tell them they weren't allowed to go to a meeting with L&H that was set up directly between Dragon and L&H?

bjornsing 14y ago
> They made a blunder out of greed, it's common, and it's not anyone's fault but theirs. As the saying goes, "never attribute to malice what can be sufficiently explained by incompetence". The Bakers themselves say the worst part was not being able to complete their work on the technology... I'd rather schalk this one down to naiveté.
damncabbage 14y ago
This seems logical to me, and if Dragon didn't like that answer they could have gone and found another investment banking firm to advise them. Weren't they already in the hole for $5M at this point, though?