Goldman becomes the scapegoat in deal gone bad
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E-mail Shanghai Daily, July 24, 2012
In the end, the Times article, although riveting, was a journalistic case study in choosing from among many facts those that suit your argument.
Another side
The point being, there is often another side to a complex story, assuming you are open to exploring it. For instance, according to court documents I reviewed, the heavily negotiated engagement letter between Dragon and Goldman specifically excluded Dragon shareholders - including the Bakers and Seagate Technology Plc, Dragon's largest shareholder - as parties. Rather, it expressly stated that Goldman would only advise Dragon, the company, and that Dragon's "shareholders would not hold Goldman liable."
Goldman had initially sought to advise not only Dragon but also the Bakers and Seagate, while requiring these shareholders to "personally guarantee payment" of Goldman's US$5 million fee. But Janet Baker wanted that provision taken out of the final agreement, and it was.
Furthermore, the engagement letter did not call for Goldman to give the Dragon board a "fairness opinion," wherein a banker opines to a board about the "fairness" of the consideration being received. The Times's article fingered Goldman for not making a presentation to the board about the L&H stock shareholders would get, but didn't mention that Goldman had not been requested to do so in the engagement letter.
Minutes of the March 27 meeting reveal that the board of directors, on its own, determined that the consideration being offered - the L&H stock - was "fair to and in the best interests of" Dragon and its shareholders. (Wayner was away on vacation during this meeting, although he called in and spoke.)
The Times's expose made much of the fact that Goldman failed to perform sufficient due diligence on L&H to uncover the fraud. First, this charge is absurd - M&A bankers are not forensic accountants. Second, Goldman holds that in previous lawsuits the Bakers brought against 30 separate defendants including L&H's auditor (KPMG LLP), investment banker (SG Cowen & Co), and officers and creditors, the Bakers "swore under oath" and "represented to this court" that Dragon's due diligence on "L&H was exhaustive, that verification of L&H's accounting was not Goldman's job, and that no amount of due diligence could have detected the fraud."
Mysterious memo
The Times also pointed to a "mysterious" unsigned February 29, 2000, memo from Goldman to Dragon urging that "additional due diligence" on L&H be performed by "accounting professionals on both sides" and noted that "experience shows that companies like Lernout & Hauspie, which grow via acquisition, necessitate an extra level of care at this stage of the process." The memo further stated that this extra level of forensic due diligence is important when the seller is thinking of taking the buyer's stock as consideration. The Bakers ignored this recommendation, and the forensic due diligence was not done. Since when is it the bankers' fault when a client doesn't take their advice?
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