Gretchen Ertl for The New York TimesJanet and Jim Baker at home. They are fighting Goldman Sachs over its work in 2000 on the all-stock sale of their business, Dragon Systems, to a company that later collapsed, leaving them shut out.
THE business deal from hell began to crumble even before the Champagne corks were popped.
The deal, the $580 million sale of a highflying technology company, Dragon Systems, had just been approved by its board and congratulations were being exchanged. But even then, at that moment of celebration, there was a sense that something was amiss.
The chief executive of Dragon had received a congratulatory bottle from the investment bankers representing the acquiring company, a Belgian competitor called Lernout & Hauspie. But he hadn’t heard from Dragon’s own bankers at Goldman Sachs.
“I still have not received anything from Goldman,” the executive wrote in an e-mail to the other bank. “Do they know something I should know?”
More than a decade later, that question is still reverberating in a brutal legal battle between Goldman and the founders of Dragon Systems — along with a host of other questions that go to the heart of how financial giants like Goldman operate and what exactly they owe their clients.
James and Janet Baker spent nearly two decades building Dragon, a voice technology company, into a successful, multimillion-dollar enterprise. It was, they say, their “third child.” So in late 1999, when offers to buy Dragon began rolling in, the couple made what seemed a smart decision: they turned to Goldman Sachs for advice. And why not? Goldman, after all, was the leading dealmaker on Wall Street. The Bakers wanted the best.
This, of course, was before the scandals of the subprime mortgage era. It was before the bailouts, before Occupy Wall Street, before ordinary Americans began complaining about “banksters” and “muppets” and “the vampire squid.” In short, before Goldman Sachs became, for many, synonymous with Wall Street greed.
And yet, even today what happened next to the Bakers seems remarkable. With Goldman Sachs on the job, the corporate takeover of Dragon Systems in an all-stock deal went terribly wrong. Goldman collected millions of dollars in fees — and the Bakers lost everything when Lernout & Hauspie was revealed to be a spectacular fraud. L.& H. had been founded by Jo Lernout and Pol Hauspie, who had once been hailed as stars of the 1990s tech boom. Only later did the Bakers learn that Goldman Sachs itself had at one point considered investing in L.& H. but had walked away after some digging into the company.
This being Wall Street, a lot of money is now at stake. In federal court in Boston, the Bakers are demanding damages, including interest and legal fees, that could top $1 billion. That figure is nearly twice what Goldman paid to settle claims that it misled investors about subprime mortgage investments before the financial crisis of 2008.
This account is based on a trove of legal filings — e-mails, motions and roughly 30 depositions, more than 8,000 pages of sworn testimony in all — that open a rare window on 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 in voice-recognition technology in the 1970s, back when a personal assistant like Apple’s Siri would have seemed more science fiction than scientific fact.
They are widely credited with advancing speech technology far faster than anyone thought possible, primarily because of an epiphany Mr. Baker had while doing his doctorate research. He figured out that speech recognition could, in essence, be reduced to math. You didn’t have to teach a computer to recognize accents or dialects, Mr. Baker realized — you just had to calculate the mathematical probability of one sound following another. His algorithms proved remarkably accurate and eventually became the industry standard. (Want to know more? Ask Siri.)
The Bakers founded Dragon Systems in 1982 in an old Victorian house in West Newton, Mass. At that time, despite having two school-age children and a big mortgage, they were determined to take no venture capital and to finance the company’s growth with its own revenue — once they had a product. They figured they could last 18 months, maybe 24.
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