Baker v. Goldman Sachs & Co.

Decision Date11 June 2013
Docket NumberCivil Action Nos. 09–10053–PBS, 10–10932–PBS.
Citation949 F.Supp.2d 298
PartiesJanet BAKER and James Baker, Plaintiffs v. GOLDMAN SACHS & CO., et al., Defendants. Robert Roth and Paul G. Bamberg, Plaintiffs v. Goldman Sachs & Co., Defendant and Third–Party Plaintiff, v. Janet Baker and James Baker, Third–Party Defendants.
CourtU.S. District Court — District of Massachusetts


Terence K. Ankner, The Law offices of Partridge, Ankner & Horstmann, LLP, Jennifer S. Behr, Catherine C. Deneke Foley, Jeffrey S. Follett, Christian M. Hoffman, Jack R. Pirozzolo, Amy Senier, Foley Hoag LLP, Michael J. Howe, Matthew L. McGinnis, Ropes & Gray LLP, Boston, MA, Debra A. Djupman, Reed Smith LLP, Philadelphia, PA, Carrie M. Reilly, Lindsey M. Weiss, Wachtell, Lipton, Rosen & Katz, New York, NY, Andrew J. Soven, Reed Smith LLP, Philadelphia, PA, for Plaintiffs.

Alan K. Cotler, Joan A. Yue, Reed Smith, LLP, Philadelphia, PA, John D. Donovan, Jr., Daniel V. McCaughey, Annmarie A. Tenn, Ropes & Gray LLP, Katie M. Perry, Foley Hoag LLP, Boston, MA, Shannon Elise McClure, Michael T. Scott, Steven T. Voigt, Reed Smith LLP, Philadelphia, PA, for Defendants.


SARIS, Chief Judge.


On June 7, 2000, Dragon Systems, Inc. (“Dragon”), a company that revolutionized speech recognition technology, merged into Lernout & Hauspie Speech Products N.V. (“L & H”). Within months, the public disclosure of a fraud at L & H rendered its stock worthless. Plaintiffs Janet and James Baker, Robert Roth, and Paul Bamberg, the founders and principal shareholders of Dragon, lost about $300 million as well as their lives' work, and spent the next decade in litigation against L & H and others trying to claim back the losses.

Janet and James Baker, wife and husband founders and controlling shareholders of Dragon, filed a complaint asserting breach of contract, negligent and intentional misrepresentation, negligence, gross negligence, breach of fiduciary duty, and violations of ch. 93A against their investment banker, Defendant Goldman Sachs & Co. (Goldman). This lawsuit was consolidated with a similar action later filed by Roth and Bamberg, the other principal shareholders.1 On January 23, 2013, after a 20–day trial, the jury found in favor of Goldman on all the plaintiffs' remaining common law claims: negligent performance of services, gross negligence, intentional misrepresentation, negligent misrepresentation, and the Bakers' breach of fiduciary duty claims. Although the instructions told them to reach the third-party claims only if liability against Goldman was found, the jury also found that Janet Baker made negligent misrepresentations to Bamberg and Roth and breached her fiduciary duty to them, and that James Baker breached his fiduciary duty to Paul Bamberg.

The plaintiffs allege Goldman violated the Massachusetts Unfair Trade Practices statute, Mass. Gen. Laws ch. 93A, because it was egregiously negligent and made fraudulent statements when it advised Dragon to merge with L & H without engaging in adequate financial due diligence. After consideration of the evidence presented at trial, the jury's verdict, and the arguments advanced by counsel, the Court finds in favor of Goldman.2


The Court makes the following findings of fact based on the evidence introduced at trial.

A. The Golden Eggs

Plaintiffs revolutionized speech recognition technology based upon a mathematical model for computer speech recognition developed by James Baker in his Ph.D. thesis. Founding Dragon in 1982, they created software that not only recognized spoken commands, but also enabled the dictation and transcription of natural conversational speech. Dragon began as a four-person company operating out of the Bakers' living room, growing into a closely held corporation, headquartered in Newton, Massachusetts and valued in 2000 at approximately $600 million. In 1994, Seagate Technologies, Inc. became a minority investor in Dragon. The Bakers remained the majority shareholders. Roth and Bamberg remained principal shareholders and were, at various times, members of Dragon's Board of Directors and senior management.

In 1997, Dragon released Dragon NaturallySpeaking, a continuous speech and voice recognition software program for general purpose use with a vocabulary of over 20,000 words. By the end of 1998, Dragon was a leader in speech technology products, had a strong portfolio of patents, and had garnered more than 100 industry awards worldwide. During this time, Dragon had an extensive research and development pipeline for future products and opportunities—Dragon's “golden eggs”—which included speech recognition for mobile telephones and handheld devices. In order to effectively develop this technology, Dragon needed additional capital and began to consider a merger with another company.

Although Dragon was recognized as a technology leader, the company had been losing money every year, except for 1998 due to increased sales of Dragon NaturallySpeaking. The primary reason Dragon had been losing money was because it was too dependent on selling its software in the retail market, which accounted for about 85 percent of Dragon's revenue. Dragon needed a revenue stream to continue to develop its “golden eggs.”

Janet Baker was CEO of Dragon from 1998 until October 5, 1999, when she was asked by Seagate to resign during a Dragon Board meeting. When she was in charge, she was considered difficult to work with. According to Dragon President John Shagoury, she was viewed as having unrealistic views of how Dragon should be valued and how pricing should be done. During this time, Dragon employees were concerned about the company's ability to make payroll. At the October 5, 1999 meeting, Shagoury stated that Dragon will “have to have layoffs if we can't find a suitable partner. I'm concerned about the fragility of key people in the next 90 days.” Tr. 27:5–7, Dec. 19, 2013. Don Waite of Seagate was subsequently appointed as Dragon's new interim CEO.

B. Goldman Sachs

Plaintiffs may have been brilliant mathematicians and scientists, but they had no financial experience with mergers and acquisitions. In the fall of 1999, Dragon received unsolicited offers to be acquired by L & H and Visteon Automotive Systems (“Visteon”), a subsidiary of Ford. Both offers valued Dragon at about $580 million and required Dragon stockholders to exchange their shares in Dragon for shares of the acquiring company and some cash. After these proposals were made, in November 1999, Goldman became Dragon's investment banker.

On December 8, 1999, Ellen Chamberlain, Dragon's Chief Financial Officer, signed an Engagement Agreement which stated that Goldman would provide “financial advice and assistance in connection with this potential transaction, which may include performing valuation analyses, searching for a[n acceptable] purchaser, coordinating visits of potential purchasers and assisting ... in negotiating the financial aspects of the transaction.” Ex. 783 at BAKE004457. The advice to be provided was “for the information of the Board of Directors and senior management.” Id. at BAKE004460. Pursuant to the fee arrangement, Goldman would receive $5 million if it helped negotiate a successful transaction.

Goldman assembled a group of four people to work on the transaction—three investment bankers (T. Otey Smith, Alexander Berzofsky, and Richard Wayner) and one technology strategist (Christopher Fine). Smith was a 21 year old banker who just graduated from college. Berzofsky, 25 years old, was actively pursuing other employment opportunities during the Dragon assignment. Fine focused largely on the technology aspects of the deal. Wayner, 31 years old, was the leader of the team. No senior Goldman Sachs investment banker did any work on the Dragon transaction.

On December 16 and 17, 1999, the plaintiffs, and other senior Dragon management, met with members of the Goldman team to have initial discussions regarding the proposals from L & H and Visteon. At these initial meetings, some plaintiffs, especially Bamberg, expressed strong reservations about merging with L & H, which they viewed as a competitor, and voiced strong concerns about their employee practices. On December 20, Goldman met again with the plaintiffs and Dragon Board of Directors. At the meeting, the Dragon Board agreed to enter into a period of exclusivity with Visteon. On February 7, 2000, Visteon terminated its letter of intent. Shortly after the demise of the Visteon deal, Dragon decided to pursue acquisition discussions with L & H.

C. Drive–and–Analyze

While Dragon CFO Ellen Chamberlain was ultimately in charge of performing financial due diligence, Goldman assumed an important role in assisting her in the task. In a December 1, 1999 memorandum, the Goldman team stated that its next steps included “Conduct[ing] Due Diligence on [L & H],” which would be based on a 30–item due diligence list. From December 1999 through March 2000, Goldman sent multiple due diligence requests to L & H. There was never any dispute that Goldman would engage proactively in undertaking financial due diligence of L & H to assist Dragon.

On February 9, 2000, L & H released its Q4 1999 earnings and had an earnings conference call, which was reported in the Wall Street Journal on February 16. In that earnings call, L & H claimed its revenues in Asia went from $9.7 million in 1998 to $137.8 million in 1999, an increase of about 1,500 percent. L & H's growth in the United States and Europe was much slower.

On February 17, 2000, Chamberlain emailed the Goldman team and expressed her unhappiness with the pace of Goldman's due diligence on L & H. She specifically requested that Goldman “drive and analyze” the due diligence, and wanted to make sure that the team “punch[es] enough holes in [L & H's] 2000 budget so we are comfortable with what [L & H] are projecting as their [earnings per share] and can make our determination as to what w...

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