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From Securities Regulation Daily, November 13, 2014

Goldman not liable for “sloppy” diligence in Dragon deal

By Anne Sherry, J.D.

Goldman Sachs’ conduct in assisting dictation company Dragon Systems, Inc. with its acquisition was not “unfair or deceptive” in violation of a Massachusetts statute. Although Goldman's conduct and due diligence may have been “sloppy and unforthcoming,” the district court properly determined that it was not unfair or deceptive (Baker v. Goldman, Sachs & Co., November 12, 2014, Lynch, S.).

Background. Dragon was acquired in 2000 by Lernout & Hauspie Speech Products N.V. (L&H). The subsequent discovery that L&H had fraudulently overstated its earnings led to the merged company’s bankruptcy and lawsuits against Goldman Sachs, which had assisted Dragon in the acquisition, for negligence, misrepresentation, breach of fiduciary duty, and violations of Chapter 93A of the Massachusetts General Laws. A jury found in favor of Goldman on the common-law claims, and the district court held that Goldman had not engaged in unfair or deceptive conduct in violation of Chapter 93A.

Specifically, the plaintiffs, who were principal shareholders in Dragon and at times board members and senior management, took issue with Goldman’s due diligence into L&H and the acquisition transaction. The Goldman team had sent due diligence requests to L&H, but the responses were not satisfactory, such that Goldman’s draft evaluation books simply included the future revenue projections from L&H. A February 2000 memorandum from Goldman articulated its due-diligence concerns and recommended that Dragon’s accountants, Arthur Andersen, perform comprehensive due diligence on L&H, side-by-side with Dragon management, its counsel Hale & Dorr, and Goldman. Several of the plaintiffs were not copied on that memo.

Affirmance. The plaintiffs did not challenge the lower court’s findings, but rather argued on appeal that the district court erred as a matter of law in holding that Goldman’s conduct was not “unfair or deceptive” within the meaning of Massachusetts General Laws Ch. 93A.  They contended that contrary to the district court’s determination, Ch. 93A does not require a showing of “egregious conduct,” and that even if that were the right standard, Goldman’s conduct rose to that level. The appeals court, however, found no error in the district court’s analysis, which drew the “egregious” standard directly from caselaw from the Massachusetts Supreme Judicial Court and the First Circuit. Furthermore, the factual findings were supported by the record and the court properly determined that Goldman’s conduct was not unfair or deceptive.

The appeals court also held that the court did not err in admitting the drafting history and annex of the engagement letter between Goldman and Dragon or in instructing the jury regarding the relevance of the engagement letter. The drafting history was relevant because it showed that language indicating that Goldman would be employed by individual stockholders was removed from the final agreement. The plaintiffs expressly chose not to sign the agreement in order to avoid indemnification obligations undertaken by Dragon. Similarly, the annex’s exclusion of any reference to “stockholders” further strengthened the inference that Goldman did not intend for individual stockholders to rely on its advice. The jury instruction regarding the letter and drafting history was not confusing and contained no error.

The case is No. 13-2173.

Attorneys: Alan Kenneth Cotler (Reed Smith LLP) for Janet Baker. Tracy O. Appleton (Wachtell, Lipton, Rosen & Katz), Timothy Ronald Cahill (Ropes & Gray LLP) for Goldman, Sachs & Co., Goldman Sachs Group, Inc. and Goldman, Sachs & Co. LLC.

Companies: Goldman, Sachs & Co.; Goldman Sachs Group, Inc.; Goldman, Sachs & Co. LLC

MainStory: TopStory MergersAcquisitions MaineNews MassachusettsNews NewHampshireNews PuertoRicoNews RhodeIslandNews

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