He's Baaack - Henry Blodgett

Not George Clooney.
I just heard that the USA IPO market is about to be jump started by allowing newly listed companies a vacation from Sarbanes-Oxley regulation. The authorities have finally realized they have driven their financial market into the ditch with their excessive regulation. IPOs are down 90% and sitting here in Canada, we send companies to London AIM and do not look at the US anymore.
The regulations are being taken away around analysts having to have a Chinese Wall (are we allowed to say that anymore?) between corporate finance putting together the deals and the analysts advising on whether to buy or sell the shares in the deal. Back in the late 90's, Henry Blodgett advised millions of investors to buy AOL and not Amazon. I was one of those investors with Merrill Lynch at the time. What a disaster that was.
So the US regulators, who have finally clued in their regulation has beaten away the world, are taking off the restrictions. Henry Blodgett can be at the board room table again, helping sell the deals and fund.

Jacoline Loewen, Director,   See Jacoline on BNN, The Pitch  Author of Money Magnet Director, Crosbie Co.
Crosbie & Co.
150 King Street West
Toronto, ON
M5H 1J9
416 362 7726

Should Banks Take Their Losses Through Free Market Mechanisms.

Some business owners tell me that they believe the mainstream financial sector has convinced an entire generation to buy and hold because it suits their business model that is asset-driven rather than performance-driven. 

Are the bulk of financial institutions simply regulatory oligopolies with asset-harvesting business models more concerned with fees and proprietary speculative activities than with providing any useful services to savers and retail investors? Is this a true reading of the finance industry?

My husband was a financial analyst for a broker dealer and they would only issue reports on buy or hold or sell because their brokerage would process the changes and charge a fee. That model has changed. Large financial firms in the USA appear to have an intrinsic institutional bias to be bullish. Where is their incentive to tell you not to invest in something, as they will usually be operating a fund in that area. This need to keep the investor invested is causing sophistry as being "underweight" unattractive asset classes rather than encouraging selling.  The investment insight is too often: sit tight, everything will go up in the long-run. These conversations about concern over stock performances are becoming common and there is an increasing noise. Most of these entrepreneurs are not critics of the financial sector, and neither am I. They appreciate their role. So what is the problem? Has the sector become too large? Did the corporate finance whiz kids take the reins from the bankers and change the race too much?

Here are the questions I have heard from business owners over the past few years:

Question 1: What is the Profitability of Banks?

Corporate profits attributable to the US finance sector were effectively stable from the 1950s to the early 1980s from 5% to 15%, then as the growth in the money supply turned sharply higher on a sustained basis in the 1980s they peaked at 40% in the early 2000s and still remain around 30% - substantially higher than long term averages. 

On an asset basis the numbers tell a similar story. The 20 largest banks in the US have combined assets of approximately 90% of GDP. The five largest banks - JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs - have combined assets of approximately 60% of GDP. These numbers are roughly 3 times what they were in the 1990s.

Canada's leading bank, TD which is now in the USA, had a thoughtful look at this very issue. The CEO asks why the bank executives should make more than the business owners. He said that if the bank is making more than those who create the wealth, that will have a long term impact on the Canadian economy. That is fantastic leadership and probably why TD is the still the leading bank in Canada and on the list of top 20 banks in the world.

The concern is the appearance of the American finance sector's intimate relationship with government and central banks. It is not surprising that it grows faster than the underlying economy. Newly printed money flows into and through the finance sector acting as a wholesale subsidy that drives corporate profits, compensation and speculation. Despite widespread belief to the contrary, government intervention into broad swathes of the financial sector to support "too big to fail" banks or, more accurately, to prevent capital destroying business activity from being eliminated to the benefit of the entire economy is not a positive for future growth.  When it is funded via expansionary monetary policy, business owners know this and see it is laying the groundwork for stagflation.

Question 2: What is the Long Term Impact of Government Bailouts?

I was fortunate to be at a speech by Stephen Roach, Economist for Goldman Sachs, who once suggested taking a bat to Paul Krugman, and I am paraphrasing:

Whatever you subsidize you actually encourage. By subsidizing failure we are ensuring bigger failures in the future and worst of all penalizing well-run businesses. He said that the firms that were prudently managed leading up to the crisis should have benefited from the demise of their poorly-run, profit over customer service, riskier competitors.  In a free economy, capital would have flowed to the profitable businesses rather than the loss making ones. The fact that this didn't happen creates a perverse "if you can't beat'em, join'em" mentality with respect to risky and imprudent business practices.  

 I worked for a bank as the corporate strategist, and it was owned by the founders and a wide pool of banks executives, then it went on the stock market. They kept their good banking practices at a cost to their bottom line growth. During the 2000s, they did not want to do high risk swaps and derivatives or risky deals and they were asked, "Are you in business or not?" Why should they now get penalized again? They lost out money on the upside and they lost out money on the downside. 

Did you see the documentary on the bail outs with the few bank heads seated around a table with George Bush and the candidate Obama and McCain? It seemed so cozy. I know it was a terrible time with the whole US economy ready to go down the chute and no one really knew what to do. Yet, the business owner I worked with at the same time period, did not have cozy talks with government leaders. Is that too much power in a few hands or is that good management? We learned later that bankers picked Obama as the Presidential candidate of choice, and fed him information (and money) not given to McCain. Is that crony capitalism? 

Question 3: Who Really Gets Helped By Low Interest Rates?

Another question asked by entrepreneurs and owner-operators dealing with banks is, What exactly is the primary purpose of low interest rate?"

We are told it is to save the economy, but is it really it is to save the American banks? It gives them time to get their house in order.

Owner-operators are getting denied loans. The CFOs understand why. After all, would you loan $10M to a business during this economic climate at a low interest rate? No. You would put it into commodity stocks or gold because for a way lower risk, you are getting a similar return. 

 Question 4: What are the Bank’s Housing Losses Doing to the Economy?

Stephen Roach actually gave me the answer. He thought the banks would be asked to eat their loans and take the hit via the free market. So far, that does not seem to have happened. 

Low interest rates are simply a case of robbing Peter to pay Paul as capital is being "strip-mined" from savers via low interest rates and in effect "donated" to the financial sector. Roach argued that the enormous size of the American and financial sector coupled with the American Bank's current insolvency, which the constant bail-outs are attempting to disguise, will be a drag on growth for years unless losses are allowed to take place via free market mechanisms. 

Bringing professional management into a family business

Every family business has its battles over growth. Advisers can wax poetic about how to increase wealth, but owners inevitably think they know best and often trust only their children to take charge.

Nowhere are these differences as stark as they are on the subject of embracing professional help to build the business.The subject remains an awkward stumbling block for too many family firms, which control up to 40 per cent of GDP and 43 per cent of the jobs in Canada. The federal government is keen to see growth and it wrings its hands over the dearth of big Canadian family businesses such as worldwide titans Wal-Mart, Smucker Foods, Samsung or BMW.

A study by McKinsey found that a key reason family businesses survive beyond the second generation is through the appointment of professional management. With an outsider as CEO, a family business tends to live past the third generation. It's particularly interesting to note that these legacy businesses tend to outperform corporations, both public and private. But that sizzle does not sell the steak.

When you ask in-laws or second generation sons and daughters in family businesses to explain the allergic reaction to professional management, they frequently sigh and tell you founders tend not to listen to advisers. To understand the reluctance of owners is to work in their shoes, which typically means 15-hour days. They achieved success by doing it all themselves. It is counterintuitive to seek help, especially when the expertise costs money.

The next generation, in general, is under paid but it is the first line of resource for employment and trust. Families in the jewellery business, for example, have the pressure of working with high-value products that can be easily stolen. Family members may not be the sharpest knives in the drawer, but they fulfill the trust requirement of the job description.

In private, family business owners will explain that any amount of time spent on succession planning, exit strategies or learning about private equity is time spent not earning money. They rarely even approach the discussion of bringing in professional CEOs. There is a higher sense of achievement from the daily work than there is from getting out the red pen and planning. "It is faulty logic," says Tom Deans, who worked in a family business and wrote a treatise on his experience in Every Family's Business.

"That is the common reaction, but as soon as family businesses do put in the tools, they start to run better. Few family businesses have a planning culture. The entrepreneur is a problem solver who is great at putting out fires. This is very different from the problem of how to protect the equity in the business and the retained earnings. The biggest problem, in fact, is the long-term plan for the business."

Family firms turn to their accountants first, and then their lawyers, who are smart but, in fairness, are not business experts. Owners are basically relying on professional technicians who are trained to take instruction, not to take the often- frightening risks necessary to grow a business. Lawyers may not want to forge relationships with professional CEOs, and they may have a light sprinkling of knowledge about private equity partners who, they assume, will ruthlessly bring in their own lawyers and accountants.

Why would these professionals press owners to bring in outside management and risk their relationship? Laissez-faire, mon ami.

Family business should be turning to wealth managers who know how to diversify money and minimize risk. "They must evaluate and anticipate the need to re-invest, divest, partner or exit," says Guillaume Lagourgue of UBS Wealth Management.

Taking on private equity partners for a five-year period reduces risk with fresh capital, but it also forces the awkward truth - maybe it is time for family members to step aside and make room for a professional CEO. With these changes, a family business is far more likely to become a legacy beyond the founder's lifetime. Once an owner experiences the new wealth, in hindsight sharing control seems like a no-brainer.

Bringing professional management into a family business also challenges the family lifestyle, the comfortable power, the good-enough revenues that pay mortgages. The cost of letting go of some of that control will boost a family's wealth for retirement. It could also produce a legacy Canadian family business that does not end up sold as a branch office.

Special to The Globe and Mail

Jacoline Loewen is a private-equity expert for business owners and the author of Money Magnet: Attract Investors to Your Business. She is the director of Loewen & Partners and the Exempt Market Dealers Association.

Join The Globe's Small Business LinkedIn group to network with other entrepreneurs and to discuss topical issues: http://linkd.in/jWWdzT

Other Financing Options for Financial Technology

For early stage tech firms focused on the finance industry, they can get picked to be part of a group of six that get client and financing help. Instead of waiting for tech entrepreneurs to bootstrap themselves into relevancy, the banks are using FinTech Lab to cherry pick the most promising ideas and turn them into functioning companies, faster.

 FinTech Innovation Lab gets financial technology start ups showcased, and this year's crop of six winners are promising a gamut that runs from CIA-inspired security and role-playing-game-like training programs.

The lab was started last year as a way to compete with financial technology growth happening in Silicon Valley and bring a new breed of innovation to the nation's financial nexis. The new class of six companies  are aiming to create a future that's all about gamifying typically dry financial data and making big data programs have Sherlock-like deduction powers. Big New York banks and venture firms are mentoring them.

"You have obviously tremendous domain expertise in financial services," said Maria Gotsch, president and CEO of the New York City Investment Fund, which, along with Accenture, co-organizes the program and its demo day event that occurred Wednesday. "The sector that is going through some restructuring right now. Any time there is restructuring there is time for new ideas."

The program aims not only create jobs, but also ushers in a new era of security and technology in the nation's financial hub.
Jacoline Loewen
Business Development
Loewen and Partners
Author of Money Magnet, Attract Investors to Your Business

Are Entrepreneurs Creating Jobs?

Something may be puzzling to some. Why do people regard entrepreneurs the same way vampires regard garlic, otherwise known as the stinking rose? Is there something stinky about building a business around what began as an innovation like the plane, the car, the light bulb, the Macintosh, Levi Jeans, Coke, or the more recent DeVinci mentioned by George Savage on the Main feed?

America still has the longest list of billionaires by far, most are self made, their businesses grown by customers with the free will to buy their goods and services. In comparison, the list of the billionaire rich people in other countries is very short, perhaps because too often the political class are the wealthy, enabled by their public sector (insert country name here, e.g. Russia, China, Zimbabwe).

In corporations, key executives will hold on to a role and organizational structure long after it has served its purpose because the structure is a source of their power.

These companies eventually go bankrupt.

We have certainly seen far too many of the political elite in many countries hold on to their power and seek to get more power, no matter the life and death consequences for their citizens and their country's economic health. In history, the battle for centralized power by political elites against the decentralized power of entrepreneurs has been the battle of the last century. Yet here it is again but now in America. Some of my professors at McGill University taught me that capitalism was not a good system and would implode by 1985. What actually happened, the Berlin Wall imploded instead. 

Communists believe that the place for entrepreneurs is in front of the firing squad. Marxists see the use of keeping business owners alive, but to put the stinking, greedy entrepreneurs in their yoke, pulling the plough to give off jobs and a larger share of salaries for workers. The business owners duty, above all,s is to pay larger tax returns because the entrepreneur did not plough that field by themselves.  Somebody helped them and they owe those somebodies more, more, more.

The unions are about gaining power over the dynamics of entrepreneurship and the free market. If unions were about the health of the company, they would know the customers pay their salaries. And by customer, that does not include the government using tax payer money to create artificial demand.

Marx created the word capital - Das Capital. They are also trying to make all business owners be known as vampire squid face suckers or whatever they were calling Goldman Sachs. This view of business owners is gaining rapid traction. When Ms. Warren, a Harvard professor can recite the Das Capital playbook,  and then the President repeats this ideology, this is a rallying call for revolution. It is a call to shift power, in my humble opinion, to unions and centralized control by government. 

What do you think? There are some business owners who deserve to be called vampires (cough...Goldman Sachs). Do people put all business owners in the same category as large, public corporations? Does the distinction matter? Do people see companies with a paid CEO or a family business owner differently? What can businesses do about this image of "you did not build that by yourself."

The Bachelor Ben Flajnik Shares His Delicious Epilogue Wine

  As a fan of The Bachelor reality TV show, I recognized Ben Flajnik in Toronto. At first I hesitated to bother him because he would prefer some privacy, but then I realized that I had been wondering if his wine was in the local LCBO, like Firestone wine. I did not even know the brand name - he might try Ben Flajnik for a new blend.
Anyway, what a delightful man who must be very tired of people interupting his day but who did not give me a hint of irritation. When I asked him about his wine - Epilogue, by the way - he glowed that entreprneural glow so familiar to those of us in the business of Private Equity and Venture Capital. When deciding on financing business owners, the character of the person is the most critical element in making a positive decision and Ben has wine in his DNA. He is also surprisingly humble. He spoke about how he and his partner ,who is in the photos on the website, were in Toronto promoting their listing. They were all over the news, but I had missed this important fact.
I predict success for Ben as he obviously enjoys his business and since my husband picks up a bottle of Firestone wine for me regularly, now he will have another "The Bachelor" wine to add to the list.
Congratulations to entrepreneur, Ben, and my husband tells me he will be picking up several bottles in the Epilogue label to take to friends up in cottage country this weekend. What will you be drinking?

The Bachelor's wines:
Visit: info@involvewines.com
http://www.evolvewinery.com/http://www.involvewinery.com/
The Bachelor Ben Flajnik

Goldman Sachs and the $580 Million Black Hole

Investment Bankers are being painted with the same brush as Goldman Sachs. They have another court case  over the business deal from hell. It all began to crumble even before the Champagne corks were popped.

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Family Photo

In 1990, Jim and Janet Baker demonstrated the DragonDictate-30K speech recognition system.

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Francois Lenoir/Reuters

The Belgian businessmen Pol Hauspie, left, and Jo Lernout, right, founded Lernout & Hauspie, the company that bought Dragon Systems but later collapsed in an accounting scandal.

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Gretchen Ertl for The New York Times

Alan K. Cotler is the lawyer for Dragon’s founders.

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Gretchen Ertl for The New York Times

Miniature dragons adorn the Bakers’ home. After the sale ordeal of their company, Dragon Systems, Mr. Baker recalls thinking, “Not only do we not have the technology any more, but we have no chance of getting it back.”

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Family Photo

Janet Baker, at front center, in a Dragon Systems photograph from the 1980s. She and her husband are widely credited with advancing speech technology far faster than anyone had thought possible at the time.

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.

Their first product was a software program for a British-made PC called the Apricot that let users open files and run programs by voice command. Then came DragonDictate, a groundbreaking speech-to-text system for dictation that still required the speaker to pause. Between. Every. Word.

For years, the Bakers pressed on, convinced that they were on track to create a program that would recognize continuous speech.

To do that, however, they eventually decided that they needed more capital. While Mr. Baker worked on the technology, Ms. Baker brokered a deal with Seagate Technology, the disk drive manufacturer. Seagate bought 25 percent of Dragon for $20 million. Then, in 1997, Dragon introduced Dragon NaturallySpeaking, a program that recognized more words than could be found in a standard collegiate dictionary. It was available in six languages and could handle normal speech, even sentences with words that sound alike, such as, “Please write a letter right now to Mrs. Wright. Tell her that two is too many to buy.”

By this time, I.B.M. and others had piled into the voice technology market, too. As the Nasdaq market raced toward record highs, the Bakers considered taking Dragon public. But in 1999, several companies — including Sony and Intel — expressed interest in buying into Dragon. Finally, unsolicited buyout offers began to arrive. One came from Visteon, a subsidiary of Ford Motor. Another arrived from Lernout & Hauspie.

TO the uninitiated, the mystique of Goldman Sachs may be hard to fathom. Known for what might politely be called ruthless professionalism, Goldman, the thinking goes, is smarter and more plugged in than just about any other investment bank. In the late 1990s, under Henry M. Paulson Jr., who later became the Treasury secretary and orchestrated the Wall Street bailouts, Goldman was the alpha dog in the lucrative game of mergers and acquisitions.

So it was that in December 1999, the Bakers, in over their heads when it came to M.& A., signed a five-page engagement letter drafted by Goldman. In it, Goldman pledged to provide “financial advice and assistance in connection with this potential transaction, which may include performing valuation analyses, searching for a purchaser acceptable to you, coordinating visits of potential purchasers, and assisting you in negotiating the financial aspects of the transaction.”

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. Dragon agreed to pay Goldman a flat fee of $5 million, less than some Goldman bankers were pulling down.

But who, if anyone, supervised these bankers — later called “the Goldman Four” in court documents — remains something of a mystery. One of the four, the most senior, testified later that their supervisor was Gene T. Sykes, a Goldman partner who at the time specialized in technology and who this year was promoted to head of M.& A. at the firm, one of the most powerful jobs on Wall Street. In a deposition, Mr. Sykes disavowed any involvement.

Most of the Goldman Four didn’t stay long at the bank. Richard Wayner, who was 32 when the Dragon deal was cut, struck out on his own in 2002 and eventually landed at the Keffi Group, an investment firm. T. Otey Smith, then 21, left Goldman in 2000 and now works for RLJ Equity Partners. Alexander Berzofsky, then 25, left Goldman at about the same time and is now a managing director at Warburg Pincus, the big private investment company. Chris Fine, then 42, was a Goldman information technology specialist who was enlisted on the deal and is still with Goldman. (None of the four agreed to be interviewed for this article.)

Before the engagement letter was signed in late 1999, Goldman sent Dragon a memo indicating that its first steps would include beginning to conduct due diligence — Wall Street-speak for kicking the tires — on L.& H. The memo included specific areas of concern, including L.& H.’s sources of revenue, its major customers, its license agreements and royalty agreements, its expected growth, its partnerships and its financial statements.

THAT December, Mr. Wayner of Goldman accompanied Ms. Baker and Dragon’s chief financial officer, Ellen Chamberlain, on a trip to Belgium to meet L.& H. executives. For the trip, another of the Goldman Four, Mr. Berzofsky, prepared a list of due diligence questions. Goldman also prepared a “merger analysis” that predicted the companies’ combined sales per share, earnings per share and total debt under three acquisition scenarios: all cash, all stock and half and half.

In its initial offer, L.& H. proposed paying $580 million, half in cash and half in stock. But the Bakers weren’t sure. News reports had questioned L.& H.’s revenue, particularly in fast-growing Asian markets, as well as some of the company’s licensing deals. Mr. Baker felt that L.& H. had inferior voice technology. But then, he reasoned, if L.& H. could generate so much revenue with lesser technology, imagine what it could do with Dragon.

By mid-February 2000, Ms. Chamberlain had sent an angry memo to Goldman. It urged the bank to move faster in its analysis of L.& H. Talks with the other companies had gone nowhere, and she expected Goldman to “drive” the due diligence process. Mr. Wayner testified later that the bank’s reaction to that memo was “to do as our client asked and to revisit all of our analyses.”

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.

The memo shocked Ms. Chamberlain. She had come to Dragon from Seagate, where she had participated in similar deals. She believed that this sort of thing was generally done by investment bankers, not by accountants. But the moment passed. No one at Dragon or Goldman brought up the mystery memo again — at least not until the lawsuits began flying. (The Bakers also filed suit against other participants in the transaction.)

THE Dragon executives thought that Goldman was taking a hard look at L.& H. After all, Dragon was paying Goldman $5 million for its advice. If Goldman wasn’t conducting due diligence, what was it doing?

“They put items on and off the due diligence list,” Ms. Baker later testified. “We discussed the issues at — at basically every meeting that we were at, and we were meeting often in person or by phone, typically, several times a week in this time frame — sometimes multiple times a day, as we’ve seen. And so they knew what everybody was doing. And they were, they were directing it.”

One of the tasks was a conference call that Mr. Wayner arranged, at Ms. Baker’s request, between Dragon and Charles Elliott, a Goldman analyst in London. Dragon was wondering why L.& H.’s share price had been gyrating wildly. Mr. Wayner told Ms. Baker, he later testified, that Mr. Elliott was following L.& H.’s stock and was up to date on its fluctuations. And Mr. Elliott assured Ms. Baker that investors were worried about the market in general, rather than L.& H. in particular. He also said he expected the stock price of the combined companies to rise substantially once a merger was struck.

Years later, in his deposition, Mr. Elliott told a more complete story. He acknowledged that he actually had not been following L.& H.; that had been the responsibility of another Goldman analyst who had left the firm shortly after the Bakers retained Goldman. After the other analyst left, Mr. Elliott testified, Goldman terminated its coverage of L.& H. No one told the Bakers that Goldman was no longer covering the company they were about to bet their futures on.

Mr. Elliott also testified that he was unaware of press reports at the time that suggested L.& H. was claiming huge revenue gains in Asia. If he had been aware, he said, he would have been “very skeptical” of those gains, given the challenges that Asian languages present for speech recognition. He also acknowledged that it would not have been difficult for him to call up L.& H.’s customers and check the revenue claims.

As the Nasdaq composite index raced toward a record high that March, Dragon’s executives made fateful decisions. On March 8, the Bakers met with L.& H. executives and that company’s advisers from SG Cowen to try to reach a definitive agreement.

A few days before that meeting, Mr. Wayner of Goldman told Ms. Baker that he would be away on vacation and couldn’t make the session. He also said that he would be unable to call in and that it was pointless to send anybody else from Goldman because there wasn’t time to catch up on the deal. It was at this meeting that L.& H. proposed shifting the $580 million deal from half stock and half cash to all stock. The Bakers, with their high-priced investment bankers M.I.A., agreed.

Later, after L.& H. collapsed, Mr. Wayner testified that the bank “did not form a point of view” as to whether an all-stock deal would be risky or advisable for the Bakers. He said he could not remember if it had crossed his mind to warn the Bakers about potential issues with an all-stock deal.

Two weeks after the initial agreement was reached, Mr. Wayner told Ms. Baker that he would be leaving the next day for another vacation. He would not participate in a conference call with L.& H.’s accounting firm, KPMG, that was set up to discuss any open questions about accounting and due diligence. Mr. Berzofsky of Goldman did participate but later acknowledged that he did not raise any concerns. The Bakers say they believed that all issues had been addressed.

Mr. Wayner was still on vacation on March 27, when Dragon’s board met to take a final vote on the proposed acquisition. This time, Mr. Fine and Mr. Smith of Goldman attended the meeting, and Mr. Wayner called in from Argentina. No one from Goldman gave a presentation, but minutes from the meeting, taken by Dragon’s outside lawyers, indicate that the Goldman bankers expressed confidence that the combination of Dragon and L.& H. would produce a market leader. The board voted unanimously to accept the $580 million all-stock deal.

Years later, Mr. Wayner testified that lingering issues of due diligence had never been resolved to his satisfaction. He was asked if he had said as much that March day on the phone from his vacation.

“No, I don’t recall saying that,” he responded.

The deal closed on June 7. By Aug. 8, the merged companies were in crisis amid reports that L.& H. had cooked its books. Reporters for The Wall Street Journal did something the Goldman Four did not: they picked up the phone and called L.& H.’s supposed customers in Asia. They found that companies in South Korea and elsewhere that L.& H. had claimed were its customers weren’t doing any business with it at all. L.& H. had pulled sales figures out of thin air.

Although the Goldman Four never tried to call those customers, it emerged during litigation that other bankers at Goldman had done precisely that — about two years earlier, when Goldman itself considered investing in L.& H. in a plan known internally as Project Sermon. In it, Goldman’s merchant banking division took a closer look at L.& H. — but, apparently, never shared what it knew, and was never asked. Goldman was considering putting $30 million into L.& H., a step that, at the time, might have seemed conceivable, given the hype surrounding L.& H.

“Whenever we invest, we always want to talk to customers,” Luca Velussi, a Goldman analyst who worked on Project Sermon, later testified. Based on what Project Sermon’s team leader, Ramez Sousou, termed “preliminary” due diligence, Goldman declined to invest in L.& H.

By Nov. 29, L.& H. had plunged into bankruptcy. Indictments and convictions followed. L.& H.’s stock price sank to zero — and the Bakers lost everything.

Dragon Systems, the Bakers’ “third child,” was put up for sale at a bankruptcy auction. Visteon acquired some of Dragon’s technology. ScanSoft bought the bulk of it and went on to become a $7 billion giant, with a licensing deal with Apple. (The Bakers believe that some of their technology made its way into Siri.) ScanSoft later acquired — and assumed the name of — Nuance, another voice technology company.

Indeed, Nuance had gone public about the same time L.& H. bought Dragon, and Goldman handled the initial offering — a fact that still angers the Bakers. They say they had no idea Goldman was simultaneously representing their company and a rival.

It wasn’t until after the bankruptcy auction, the Bakers now say, that the full force of what had happened hit them. The money was one thing. But what they really wanted was the opportunity to complete the work they had started decades earlier. As part of the deal with L.& H., they had expected to continue their research. Once L.& H. collapsed, they had held out hope that they might get their technology back — either through litigation or through the bankruptcy auction. They now knew that it wasn’t going to happen.

“The door is closed,” Mr. Baker remembers thinking. “Not only do we not have the technology any more, but we have no chance of getting it back.”

THE Bakers’ case against Goldman is simple. Their lawyer, Alan K. Cotler of Philadelphia, captured it in a single sentence in a motion for summary judgment: “The Goldman Four were unsupervised, inexperienced, incompetent and lazy investment bankers who were put on a transaction that in the scheme of things was small potatoes for Goldman.”

Summarizing Goldman’s defense is more complicated. Based on the firm’s response to the complaint, its motion for summary judgment and testimony of the people it employed, most of that defense falls under one of three rubrics: The Bakers do not have standing to sue. Goldman had no obligation to do a financial analysis of L.& H. And Goldman’s bankers actually performed quite well. The firm released a statement that asserted, “Goldman Sachs was retained as a financial adviser by Dragon Systems, not its shareholders, and performed its assignment satisfactorily in all respects.”

Goldman’s lawyer, John D. Donovan of Ropes & Gray in Boston, has argued that under the terms of the engagement letter, only Dragon Systems had the right to sue, and Dragon no longer exists. Goldman has even filed a countersuit against Ms. Baker, contending that by suing Goldman she had breached the contract. Even though Ms. Baker lost everything in a deal Goldman orchestrated, the firm says Ms. Baker should now pay its legal fees.

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.

Goldman’s lawyers have argued in a motion that while Goldman “strongly urged” Dragon to engage an international accounting firm to do a “forensic accounting analysis on L.& H.,” Ms. Baker “prevented” Dragon from following Goldman’s advice because she did not want to incur the expense of the due diligence and did not want to delay the transaction. The Bakers call this argument “complete fiction,” and even the Goldman Four seem dubious. They testified that Ms. Baker did nothing to block the performance of due diligence.

Goldman also hired an independent investment banker, Ian Fisher, who filed an expert report arguing that Goldman was not obligated to conduct due diligence because Dragon did not order what is known as a fairness opinion, an analysis of the acquisition price.

The Bakers have hired their own expert, Donna Hitscherich, a former investment banker with JPMorgan Chase who lectures at Columbia Business School. She wrote in her expert report that Goldman was obligated to perform due diligence with or without a fairness opinion.

If the case goes to trial in Boston, as scheduled, on Nov. 6, the final argument that Goldman can be expected to make is that the bankers, as Mr. Wayner testified, gave the Bakers “great advice.”

Mr. Berzofsky, too, testified in his deposition that the Goldman Four did a “great job.”

Even though Dragon lost everything?

“Yes,” Mr. Berzofsky said. He was given several opportunities to clarify. And then he was asked one more time — the fact that the Bakers and Dragon’s shareholders lost everything doesn’t affect your opinion?

“Correct,” Mr. Berzofsky responded. “We guided them to a completed transaction.”