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How the Inventors of Dragon Speech Recognition Technology Lost Everything 606

Posted by samzenpus
from the all-the-eggs-in-one-basket dept.
First time accepted submitter cjsm writes "James and Janet Baker were the inventors of Dragon Systems' speech recognition software, and after years of work, they created a multimillion dollar company. At the height of the tech boom, with investment offers rolling in, they turned to Goldman Sachs for financial advice. For a five million dollar fee, Goldman hooked them up with Lernout & Hauspie, the Belgium speech recognition company. After consultations with Goldman Sachs, the Bakers traded their company for $580 million in Lernout & Hauspie stock. But it turned out Lernout & Hauspie was involved in cooking their books and went bankrupt. Dragon was sold in a bankruptcy auction to Scansoft, and the Bakers lost everything. Goldman and Sachs itself had decided against investing in Lernout & Hauspie two years previous to this because they were lying about their Asian sales. The Bakers are suing for one billion dollars."
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How the Inventors of Dragon Speech Recognition Technology Lost Everything

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  • Re:Why civil? (Score:5, Interesting)

    by DoofusOfDeath (636671) on Sunday July 15, 2012 @04:13PM (#40657737)

    Yes, out of the tens of thousands of emoyees everyone is supposed to know what everyone is doing

    And a few there found that l&h was a fraud before it blew up

    If corporations are people, then they're responsible for the relationships between the different thoughts in their heads.

  • Re:Why civil? (Score:3, Interesting)

    by Anonymous Coward on Sunday July 15, 2012 @04:16PM (#40657763)

    Maybe and maybe not. A more interesting question would seem to be were they negligent. If I pay someone $5m for investment advice and an introduction to a reputable financial institution I would assume that part of the reasoning is to mitigate the risk of selecting investment partners without being able to perform the due diligence yourself. If GS instead takes my $5m and then introduces me to a fraudulent company then I haven't off loaded my risk at all and it would seem to be the equivalent of consulting malpractice or negligence. I'm not sure fraud is the right term but they definitely didn't uphold their contract.

  • by alphatel (1450715) * on Sunday July 15, 2012 @04:16PM (#40657765)

    IN BIZARRO WORLD

    Mr. Berzofsky ... 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.”

    Bizarro World in full force

  • I don't get it (Score:5, Interesting)

    by decadentdepraved (2684831) on Sunday July 15, 2012 @04:23PM (#40657819) Journal
    I don't like GS (have had multiple experiences). But I'm still skeptical. Something seems off here. Given lack of good counsel, why did the Bakers go out on a limb, change course, and agree to an all-stock sale at the last minute? Why not walk away, or hire better advisors to get you what you need, and challenge GS fees in parallel? $580 mil was at stake. $5 mil is 1% of the pie. Seems like the only reason to sell is to get liquid. Why go to all that trouble just to swap shares of one stock for even higher risk and reward?
  • What I wondered is.. (Score:5, Interesting)

    by biodata (1981610) on Sunday July 15, 2012 @04:24PM (#40657823)
    Who owns Scansoft, who apart from GS are the other big winners from this transaction? They got the world's best speech rec software for a fraction of its true value - I wonder who they were advised by?
  • Re:Why civil? (Score:4, Interesting)

    by ShanghaiBill (739463) on Sunday July 15, 2012 @04:27PM (#40657847)

    Did Goldman Sachs employees engage in some kind of fraud?

    It is possible that they did. It all depends on what the contract says. If, in addition to finding a buyer, they also promised to do due diligence [wikipedia.org], and they gave a different conclusion from the one reached internally, then that could be considered fraud. Since GS was paid $5M, they certainly had the resources to be thorough, so "we forgot about that" probably won't be considered a valid excuse.

  • Re:Why civil? (Score:5, Interesting)

    by Anonymous Coward on Sunday July 15, 2012 @04:27PM (#40657851)

    Yes, when a company agrees to take a large fee to advise on an M&A advisory, it's completely unreasonable to expect the people they put on the deal to do such challenging things like due diligence, which might include asking around if anyone knows about this company, or doing any research on their own.

    Or if, as is apparently their stated position in this lawsuit, they believe that doing due diligence isn't part of their job, pointing out to their client that no due diligence has been done, and calling that a risk to the long-term value of the deal is apparently ALSO not their jobs.

    Look - high finance is hard. People routinely make lots of bets with lots of money. Sometimes those bets go badly. And having good advisors isn't a magic bullet for avoiding a bad bet - sometimes the best info you have at the time is wrong, and only with the benefit of hindsight might you realize something might not turn out.

    But there's a difference between "The best info we had was wrong" and "We didn't really bother getting any info." And also between "We advised you that we weren't going to research this, and you agreed to take on that risk" and "we gave you reason to believe we'd done enough homework that you should feel confident, even though we hadn't."

  • Re:Sad (Score:5, Interesting)

    by kolbe (320366) on Sunday July 15, 2012 @04:42PM (#40657961) Homepage

    Back in 1997-99, my colocation space at Level 3 was right next to Dragon Systems' cabinets. As such, I was able to chat with their IT team on several occasions and met the Bakers on at least one occurrence where we discussed the futures of digital speech recognition (Dragon 2000 was being developed for Win2k at the time). Their insights and knowledge of speech recognition were unmatched by anyone else in the industry, not even IBM (who was working on it at the time too) was as advanced and I have no doubt that we would not have Siri or other similar technologies today if not for the Baker's research from in and out of Carnegie Mellon University.

    The Baker bunch are not stupid people, they made a remarkable company last for almost 30 years, but it is obvious that they made a big mistake by putting everything in one "basket" as others here have stated. While I wish them luck, white collar crimes such as these are rarely won.

  • by Anonymous Coward on Sunday July 15, 2012 @04:48PM (#40658019)

    There's an "Ethical Wall" between the consulting and investing arms. You'll hear complaining on every transaction, 50% of the time it's too high, 50% of the time it's too low. The consultants shouldn't know what the investors are trading on, and the traders shouldn't know what the consultants are advising on. As bad as it looks, this is how this should have happened, from GS's perspective.

  • Re:Why civil? (Score:3, Interesting)

    by gznork26 (1195943) <<moc.liamg> <ta> <62kronzg>> on Sunday July 15, 2012 @04:49PM (#40658025) Homepage

    Sure. Go ahead. Make corporations 100% people. Give them all of the rights they've been lusting after, and once they've grabbed that carrot, shut the door behind them and give them the responsibilities and the punishments as well. I fantasize about this sort of thing on my blog. This one launched a series: http://klurgsheld.wordpress.com/2007/08/30/short-story-logical-conclusion/ [wordpress.com]

  • Re:Two lessons here (Score:4, Interesting)

    by cpu6502 (1960974) on Sunday July 15, 2012 @04:54PM (#40658061)

    >>> That paper shit they pass around on wall street has nebulous value. If someone wants to give you millions of dollars for your company, let them give you millions of actual dollars.

    Irony.
    Dollars are paper too. In fact the paper dollar has lost 97% of its value since the creation of the Federal Reserve in 1913... most of it just since 1972. Contrast that with the 1800s when the paper dollar lost just 2% of its value (because it was tied to gold & silver... real goods that can't be run off a printing press.)

  • L&H at fault, not GS (Score:2, Interesting)

    by tukang (1209392) on Sunday July 15, 2012 @04:56PM (#40658071)
    I RTFA and while it says that another division of Goldman Sachs was skeptical about L&H, there is no evidence that the 4 guys who handled the account had any knowledge of it or communicated with that division. Nor is there any evidence that they had any motive to sell Dragon Speech to L&H when they had a lot of other credible suitors like Ford & Sony. Was Goldman Sachs sloppy? I'd say yes. But the real fraud was committed by L&H and as much as I don't like Goldman Sachs, it's not their fault that the folks at L&H were con men.
  • Re:Ironic (Score:5, Interesting)

    by Undead Waffle (1447615) on Sunday July 15, 2012 @05:11PM (#40658161)
    The funny part is that originally the investment banks (Goldman Sachs, Bear Sterns) were not part of the FDIC and thus could not receive money from the Federal Reserve because they were not real banks. They had to be re-classified as normal banks to make it legal to give them money. But that wasn't a problem because The Secretary of the Treasury at the time was a former CEO of Goldman Sachs [wikipedia.org].
  • by dark12222000 (1076451) on Sunday July 15, 2012 @05:24PM (#40658245)
    Actually, per US law, they have stolen money. They intentionally lead their client who was acting in good faith into a business deal which Goldman-Sachs could reasonably believe would go very badly, and without warning them - and they accepted money for this.

    That *does* count as theft in the US.
  • by decora (1710862) on Sunday July 15, 2012 @05:27PM (#40658257) Journal

    you can read countless articles about Goldman trades within the past 10 years, since they became a public company especially, and find numerous examples of where Goldman 'analysts' or 'consultants' were wishy washy with the 'trading' folks , either their own or others.

    just becasue finance schools teach 'chinese walls' and they talk about it in presentations doesnt mean it actually happens.

  • Re:Ironic (Score:5, Interesting)

    by hairyfeet (841228) <bassbeast1968@gma i l . com> on Sunday July 15, 2012 @05:33PM (#40658297) Journal
    The sad part is they won't win, and GS will NEVER go away. look at their history, they've been knee deep in dirty dealing for over a century now and have learned how to slime their way through the halls of power. its no coincidence that so many in the Fed are tied into GS, hell they are practically Wolfram and Hart on the evil scale. If they had demons in suits waltzing through their halls like on Angel frankly i wouldn't be surprised, any truly nasty corporate dealing that has made a lot of money while fucking people over? GS is there.
  • One sentence. (Score:5, Interesting)

    by siddesu (698447) on Sunday July 15, 2012 @05:47PM (#40658397)

    If you have a good business that generates revenues, it is better to rely on it, rather than hope that 419 scams and "get rich quick" schemes will work for you.

    The differences between GS and that Nigerian scammer are the better writing talent and the better government protection that one of them is using.

  • by Anonymous Coward on Sunday July 15, 2012 @05:50PM (#40658417)

    Even if the 4 junior guys assigned to Dragon didn't know about the previous Goldman analysis of L&H (and they probably didn't), someone up top certainly did. Their work should have been looked over by a supervisor and/or others up top at Goldman. And those people should have known.

    Also, the Wall Street Journal reporters calling the L&H "customers" proved that even cursory due diligence here would have proved that L&H were fraud.

    And it's way too convenient that Goldman was representing a competitor (Nuance) at the same time.

    Goldman was negligent and possibly also double-dealing.

    Goldman's only hope here is to get out on a standing issue. If Goldman actually has to go to trial on this, they're screwed. A jury will crucify them. And rightfully so.

    My wild guess? This settles before trial for a couple hundred million.

  • by Paul Fernhout (109597) on Sunday July 15, 2012 @05:57PM (#40658469) Homepage

    http://www.wired.com/wired/archive/11.02/code_pr.html [wired.com]

    As that older article points out, the Bakers also spent some time early on at IBM Research doing speech stuff (and from when I was working at the IBM Speech group myself much later, it did not seem completely clear what way most of the knowledge was flowing). My undergrad adviser at Princeton, George A. Miller, who did a lot in the psychology of natural language and knew the Bakers (I think from when he was at Rockefeller with them), told me about this loss more than a decade ago, as a cautionary tale. More than the money, what really hurt most for the couple was not being able to work on their project anymore. For anyone who really cares about what they are working on, this is a good argument for working in the free and open source software realm rather than trying to finance proprietary software somehow, even when you think you are the "owner" of the software. Imagine if the Bakers had released Dragon as FOSS back then and built a consultancy around it -- at least they would not be alienated from their 20+ year labor of love (or "third child" as they called the software). In general, you also can't expect the same people who put their love into creating great things for the world to be fully prepared to deal with business sharks (even business sharks like GS being supposedly hired to "help" them). I'm glad my wife and I released our own labors of love (like our Garden Simulator and PlantStudio software) as FOSS instead of taking on investors and making it proprietary, since at least we can always still work with the source code. Of course, the flip side of that is often not having the time to do that because of a need to do other things for money. We ideally need a "basic income" and similar social changes to solve that problem and to minimize a software industry based around "artificial scarcity".
    http://www.basicincome.org/bien/ [basicincome.org]
    http://www.artificialscarcity.com/ [artificialscarcity.com]

  • Re:Ironic (Score:2, Interesting)

    by CodeBuster (516420) on Sunday July 15, 2012 @06:02PM (#40658499)

    They take the little guys money and bend them over (without a tube of Vaseline).

    If that's the way you feel then perhaps you shouldn't entrust them with your money?

  • Their mistake (Score:2, Interesting)

    by Anonymous Coward on Sunday July 15, 2012 @06:04PM (#40658513)

    Was trading their company for stock in another company. That was monumentally stupid.

    I've spun up and sold a handful of companies now and not once did I accept stock in the purchasing company. When I exit, I EXIT, as in, that's it. The only reason I start a company is to sell it for a ton more cash than it took me to start and build it. I can then use a small percentage of that cash to start another one.

    When you swap stock, you're trading something you know everything about (your stock) for something you don't know ANYTHING about (their stock). You don't know how they're cooking the books, or lying on their SEC forms, or laundering assets away, or playing other ENRON games. Certainly they could take the same tack about you, but then, you're the one with something they want, so they should be the ones to take the risk.

    I have no problem holding onto a company that is making me money, if someone doesn't want to buy. If they have doubts about the way I do things, that's fine. I'll just keep making money until some other buyer comes along.

    The ONLY time someone is in a hurry to sell is when they're losing money, and the company's days are numbered (like, in this example, the purchasing company who wanted to trade their crappy losing stock for some good, profitable stock). I can wait.

  • Re:Microsoft Agent (Score:5, Interesting)

    by FreelanceWizard (889712) on Sunday July 15, 2012 @08:14PM (#40659235) Homepage

    I actually wrote a fair amount of UI code interfacing with Microsoft Agent as part of a research project, AutoTutor. While the L&H TTS engines were indeed the default for Agent, that's just because they were the default ones installed on Windows (2000 and XP) at the time. Agent allows you to load the TTS engine of your choice, so long as it supports the Speech API. Because the Speech API includes callbacks for phonemes spoken, Agent can synchronize lip movements of the character to what's being spoken by the speech engine regardless of its creator.

    Ultimately, the poor quality of the L&H voices led us to SpeechWorks and AT&T's NaturalVoice products. Sadly, both the TTS and voice recognition fields went through major consolidations in the early 2000s, and now SpeechWorks is dead (acquired by Nuance). NaturalVoice is still available, more or less, from Wizzard Software.

  • It's unfortunate ! (Score:5, Interesting)

    by Taco Cowboy (5327) on Sunday July 15, 2012 @08:16PM (#40659239) Journal

    It's very unfortunate that most of us geeks are not that well versed in financial thingy, and that we geeks are too trusting of others - methinks this maybe the result of we geeks, in our own geeky-universe, are generally trustworthy

    Unfortunately, the world out there is filled with critters that will cheat everybody, even their own mothers !

    The two inventors of Dragon Speech Recognizing System put their trusts in Goldman Sachs, which, by now, most of us geeks should know not to trust

    It is even more unfortunately that the two inventors now have to rely on lawyers to sue Goldman Sachs - and lawyers are critters that are not that far removed from the kind of critters that occupies the Capital Hill / White House / Wall Street

    Methinks the only way we geeks can survive the world out there is to turn ourselves into the baddest kind of critters - even more badder than the critters of Wall Street, critters in the Capital Hill and/or the White House
     

  • Re:Two lessons here (Score:5, Interesting)

    by jpapon (1877296) on Sunday July 15, 2012 @08:34PM (#40659347) Journal
    Man, you gold-standard people piss me off.

    If you want gold so badly, just buy goddamn gold already, and stop bothering the rest of us who understand that there is way too much money circulating (or way too little gold) to move away from fiat money. There's absolutely no reason to back things with gold. If you're so set on a fixed amount of currency, just argue for a fixed amount of currency. There's no need to get some metal involved who's only real values are 1. Shiny and 2. Doesn't corrode.

  • by garyebickford (222422) <gar37bic@NospaM.gmail.com> on Sunday July 15, 2012 @08:40PM (#40659387)

    Methinks the only way we geeks can survive the world out there is to turn ourselves into the baddest kind of critters - even more badder than the critters of Wall Street, critters in the Capital Hill and/or the White House

    I think that's a) impossible, as it requires a denial of what makes one a geek; b) destructive, as it requires one to become what one hates. I have a relative, who always talks about how much more successful she might have been if she had become a lying, thieving charlatan like some of those she's dealt with in the past, and made her life more difficult. But that would have required her to become someone she isn't, and wouldn't have wanted to be.

    I would just say the following: I never read Nietzche, but from my understanding Nietzche asserted that there were two types of people, masters and slaves. Masters (at least as far as those who adopted and distorted the ideas of Nietzche and Weber after WWI, to a great extent leading to WWII) were basically what we would now call sociopaths or psychopaths - capable of lying, cheating, enslaving and murder to achieve the ideal world. Slaves, in their view, were the other 90% of the world.

    And, in at least one sense this was and is true. A few people (at much higher percentages in higher leadership positions, according to recent research) are that type of 'master', and many, many people - probably the great majority IMHO - just want to not think, not worry, just do what they are told and watch sports on TV. (Yes, I'm generalizing).

    But IMHO there is a third group, that Nietzche never talked about to my (poor) knowledge - I'll call them creatives. These are the explorers, the artists, the engineers, the 'geeks' of all stripes - and about 1/2 of the entrpreneurs. The creatives don't want to be masters, and refuse to be slaves. They will always be the disruptors, will never be accepted by either of the other groups, and will always be a thorn in the side to the 'system'. And I will assert that they are the ones that largely prevent the 'masters' from taking over completely - as long as information and movement are free, and the system can continue to expand. (Thus my promotion of commercial space development - the ultimate 'free frontier', that never ends. Not to digress TOO far.)

  • Fiduciary duty (Score:4, Interesting)

    by JDG1980 (2438906) on Sunday July 15, 2012 @10:15PM (#40659839)

    The legal argument here will almost certainly be that, by accepting $5 million from the Bakers for consulting fees, Goldman Sachs had a fiduciary duty [wikipedia.org] to act in their best interest regarding the transaction.

    You can argue that they should have known better than to "put all their eggs in one basket". But the fact that the client should have known better is not a legal defense to a breach of a fiduciary duty. That's why you're paying the professional in the first place – because they're supposed to know better than you! They have a legal obligation to use that knowledge in your interests, not double-dip on the side.

    The fact that Goldman considered investing in L&H and then specifically declined to do so is strong evidence that this recommendation to the Bakers was in violation of their legal duties.

  • by Dahamma (304068) on Sunday July 15, 2012 @11:47PM (#40660237)

    Either be outraged about the wall, or outraged about the lack of a wall.

    Except it's not that simple. There was a "wall" in both cases. The outrage is when the banks ignore it to profit in one case, and try to use it to defend themselves from lawsuits in another.

    And if you RTFA, the lawsuit is not really about this, anyway. It's about negligence to do any due diligence by the bankers handling the deal, not whether they shared information among departments. Again if you RTFA, both GS investment bankers and the Wall Street Journal were able to trivially find evidence of massive lies about the customer base, which is a pretty strong case due diligence was not performed. So, no, this is NOT "how this should have happened, from GS's perspective", unless their perspective was to take the customer's money and not actually do their job...

  • Re:Ironic (Score:4, Interesting)

    by garyebickford (222422) <gar37bic@NospaM.gmail.com> on Monday July 16, 2012 @12:51AM (#40660441)

    Not yet. It will remain hidden for a while, but you can't print money at that rate and not have it show up in inflation. People and institutions are getting paid without producing anything. That is the definitive cause of inflation. I'm not saying it's new, just that we've entered a new phase where the second order effects are becoming significant - the rate must increase at a faster and faster rate to prevent collapse. This is the classic symptom of the inflationary spiral, starting to exceed the system's ability to damp itself.

    There are lots of academic papers and popular articles and even books, showing the both the official 'core inflation' and CPI numbers are completely divorced from reality and have been for years. It's an ongoing topic of frustration and derision for many economists.

    Just as a somewhat-related example (not rigorous, just indicative) showing the long term discrepancies, look at the average price of cars 1970 to today. In 1968 a Volkswagen Beetle was $1800 base price. Today the VW 'New Beetle' (essentially the same car) starts at $18995, ten times as much. (One can argue about features, but it's a reasonable comparison). That works out to about 8% inflation over the last 40 years. Knock of 25% of that for vaunted new capabilities, safety, whatever, that's 6%, still more than twice the official rate. The price of many goods has remained the same - I can buy jeans at Walmart today for about the same price as Levi's in 1970 - but that's a false example, as it depends on the _temporary_ distortion of wage scales around the world. When (not if) the worker in Thailand has the same standard of living as the US worker, those jeans will be well over $100 in the US.

    Similarly, the cost of electronics has dropped precipitously - but that is the result of technical advancement, which (again Econ 101) is the _sole_ method of improving the standard of living in a modern economy.

    Even more simply - the wages of carpenters and software engineers (for example) have both risen by a factor of 5 to 10, while the actual standard of living for people in those jobs has remained the same or dropped in that same period. Q.E.D. that is inflation - again closer to 8% than to the 2% or 3% promulgated by the government. For people in less skilled positions things are much more dire - and contrary to some politicians' propaganda and excuse making, this is not due to corporate raiders or evil capitalists - any more than sharks are the cause of tsunamis.

  • Re:Ironic (Score:4, Interesting)

    by TarouSatomi (2684951) on Monday July 16, 2012 @01:03AM (#40660463)

    I'm not sure what you think inflation means, but it has nothing to do with whatever it is you think you're calculating. CPI blahblahblah...

    Inflation can be measured both in terms of dollars in existence (which he is measuring) and in terms of prices, which the CPI purports to measure. Unfortunately for the American public, CPI is basically a wad of shit and doesn't measure anything meaningful these days. Amongst the absurdities: A) Geometric weighting is applied so that the items expanding in cost most rapidly are given less weight on the theory that people are likely to use less of those resources in future years B) Individual items that have gone up dramatically in price are dropped from the basket of goods via substitution. So if prime rib goes up 15% this year they will instead measure hot dogs. (This was part of how the Greeks got into the Eurozone - they flim-flammed the other continentals with dropping lemons from the CPI basket, etc) C) Pretty much everything they can dream up over at BLS will get hedonically adjusted. An entry level laptop that is $299.99 in year 1 and is $299.99 in year 2 will actually get reported as negative inflation because the new laptop will invariable have some new feature (or even bugfix!) that causes it to have more utility for the same cost. The BLS can say whatever it wants for the adjustment and there is NO PROOF because it is entirely opinion based as to whether or not the new feature set is worth $299.98 or $0.01

  • Get 'em! (Score:4, Interesting)

    by geohump (782273) <geohump&gmail,com> on Monday July 16, 2012 @11:05AM (#40662951) Journal
    Go Jim and Janet, Go!
    Don't forget legal fees and damages!

    Former Dragon Employee, wishing you well.

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