[leroy_masochist]

> Part of a due diligence process is looking at internal financial statements.

L&H conducted accounting fraud; both of its founders received criminal convictions for doing so [0]. The whole point of accounting fraud is falsifying internal financial statements. It is true that investment banks conduct diligence by looking at a company's financials, but this is for valuation purposes -- i.e., analyzing how the company has performed relative to other comparable companies. Investment banks do not employ forensic accountants who specialize in sniffing out fraud; accounting firms do. The issues in question were the kind that would be discovered in the diligence process by competent accountants, not competent investment bankers.

> Also not recommending your client put in a collar after an all stock deal? Don't know about Goldman but that was pretty much standard advice at mine.

As a matter of fact, GS did recommend a collar, and the Bakers ignored this advice: "the Bakers did not take steps to hedge the Lernout stock they received when advised of their ability to do so." [1]

[0]: http://www.wsj.com/articles/SB100014240527487039893045755035...

[1]: http://dealbook.nytimes.com/2013/01/29/lessons-for-entrepren...

[at5]

Technically you're right. But a banker's role is really to provide advice on the deal and work in the best interests of the client. Sophisticated clients don't need bankers so don't pay them much (PE firms sometimes pay as little as a few hundred grand). And it's fairly justified because short of leveraging their sales force and/or balance sheet, bankers add little value in standard processes like M&A or capital raises. Definitely dropped the ball. If Goldman was a no name shop their argument that they were let off the hook in a court of law would not help them win clients.

Cash flow fraud is extremely easy to follow if you look for it; more so if you have monthly/weekly invoices and reconcile that with the cash flows. You'd have noticed the loan treatment of factored receivables quite quickly.

On the hedge (and the whole lawsuit); looks like a he said she said really. Goldman says the all-stock deal was approved without their presence; Baker says they didn't show up.

[morgante]

> But a banker's role is really to provide advice on the deal and work in the best interests of the client.

In this case, they strongly recommended that the clients hire an external accountant who would be more skilled in investigating cash flow fraud. Forensic accounting is out of the scope of the banker's engagement, but recommending that they hire someone to do it was serving the client.

It really seems like Dragon was pushing the transaction to go faster, against Goldman's recommendation.

> Goldman says the all-stock deal was approved without their presence; Baker says they didn't show up.

So they both agree that the Bakers accepted an all-stock deal without Goldman's recommendation. While Goldman comes off looking lazy here, it doesn't make them liable.

[at5]

I think you misunderstand. It's not a legal issue. It's whether you provided adequate service. And Goldman didn't. And bankers are almost never liable fyi because of the language baked into engagement letters.

It's also not about forensic accounting. A 5 person deal team is quite tiny especially if they're mostly junior. The acquiree should absolutely have access to internal documents in an all stock deal; your future is at stake here. Something like already factored receivables somehow requiring payments to be made in future periods makes no sense and would jump out immediately to anyone half competent who bothered to look.

Not showing up for a meeting is not the same as saying after the fact, 'ok guys let's close this'. I can guarantee you Goldman signed off on it. You don't sign merger documents at the meeting itself. GS likely said "fuck it all stock it is". They get paid anyway, in cash.

[leroy_masochist]

> GS likely said "fuck it all stock it is". They get paid anyway, in cash.

Massive category-mistake here. Investment banks don't have sign-off authority on these kinds of transactions, they serve as a advisors. And in this particular case, GS's defense was based on the fact that Dragon didn't follow their advice. Both in terms of the consideration and in terms of Dragon's option to hedge the stock they received as consideration.

By the way -- GS got 1% on this deal, when it's normally up around 2 or 3. The engagement letter didn't even make them advisors to the board, just to management. That's a much lower standard of care. If I had to guess, I'd say that the Bakers were trying something along the lines of, "Potential buyers won't fuck us over if we hire Goldman. What's the cheapest we can hire Goldman for?"

They hired the firm on an extremely limited mandate at a time when the tech M&A market was going haywire. They got a junior team that, while it provided substantively good advice, did not do remotely enough to protect the client from its own brash stupidity (this is not a formal responsibility, but is the kind of thing that partners like Gene, who was nominally on the deal but couldn't even remember it under oath, are good at). FWIW, I agree that GS does not come across well in this particular episode.

[at5]

Ah yea but bankers are like real estate agents; their incentive is to maximize their return per unit of time invested. If GS didn't think there's going to be a large marginal return (on time) in asking for more from the buyer then they'll say ok, you're happy I'm happy. It's about incentives. And yea I am aware they don't sign off but the Bakers aren't exactly experts; they would have said yes if the bankers said yes and the numbers seem high enough for them. It raises the question of whether there is any value in standalone M&A advice. Sophisticated sellers don't need pitchbooks and are well able to pull together their own models. Unsophisticated sellers basically go along with the bankers; who have no skin in the game and just want to close the deal. And then these sellers potentially end up with bad outcomes.

And yea the Bakers definitely should have gone with a smaller bank given the deal size. But hey, BODs make that mistake all the time too. Also given the size of the Bakers stake (50+%), not much difference between board advisory and management advisory is there? Theirs is the deciding vote.

Agreed with you on the last point. Been on more than one deal team where we've had to talk clients out of shooting themselves in the foot. But that's part of the game. No engagement letter covers that but a sensible client would expect that from their banker. Legally GS was always in the clear.

[leroy_masochist]

> And yea I am aware they don't sign off but the Bakers aren't exactly experts; they would have said yes if the bankers said yes and the numbers seem high enough for them.

What are you trying to say here? The whole crux of this case is about the Bakers ignoring GS' advice.

> the Bakers definitely should have gone with a smaller bank given the deal size

$500mm is right about the median deal size of GS sell-side M&A engagements (at least it was when I left several years ago).

> not much difference between board advisory and management advisory is there? Theirs is the deciding vote.

If you are in fact an investment banker, you should be familiar with the non-trivial differences in the bank's responsibilities to the BOD and management team, regardless of BOD makeup and/or management's ownership of Company.

[morgante]

> I think you misunderstand. It's not a legal issue.

Since this article is literally about a lawsuit, it does seem like a legal issue.

I think we probably agree though. Goldman absolutely did a poor job on this deal, but that doesn't make what they did illegal (as many commenters here seem to feel).

[at5]

Never said it was illegal...