By Jonathan Stempel
NEW YORK (Reuters) - Goldman Sachs Group Inc (N:GS) has defeated a married couple's appeal in a lawsuit accusing the Wall Street bank of negligence for arranging the $580 million (367.88 million pounds) sale of their speech-recognition company to Lernout & Hauspie, which soon collapsed in an accounting fraud.
The 1st U.S. Circuit Court of Appeals in Boston on Wednesday let stand rulings against James and Janet Baker, who hired Goldman to coordinate the all-stock buyout of Dragon Systems Inc at the height of the 2000 technology bubble.
Goldman had been accused by the Bakers and two former Dragon employees of negligence, misrepresentation, breach of fiduciary duty and unfair business practices for letting the sale go through despite concerns about Lernout's accounting.
A federal jury ruled for Goldman on most claims in January 2013, and a judge ruled for Goldman on the remaining unfair business practices claim five months later.
Writing for the appeals court, Chief Judge Sandra Lynch rejected arguments that the jury verdict was tainted by faulty instructions, and that the judge erred in finding that Goldman's conduct had to be "egregiously wrong" for it to be liable.
"Goldman's conduct, even if sloppy and unforthcoming, was not unfair or deceptive," Lynch wrote for a three-judge panel.
Lawyers for the Bakers did not immediately respond to requests for comment. Goldman spokesman Michael DuVally said the bank is pleased with the decision.
The lawsuit was handled in Boston, and is a rare case of a major U.S. bank going to trial over a merger rather than settling.
Goldman agreed in June to pay $67 million (42.49 million pounds) to settle a lawsuit in the same court accusing buyout firms of colluding to depress prices of companies they bought.
'BEVY' OF ISSUES
The Bakers were pioneers in speech-recognition technology, creating algorithms that let computers understand and react to human speech.
They founded Dragon in 1982, and held a majority stake when they agreed to sell it to Lernout in March 2000, after receiving interest from companies including Ford Motor Co's (N:F) Visteon unit.
Lernout completed the buyout in June 2000, earning Goldman a $5 million fee, but began to unravel two months later amid revelations of inflated revenue and nonexistent customers. It filed for bankruptcy that November, leaving its stock worthless.
The Bakers recouped more than $75 million in settlements with Lernout officials, and its bankers and auditors, before putting Goldman in their sights.
Goldman contended that its job was to arrange the buyout, not conduct due diligence that might uncover Lernout's fraud, and that the Bakers were in a hurry to sell.
Evidence included a Feb. 29, 2000, memo in which Goldman urged "comprehensive due diligence" on Lernout's revenue, related-party transactions and accounting for acquisitions.
Lynch said that memo raised a "bevy" of issues, but found no evidence that Dragon asked Goldman to investigate Lernout more.
The other plaintiffs were Dragon employees Paul Bamberg and Robert Roth, who held more than 8 percent of its stock. Nuance Communications Inc (O:NUAN) now owns the Dragon software.
The case is Baker et al v. Goldman Sachs & Co et al, 1st U.S. Circuit Court of Appeals, No. 13-2173.
(Editing by Matthew Lewis)