Dragon, a speech recognition technology company considered to be “a leader in speech technology products” and valued at $600 million, was in perilous straits. Despite being valued so highly, the company lost money in every year of its existence except for one year. Dragon was sorely in need of capital.
Dragon considered merging with another company to sustain itself until it could develop its technologies further and make them profitable. To go about this business, Dragon entered into a contract with Goldman Sachs on December 8, 1999, to “provide [Dragon] with financial advice and assistance in connection with this potential transaction, which may include performing valuation analysis, searching for a purchaser acceptable to [Dragon], coordinating visits of potential purchasers and assisting [Dragon] in negotiating the financial aspects of the transaction.”
Goldman formed a four-member team to conduct financial due diligence on Lernout & Hauspie Speech Products N.V. (“L & H”), a company that had offered to buy Dragon for $580 million paid in stock. Goldman’s assessment of L & H was “positive in the overall” but “did not give an opinion pro or con on the transaction.” In June 2000, the Dragon board approved the merger with L & H and ceased to become an independent entity.
Unfortunately for the ex-board members of Dragon, the Wall Street Journal reported that L & H had vastly overstated its revenues in an August 2000 article. The SEC promptly began investigating L & H’s financial statements. L & H had improperly recorded $373 million in revenue and was forced to restate its financials for the past two and a half years. In November 2000, L & H filed for bankruptcy and the share of L & H stock used to pay for the merger became worthless. Naturally, the ex-board members of Dragon took Goldman Sachs to trial for negligent performance of services, gross negligence, and intentional and negligent misrepresentation, among other claims. However, the court ruled in favor of Goldman on January 23, 2013, and an appeal for a new trial by the plaintiffs on the grounds of evidentiary errors and erroneous jury instructions was rejected by the First Circuit Appeals Court on November 12, 2014.
L & H’s fraudulent actions obviously caused harm to the shareholders of Dragon. Who are some less obvious stakeholders, as defined by the WH Process, that were negatively affected by L & H?
During the trial, it was noted that Goldman’s team had not disclosed their concern about the status of due diligence of L & H to Dragon because “the client did not ask.” How ethical was this course of action?

[James and Janet Baker; Paul G. Bamberg and Robert Roth v. Goldman, Sachs & Co., 771 F.3d 37 (1st Cir. 2014).]