Lernout and Hauspie found guilty of fraud

Summary

Jo Lernout and Pol Hauspie, once thought to be the bright future of Flanders' technological development, were this week found guilty in a Ghent court on a range of charges, including fraud. After 20 months of deliberation, the court found that the pair of entrepreneurs had invented non-existent contracts with customers in order to hype their company, Lernout & Hauspie Speech Products (L&H), and drive up its share price.

Massive trial reaches verdict, but no decision yet for thousands of investors

Jo Lernout and Pol Hauspie, once thought to be the bright future of Flanders' technological development, were this week found guilty in a Ghent court on a range of charges, including fraud. After 20 months of deliberation, the court found that the pair of entrepreneurs had invented non-existent contracts with customers in order to hype their company, Lernout & Hauspie Speech Products (L&H), and drive up its share price.
© Belga
 
© Belga

The fraud only came to light in 2000 after Microsoft obtained a stake in L&H, sparking interest in a company from an obscure corner of West Flanders whose success story seemed too good to be true.

Last Monday's verdict, which had not been read out in full by the time Flanders Today went to press, was the culmination of an investigation that started in 2001 and a case that saw thousands of mainly small investors losing fortunes. At one point, the attendance at the trial was so large the proceedings had to be moved from the justice palace to the International Convention Centre in Ghent.

This week, only Lernout and Hauspie, as well as senior directors Nico Willaert and Gaston Bastiaens, were present in the court. Other defendants were represented by their lawyers. At the reading of the verdict, four of the absent accused were immediately acquitted - one of the company's lawyers, two members of the legal service and the director of the Flanders Language Valley Fund (see below).

The court ruled that the rights of the defence had in their cases been breached. A number of procedural matters, including some raised by Dexia Bank, were then dealt with and, in the main, overruled by the bench. Motions to have evidence ruled out were rejected, but the substantive verdicts were still awaited.

Lernout & Hauspie was founded in 1987 by Jo Lernout and Pol Hauspie, two entrepreneurs from Ypres, West Flanders, whose goal was to teach computers to understand spoken language - an idea that must have seemed to belong to the realm of science fiction at the time, and which has still not been fully realised.

They financed their company by asking for support from friends and family: private investors provided €1.11 million in the first five years. In addition, L&H received venture capital of €750,000, with the backer pulling out after a year with a profit of 30%. The Flemish government, meanwhile, gave out grants worth up to €750,000 a year in R&D subsidies, as well as more than €3 million from the risk capital fund GIMV.

The two entrepreneurs managed to carry a lot of people along on their dream journey. The company was seen as a representative of the new Flanders, focused on new technology rather than dated industries such as coal. It was also a boost to West Flanders, and Ypres in particular, which had long been associated only with the tragedy of the First World War. The local pride, together with a limitless future for computers, convinced a great many people to sign up. The civil side of the case, which will be dealt with at a later stage, involves some 15,000 former shareholders who are claiming damages that could amount to €1 billion.

From the outset, L&H's dreams far outstripped the reality. Speech recognition programmes had been developed by the US military in 1971. In 1982, the Dragon company was founded, but it only developed the continuous speech dictation software Naturally Speaking in 1997, a decade after L&H had started up. The Ypres company, meanwhile, saw the use of its speech technology products limited to toys and gadgets.

In 1993, American telecoms giant AT&T invested €7.5 million. L&H was quoted on the Nasdaq technology index, and the company carried out a series of takeovers. In 1997, Microsoft took an 8% stake in the company for a price of $45 million (€34.5m), which rocketed L&H to world attention, but which also brought it under closer scrutiny that would eventually lead to its downfall.

L&H had ambitious plans not only to develop as a company, but to be in the forefront of a technological revolution in West Flanders. They opened Flanders Language Valley (FLV) in 1997. Essentially a business park, FLV was intended to become a hot spot where cutting- edge tech companies would gather and crossfertilise, along the lines of Silicon Valley. The Flanders Language Valley Fund, a venture capital outfit, had its offices in FLV right next to L&H.

In 2000, L&H took over Dictaphone for a massive €690 million, €300m of it debt. Less than three weeks later it took over Dragon itself for €353m - a small sum for a company whose Nasdaq rating set its worth at €11.6 billion.

But the huge acquisitions aroused the curiosity of the Wall Street Jour- nal, which did a little digging into the company and reported that most of its Korean customers didn't actually exist. Continued investigation uncovered a range of irregularities in the company's accounts, which led to the suggestion that L&H had hyped their own success as a means of manipulating the share price, which went into freefall as a re- sult of the allegations.

The American stock market regulator SEC began an investigation, and the share price fell even further. Thousands of investors, including most of the West Flanders business community, saw their investments turn to ashes.

The company made some partial admissions and filed for bankruptcy protection. Hauspie stepped down in November, and Lernout followed in March of 2001. The police arrived at L&H in April and placed Lernout and Hauspie in detention, where they spent nine weeks, charged with stock market manipulation, forgery and criminal conspiracy. The company was declared bankrupt in October 2001 and its assets bought up by US company Scansoft that December.

The case against the two men, as well as 19 others, including Dexia Bank and auditors KPMG, started in Ghent in 2007, with the prosecution calling for sentences of five years for the two businessmen. Hauspie pled guilty to fraud, but Lernout continued to claim his innocence. The case ended before the court in January 2009; since then the three-man bench has been consid- ering a case file amounting to 400,000 pages of evidence. This week's judgement alone runs to 2,100 pages and would take two weeks to read out.

 

Lernout and Hauspie found guilty of fraud

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