5 ms·

What? Part of a due diligence process is looking at internal financial statements. Cashflow issues would have jumped out immediately. GS absolutely dropped the

by at5 11y ago

What? Part of a due diligence process is looking at internal financial statements. Cashflow issues would have jumped out immediately. GS absolutely dropped the ball on this one. 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.

leroy_masochist 11y ago
> 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/SB10001424052748703989304575503500899087566 http://www.wsj.com/articles/SB100014240527487039893045755035... [1]: http://dealbook.nytimes.com/2013/01/29/lessons-for-entrepreneurs-in-rubble-of-a-collapsed-deal/ http://dealbook.nytimes.com/2013/01/29/lessons-for-entrepren...
- at5 11y ago
  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 11y ago
    > 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 11y ago
      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.
      - morgante 11y ago
        > 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).
        11y ago
deleted 11y ago
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by at5 11y ago

leroy_masochist 11y ago

> 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/SB10001424052748703989304575503500899087566 http://www.wsj.com/articles/SB100014240527487039893045755035... [1]: http://dealbook.nytimes.com/2013/01/29/lessons-for-entrepreneurs-in-rubble-of-a-collapsed-deal/ http://dealbook.nytimes.com/2013/01/29/lessons-for-entrepren...

at5 11y ago
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 11y ago
  > 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 11y ago
    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.
    - morgante 11y ago
      > 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).
      - 11y ago

deleted 11y ago

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