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L&H goes on Korean offensive against WSJ

Appoints KPMG to conduct audit

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Lernout & Hauspie has appointed KPMG to conduct a mid-year audit into the company, in a response to an article in the Wall Street Journal last Tuesday (Aug 8,2000), which questioned the veracity of the company's published sales figures for Korea (WSJ has trouble with LearnHowtoSpeak Korean).

CEO Gaston Bastiaens last night said he had no doubt that the result of the audit would confirm that "during the first two quarters of 2000, L&H Korea had strong revenues and a very solid business base".

In the aftermath of the WSJ article, one billion dollars was wiped off the market cap of the speech and translation software specialist, and four new class action suits were brought by allegedly shocked shareholders.

What are we going to do about Korea?
Perhaps the strangest part of the story the WSJ printed was the serious lack of understanding of Korean business culture. L&H is clear that the aggressiveness and imprecision with which the questions were posed invalidate the WSJ innuendo that L&H had misreported its Korean sales.

There are three reasons supporting the view that L&H has correctly reported its Korean sales. The strongest move is getting in KPMG to do an audit. In addition, during the conference call for the Q2 results, the financial analysts seemed to be unconcerned at the WSJ story. And finally, Bastiaens demonstrated his faith in the future of the company by buying 151,000 shares for between $36.625 and $42.125 in May - for around $6 million. On Friday, the shares closed at $30.25, up 10 percent on the day, but a long way off the $68 in April.

If the Korean market turns out to be as L&H has claimed, it will be an extraordinary example of how quickly a market can grow. It would indicate that the speech recognition and language market has at last matured in some sectors to the extent where it is of significant benefit - especially in countries where keyboarding is difficult.

As it will take some weeks for an audit, The Register will be reporting from Seoul later this week after discussing the matter with L&H's customers, and investigating just how the WSJ telephone survey was carried out.

If the KPMG audit shows that L&H has correctly stated its sales, the corollary would be that the WSJ got it wrong. We look forward with interest to getting more information from the WSJ. In the meantime, here's a tour of the dramatis personae involved, as well as the financial and media issues that confront L&H. We have no reason to believe, and we do not suggest, that anyone is acting in concert.

WSJ

The journalist at the centre of the WSJ piece on L&H's Korean sales is Jesse Eisinger, who is based in London. He appeared on CNBC Europe on Wednesday morning (Aug 9), claiming that L&H does "not have any evidence that we've found to substantiate these accusations by L&H (that his piece was incorrect)". Eisinger was tackled by the CNBC interviewer about dissenting financial analyst opinion, but he accused Rob Stone of SG Cowen (who favours the stock) of not doing "rigorous analysis".

There was a further encounter between the WSJ and L&H,. On Friday (Aug 11, 2000) the WSJ Europe carried an article in which Eisinger boasted claimed, of the three times that the WSJ had included sceptical reports about L&H, the share price dropped 22 per cent, 37 per cent and 15 per cent compared with the share price on Wednesday 9 August. This is a very peculiar thing for a newspaper serving the financial community to boast about.

Get Shorty

As if the WSJ article wasn't bad enough (for L&H), what should come along at more or less the same time (a few hours before the release of L&H&'s Q2 results) but an attack on the company by hedge fund Rocker Partners on Radio WallStreet.

Rocker is shorting L&H shares by effectively placing a massive series of bets that the L&H share price will go down substantially. Shorting is a time-honoured business tactic among share traders. There is nothing illegal about its practice. However, the results can sometimes be destabilising for the target company.

Shorting works like this: the shorter borrows someone else's shares in - say L&H - through a broker, unknown to the real owner, sells them and hopes to buy them back at a lower price later, so profiting from the difference.

If the share price goes up, the broker requires additional money to cover the losing short position. If the real owner wanted to sell the shares, the broker may insist that the shorter immediately bought shares to cover the position, whether the cost were more or less than the price at which they were shorted.

So far, Rocker appears to have miscalculated how L&H shares would perform, to its considerable cost, but it is not known just how many of the 9 million L&H shares that were shorted in July were the result of Rocker's activities.

Rocker has actively bad-mouthed L&H in weekly webcasts on Radio WallStreet, where it buys time slots and is not subject to any editorial constraints.

Marc Cohodes, the Rocker partner who looks after the L&H account, made disparaging remarks and personal attacks on L&H executives during the webcast last Tuesday. L&H told The Register that it refused to participate in the programmes, as it doubts it could get a fair hearing.

On TheStreet.com

Joining the anti-L&H claque is TheStreet.com, the high-profile financial news service. This site has published ten aggressively negative articles about L&H by Herb Greenberg. Although it was announced that he was on holiday and that his column would not appear last week, Greenberg couldn't resist filing a story on Friday reiterating the WSJ's claims about L&H's Korean customers. Greenberg has attracted an unofficial
FAQ, which notes that "stocks often react in the opposite direction to sentiment voiced (by Greenberg). Another player seems to be Brian Skiba, a financial analyst for Lehman Brothers, who is known to have a negative view of L&H.

Coincidentally (and we don't mean this sarcastically) Rocker has a 10 per cent shareholding in TheStreet.com. TheStreet.com has a policy that its columnists may not have holdings or a short position in any stocks other than in mutuals or TheStreet.com. TheStreet.com says in its conflict and disclosure policy: "In stories primarily concerned with [a list of companies backing the company, but excluding Rocker], TheStreet.com notes their ownership stake". No stories mentioning Rocker note the 1,177,828 shares that Rocker held in it on 8 May, according to a Form 13F filed with the SEC.

The same report shows that Rocker held on that day 562,700 L&H shares then worth $62,178,000 "long" (i.e. actually owned), which was by far Rocker's biggest investment.

Rocker's holding in these shares enables it, if it so wishes, to take advantage of a weak market - when NASDAQ or EASDAQ is closed. At such times it is possible to push the price down by selling only a few shares: a sign of this is a big spread between the buying and selling prices.

When a company is the object of a short seller, it is miserable time for employees. By chance the L&H share option plan has finally been through the labyrinthine Belgian government approval process, so that employees will now be able to benefit from options at a relatively low price, which should be both cheery news for them and an incentive - although it will be further bad news for Rocker. ®

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