L&H returns fire as the class actions roll in

Mother lode or monies owed? We look at the options

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Special Report The question to be resolved at speech and language specialist Lernout & Haupsie (L&H) is whether there is any funny business going on, particularly in its reporting of sales. The special mid-year audit of L&H's worldwide activities the company has called in the hope of silencing critics and reassuring shareholders will be able to resolve this definitively, but from our qualitative assessment of the company we have seen no signs of hanky panky.

Although there's no ceasefire in the fierce and acrimonious battle raging between the critics and supporters of the company, it's now an opportune moment to review the current situation before the results of the audit are released - probably in October.

The critics include the Wall Street Journal, and particularly Jesse Eisinger, who has written four highly-negative articles about L&H at strategic moments this year, including one earlier this month that cast doubt on L&H's Korean sales and wiped a billion dollars off the value of L&H. Eisinger used to work at TheStreet.com where Herb Greenberg, an even more vociferous critic of L&H, has written more than 60 articles knocking L&H.

But that's not all: there's also Rocker Partners which has a hedge fund that shorts L&H, and which has as its objective the reduction of L&H's share price. Rocker's Marc Cohodes also has a weekly programme on RadioWallStreet.com that lambasts L&H mercilessly.

On the other side, there are the L&H shareholders with a long position who believe in the burgeoning market for speech and language products and L&H's leading role in this market, which includes the new coupling to telephony and artificial intelligence. They believe it is just a matter of time before speech interfaces become commonplace, and perhaps more ubiquitous than the GUI. In many ways, the speech interface situation today resembles that of the GUI market at the beginning of the 1990s when IBM and Microsoft were engaged in a knife fight over OS/2 and Windows.

L&H executives are also resolutely bullish about the future, and determined that the company's Belgian base in Ieper in what it calls the Flanders Language Valley (FLV) should be a world model where speech and language technology companies can co-exist and mutually support each other.

Founders' deals cloud issue

L&H founders and co-chairman Jo Lernout and Pol Hauspie set up the FLV Fund in 1995 to dispense venture capital, and their IPO in 1998 on EASDAQ raised $65 million. Apart from L&H, there is backing from Microsoft and Cisco in SAIL (speech, artificial intelligence, and language) technology. As of April, the Fund was financing 44 projects, with most investments being in the US and Belgium, although this is expected to broaden next year.

A related activity is the SAIL Port project announced last November when the FLV was created, which has as its objective the establishment of nine more SAIL ports around the world. This initiative by Messrs L&H personally is channelled through the SAIL Trust, to which they have pledged $100 million, and which offers $10 million for infrastructure and incubation services for each port - if a government makes a similar financial commitment. Several have been agreed, and others are currently being discussed.

There is further structural complexity because there's also the SAIL Labs, as well as Messrs L&H's investment vehicle called LHIC. Critics have focussed on accounting issues between these various entities and related party transactions. There has been strong criticism of the offshore Brussels Translation Group, which was supported by some anonymous Belgian investors, to develop translation software. There's still much that needs to be explained about L&H's role in this.

Critics say it therefore cost more than if the software had been developed in house by L&H, but there would appear to be some accounting advantages (writing it off over several years) in having done it through the BTG. The real issue is whether L&H shareholders suffered as a result of the transaction, but so far there is no evidence to suggest this, although such deals do raise a lot of questions.

It became clear that there was a considerable amount of false and misleading information about L&H being circulated, which was why we visited L&H's Korean operations. We reported that our on-the-spot enquiries had found that the Wall Street Journal's Korean reporting was factually inaccurate, and that its negative stance about L&H is in line with the theories advocated by those opposed to L&H.

L&H has released a list of its Korean clients and how it is engaged with them. Our own visits to four L&H customers (Hung Chang Corporation, Human Interactive Worldwide, Hanhwa Securities and VoiceCom.Net) confirmed what L&H had been claiming in these cases, although we did not get into detail about the value of contracts since KPMG will clearly be doing this.

The infrastructure in L&H's offices in Seoul - more than 300 workplaces were observed in the pleasantly refurbished offices - and our face-to-face conversations with some 20 L&H executives and senior staff - provided further confirmation that this was not any form of shadow operation. The WSJ did not visit L&H's Seoul offices before publishing its story.

With so much energy being directed against L&H by its detractors, who have so far been unable to find any hard evidence to support their claims of improper practices, it might seem reasonable to assume that the story L&H has been telling about its Korean operations and their remarkable contribution to revenue is true. Unless the KPMG audit shows otherwise, the WSJ appears to be wrong in its innuendo that L&H was mis-reporting its Korean sales. (The inevitable class actions that arose from the WSJ story didn't pussyfoot around: they claim fraud.)

Until the matter is finally resolved, the criticisms are likely to remain fierce and unrelenting. Cultural differences between raw American capitalism and the more laid-back European approach of L&H has resulted in a chasm that was hard to cross during Gaston Bastiaens' tenure as CEO. We shall have to see whether things change under the new CEO, John Duerden. The Register has just concluded interviews with both of them. ®

Gaston Bastiaens
John Duerden

Related Stories:
The trouble with LearnHowTospeak Korean
L&H goes on Korean offensive against WSJ
The Reg visits Korea to assess L&H's sales

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