For today’s trawl through the archives of the Legal IT Insider we go back to the year 2001 and the now largely forgotten scandal of the Lernout & Hauspie speech recognition technology accounting scandal.

Lernout & Hauspie was founded in 1987 in Belgium by Jo Lernout and Pol Hauspie. In 1995, it went public on the NASDAQ and was also quoted on the now-defunct Brussels-based EASDAQ exchange and at its peak, Lernout & Hauspie had a market capitalization of almost US$10 billion. Through its venture capital arm, the Flanders regional government became a major investor in L&H and, at one point to help with a cash-flow crisis, guaranteed 75% of a bank loan to the company. (Microsoft and Michael Dell of Dell were also major investors i the company.) L&H was also the flagship business within the “Flanders Language Valley” – an attempt to build a Belgian equivalent of the Silicon Valley tech hub. In fact, for a brief moment in time Jo Lernout and Pol Hauspie joined Poirot, TinTin and Manneken Pis on that exclusive list of the Famous Belgians

As L&H grew, it acquired a number of its competitors including, in 2000, such well-known American businesses as Dictaphone and Dragon Systems, the latter being the company behind the Dragon Dictate market leading speech recognition system. However in August 2000, the Wall Street Journal uncovered details of a major financial scandal involving $175 million of fictitious transactions in South Korea and improper accounting methodologies elsewhere. Then, in April 2001, founders Jo Lernout and Pol Hauspie, as well as former CEO Gaston Bastiaens, were arrested in what was the largest corporate scandals in Belgian history. The company itself filed for bankruptcy in October 2001 with most of its speech technology businesses (including Dragon) being acquired by Nuance Communications (then still called ScanSoft) for just $39.5 million.

In the criminal proceedings that followed, Pol Hauspie pleaded guilty but Jo Lernout – described by the prosecution as the “brains” behind the fraud – denied any wrongdoing, claiming the company was the victim of a “CIA conspiracy”. On 20 September 2010, co-founders Jo Lernout and Pol Hauspie, as well as Nico Willaert, former vice chairman, and Gaston Bastiaens, former CEO, were each sentenced to five years prison (of which three years effective and two years probationary) for fraud by the Ghent Court of Appeals. The company’s former auditors KPMG were acquitted of criminal charges but did pay $115 million to settle a shareholders’ class action that they had failed in their audit of L&H.

Lernout & Hauspie was also a recipient of the 2002 Ig Nobel Prize in Economics “for adapting the mathematical concept of imaginary numbers for use in the business world.”