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Caleb Newquist: February 1998, Bill gates, the richest man in the world, is walking into a government building in Brussels. He turns and waves to someone behind him, smiling as he turns back up the stairs. He takes a cream pie to the face. And then another. And then another. An act of pastry based protest against the power and influence of tech billionaires. Just days before gates company, Microsoft had invested millions [00:00:30] in a Belgian speech recognition company called Lernout and Hauspie. And although the pie washed off easily enough, what Microsoft had just stepped into would leave a much bigger mess.

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Caleb Newquist: This [00:01:00] is. Oh my fraud! A true crime podcast where the bodies are fine, but the books are cooked. I'm Caleb Newquist. Hi. How are you? How's everybody? Great. Great to hear. However, that is. Um, maybe you're curious. Maybe you're not. You're probably not. But I have good news. And that is. I think I've gotten the hang of this CPAp machine, and it seems [00:01:30] to be working. And so, yeah, that's that's I'm feeling slightly more rested, but I'm on, I'm on I'm a, I'm on a good streak, let's say of, uh, of, of using it. And I met with my doctor yesterday and, and I mostly met with my doctor because, you know, I want insurance to keep paying for this ridiculous machine that I have to use, uh, to get some decent rest. And so I did it. Plus, I love my doctor. [00:02:00] She's wonderful. And so I don't mind just hanging out with her and talking. And she, uh, is is kind enough to reciprocate. She likes she likes a good hang. And so she said everything looked good. And then we, uh, you know, talked about other stuff. Anyway, that's that's the only update I've got for you. I'm sorry if that's disappointing, but really, you should feel good because I feel better. Okay. All right. Uh, reviews. Reviews. Here we go. You gave [00:02:30] us five stars and writes fun in school. I stumbled across your podcast while looking for interesting content for the forensic accounting class I teach, and I've been hooked.

Caleb Newquist: The students love your work too. One of their assignments is to listen to a few fraud podcasts. Yours is hands down a favorite and bonus CPE for me. Keep up the great work! I do miss Greg and wish him the best. Oh, we all wish Greg the best. He's doing fine. He's doing better than fine. Uh, if you're on Instagram, go [00:03:00] check out the Comedy Church channel on Instagram. Uh, they're they get they they have lots of they have good clips. They have good clips. And you can see Greg there and this is a free plug Greg. You're welcome. Anyway, um, yeah. Thanks for the review. Uh, here's another one from Allison on the earmark app. I like this show, but it really needs two voices. Listening to one person for over an hour is a lot. It's so helpful to have that back and [00:03:30] forth conversation between two people with different experiences and perspectives. I didn't think I'd care either way, but I used to really look forward to each episode, and now I'm letting them pile up in my downloads. Uh, that was, uh, three stars, I believe. So there you go. Three stars. Anyway, Allison, thanks for the review. And I'm sure you're I'm sure there's other people that feel similar to you. And look, here's the thing. Greg didn't want to do the show anymore. Okay.

Caleb Newquist: And because I'm not a monster [00:04:00] and Greg is an autonomous human being. This show currently has one person, and that person is me. And we're just not going to throw any warm body into Greg's seat. You know, we're not going to do tryouts. You know, it's just a waste of time. Um, and, you know, Zack is here. Yes. But he you know, he doesn't want to talk. At least I don't think he does. I don't know. Anyway, he talked. He talked in the last episode a little bit. Okay, so. Or a recent episode. I don't know which one. It is. [00:04:30] The point. The point is, Allison, I know your time is valuable. Everyone's time is valuable. So turn the speed up. That way it goes faster, right? You can go to X, and all of a sudden, you know this. If it's over an hour, then. Then we're talking like 30 minutes, 35 minutes. You know, God knows there's plenty of people that listen to podcasts this way. I will also just mention in my own defense, okay, we've had quite a few more guests in Greg's absence, and so there is some conversation [00:05:00] happening. Okay. And the case study episodes are shorter because there's only one person talking now. Okay. Anyway, two x 1.5 will go much faster. Thanks to everyone who writes reviews and emails. And thanks everybody to, you know, race the show on Apple, Spotify, earmark wherever you happened to listen.

Caleb Newquist: That helps us out. Also, if your firm or your conference or your event, or [00:05:30] your bar mitzvah or your grandma's surprise birthday party needs a live or virtual presentation on fraud or ethics, then we can talk about that. Okay. Email. Oh my. Fraud at earmark CPE. Com to get more information on pricing and availability. All right, that's enough business time for some fraud. Our story begins in Belgium, specifically [00:06:00] the Flanders region, also commonly known as the Flemish Region. This is the part of the country where Dutch is the language, and it contains many of the Belgian cities that you may have heard of. Bruges, Antwerp, Ghent and the regional capital is Brussels, which is also the national capital, and it is the de facto capital of the European Union. Although it's [00:06:30] technically, I guess the European Union technically doesn't have a capital anyway. And also Brussels has its own region. It's Brussels itself is like its own region within Belgium. I don't know, as I tend to do with some of these things. I went down a bit of a rabbit hole. Okay, so humor me. All right. Anyway, um, technically, Brussels is not part of Flanders, so there you are. For the record. In [00:07:00] any case, we're focusing on a part of Flanders you probably haven't heard of, uh, which is in West Flanders. And the town is. Okay, I think I'm saying that now. I think I'm saying that right.

Caleb Newquist: Yep. Okay. And it's spelled y p r e s. If you're out there listening, feel free to correct me, but it is what I got. Okay. West Flanders. Anyway, in late 1987, two West Flanders [00:07:30] natives, Jo Lernout and Paul Hauspie, founded a company called Lernout. Jo was the visionary salesman of the two, and Paul was the detail oriented, salt of the earth kind of worker type. Jo began his career as a teacher, but then he got an MBA and moved into sales positions with various companies, including the Belgian divisions of Merck and Wang Laboratories. Paul had [00:08:00] inherited his father's accounting firm, but soon started developing software, as one does in his spare time, and he eventually founded a company that produced software for accountants and financial advisors, and he sold that company in 1986. And along the paths of their respective careers, they both found an interest in speech recognition technology. Now Lernout later became [00:08:30] Lernout and Hauspie Speech Products, commonly known as LNH in Ipra and all around Belgium. And the easiest way to think about the vision of the company is this they basically wanted to eliminate the computer keyboard. Word. Now, these days, I think a lot of us kind of take speech recognition technology for granted. You know, Alexa, Siri, [00:09:00] whatever, whatever computer you engage with that can hear your voice and respond to it. Uh, yeah. That that's kind, that's become everyday an everyday thing.

Caleb Newquist: But in the late 1980s and early 1990s, the idea that computers could be operated by voice only was pretty revolutionary. And so, like many startup founders, Joe and Paul recruited their early funding from friends and family. But [00:09:30] because of their roots in West Flanders, it kind of had more of a small town feel. So one one account described it as, quote, a company set up by West Flanders natives with West Flanders capital and a West Flanders mentality. Work hard and smart. Take well calculated risks, and like many startups, the early years were difficult as the company tried to get off the ground. But as we've noted, [00:10:00] Joe and Paul were a scrappy sort. They proved to be very resourceful in securing financing to keep the doors open and the lights on, including from local residents and the regional Flanders government. There were some restructuring along the way. The details are very boring, but I did read them for your sake. The important thing to know is that Joe and Paul had a big vision for their company, and they were committed to it. They really wanted [00:10:30] to revolutionize speech recognition at a massive scale. Year after year, they plowed money into research and development, and it made things very difficult because they virtually had no revenue. They had this small All applications business to finance a lot of that early R&D. But they sold that business because they wanted to focus on developing the core speech technology. [00:11:00]

Caleb Newquist: Now, the first big moment that occurred in the company's journey was in 1993, when AT&T invested $10 million out of $102 million valuation. And after, you know, nearly four years of making no money, the AT&T deal led to the company's first year of earning revenue from its actual speech technology. Still, LNN [00:11:30] was spending money too fast. It was hiring people, investing in the R&D. It opened offices in Boston and Taiwan. So in June of 94, L.A. Raised another round of financing to keep things going. It was at this stage where Joe and Paul really tapped into the locals, what with a financing device known as automatic convertible bonds. Okay. And these would essentially [00:12:00] turn into equity if the company ever went public. Okay. In one account, they describe it this way, quote, through sheer personal will and persuasion skills, they managed to sell the largest portion of the issues to some 600 Flemish very small private investors, each investing an average of $33,000. These were mostly small entrepreneurs, farmers, grocers and traders. Anyway, my favorite story that came out of [00:12:30] this period was when Joe and Paul called on a local pig farmer for an investment after they, you know, they gave this pig farmer the. They gave him the spiel. Right. And he produced a half eaten bank saving savings certificate for about $60,000 that he had salvaged after it was accidentally fed to his pigs.

Caleb Newquist: The farmer told Joe and Paul that if the bank would accept the certificate, he would let [00:13:00] them invest the funds on his behalf in the bonds. And best part quote. After much convincing, the bank took the certificate. All right. So after the locals round LNH went on one more lap to raise financing in anticipation of an initial public offering in late 1995. Now, by this time, many analysts in the United States and Europe had had the opportunity [00:13:30] to kind of kick the tires on L.A. And they were very skeptical of the company's performance and prospects, especially as a public company, if it were to become one. Now, for starters, there were a lot of companies going public at this time. It was the mid 90s, um, and 1993 had been a record year for companies listing on public exchanges. And in November of 1995, apparently there was about three [00:14:00] IPOs per day on average. Um, December was expected to be even bigger. And so there was a lot of competition in terms of these new companies coming to market for big investors to consider. By the same token, all this activity meant that the market in general was maybe a little bit more comfortable. Taking a chance on an unproven company like that was risky, maybe, but also [00:14:30] possibly on the cusp of a big technological breakthrough. However, it was this very technology, speech recognition technology that made so many analysts Skeptical about Lash's prospects.

Caleb Newquist: First of all, it was a competitive space in an already competitive investing environment, and some felt that the technology was still in its infancy and too primitive, [00:15:00] and computers too weak for Lash's technology to take off. Despite some doubts, Joe and Paul continued to believe in their vision for developing Lash's speech recognition technology. The company went public on the Nasdaq on November 27th, 1995, at $12.50 a share. So, [00:15:30] with a heap of potential and a heap of skepticism to match it, Elon was now a public company. It faced a tough market and lots of competition, but its scrappy founders were not dissuaded. They were on a mission. A key part of that mission, as maybe alluded to earlier. But we'll just say out right now, is that Joe and Paul very much wanted the success of their business to benefit [00:16:00] the West Flanders region, where they were from. On the way to its IPO, Elon's ambition was instrumental in creating what was known as the Flanders Language Valley. Now, even back in the 1990s, Silicon Valley and California here in the US was kind of the envy of the world for the innovation and technology that came out of the region. Belgium wanted its own valley of [00:16:30] sorts, and speech recognition was the tech that they decided to hitch their wagon to. The Flanders government even made Ipra a tax haven which allowed research grants to flood the area, leading to the creation of many new businesses.

Caleb Newquist: But now that was public. Joe and Paul wanted to kind of double their efforts in supporting their home. They helped create what was known as the Flanders Language [00:17:00] Valley Fund. This is a venture fund that invested in many of Elena's customers. You'll hear me call this the Flve fund throughout this episode. Now, as you might imagine, this commitment to their roots created a profound fondness of Joe and Paul with local and national Belgians. But it also caused some issues. Now, that was a public company listed in the United States. For example, the [00:17:30] Flve fund took a 49% interest in the Belgian unit of Quarterdeck Corporation. So who was quarterdeck? Well, it was a Southern California software company that had kind of well, let's call it moderate success in the 1980s and early 90s, according to the company's Wikipedia page. Their most famous products were quarterdeck, Expanded, Memory Manager, Desk View, Clean [00:18:00] Sweep, Desqview X and Quarterdeck Mosaic Manifest and Partition It. It even got a patent at some point that allowed multiple windowed PC applications under MS-DOS. If DOS is something that you are familiar with and remember fondly, then maybe you have heard of quarterdeck. I don't know. Anyway, that's who quarterdeck was anyway. In 1995, the Belgian unit of quarterdeck [00:18:30] was Lasch's largest customer, accounting for 30% of its revenue. The quarterdeck parent company also chipped in 6.5% of Larry's revenue.

Caleb Newquist: So in case you didn't follow all that, I know I was going. I was winding as a winding road to get to this place. So let me just recap. Larry's largest customer took investment dollars from the venture fund that was co-founded and advised by Larry's [00:19:00] founders. Okay, but there's more. So let me tell you about that. And that is Quarterdecks new CEO. They had a new CEO in 1995. He was a guy by the name of Gaston Bastion, and that's my best friend. I can't do it any better. He was a Belgian and he kind of had an interesting history. So early in his career, Gaston was working at Philips Electronics, and he was part [00:19:30] of the team that created the Compact disc and compact Disc interactive. Okay. Pretty cool. After that, he spent some time at Apple starting in 1992, and as far as I could tell, nothing quite so revolutionary as the compact disc happened at Apple in Gaston's time there. But he was working in the company's personal interactive electronics division, and he was in charge of the [00:20:00] operating system that Apple was developing for personal digital assistants. Okay. And once at a trade show, Gaston was discussing the rollout of the Newton operating system that was going to run on Apple's much anticipated mobile device, the Messagepad. Okay, Gaston said it was going to be out at the end of summer, and when a journalist badgered him about the quick turnaround or the [00:20:30] short window or whatever it was that he was skeptical about, Gaston wagered his wine cellar that it would launch on time.

Caleb Newquist: Well, here's what happened. The message pad did launch in August 1993 to great disappointment. The operating system was full of bugs, including, quote, faulty handwriting recognition, which for personal digital assistants at that time were kind of a big deal. Main [00:21:00] feature. It was widely speculated that Gaston had rushed the Newton operating system so he wouldn't lose his beloved wine cellar. Anyway, this was the guy who was the CEO of quarterdeck in 1995, whose Belgian division was LA's largest customer. Unfortunately, Bastian Gaston Bastian, during his [00:21:30] time at quarterdeck, he was on a bit of an acquisition spree, none of which turned out very well. And so he quit as CEO of Quarterdeck in August 1996. But no worries, he landed on his feet. He became the president of L.A just a few months later. All right, so L.A has a new CEO, which. Okay. Great. Fresh blood, [00:22:00] fresh contacts, whatever. It was also around this time in late 1996, that it had become obvious to Jo Lernout that L.A badly needed to catch up in the development of its speech recognition technology. The problem, as we've discussed, is that research and development is very expensive. In L.A was already really not making very much money. So what's a scrappy newly public [00:22:30] company to do? Easy. It rounded up some investors to create a new business called Dictation Consortium that would do the research and development.

Caleb Newquist: This helped keep all those pesky R&D expenses off of Larry's books, but also somehow allowed to claim 26.6 million in revenue in 1996 and 1997, which was one quarter and 19% of their total sales for those two years. Okay, so Dictation [00:23:00] consortium, you want to know who invested that is who owned dictation consortium. Yeah FLV fund, the same FLV fund that was financed in part by LRN founders Jo Lernout and Paul Hauspie, the same FLV fund that owned 49% of the Belgian unit of Quarterdeck Corporation and Larry's largest customer FLV fund, owned 61% of dictation consortium. [00:23:30] The other investors, according to Jo Lernout, were, quote, 5 or 6 people who were anonymous because they were rolled up into companies that were organized in Luxembourg and the British Virgin Islands, which, as you may or may not know, are very popular tax havens. Also around this time, L.A secured a $30 million investment from Intel Corporation, but also a strategic [00:24:00] alliance with Microsoft. Microsoft was already a customer, but then in early 1998, it invested $45 million in the company. And they seemed pretty excited about it. The chief technology officer at the time said, quote, for the past several years, Microsoft has made great progress toward a vision of the personal computer, which can then interact with users via spoken language. Through this alliance with Lernout and Hauspie, we are taking a big leap forward in [00:24:30] transforming that vision into a reality.

Caleb Newquist: Oh, and guess what else happened? Microsoft also tossed the FLV fund $3 million. So, um, funny story about this Microsoft bit. Bill gates was in Belgium around the time of this announcement. And on February 4th, just a few days after the news, he was walking [00:25:00] into a government building to give a speech and meet with Belgian business and government leaders. When he took not one, not two, but three cream pies in the face. Now, if you don't remember this or you weren't around when this happened, the video is online and it is very easy to find. Uh, but we've also put it in the show notes, and it has Dan Rather's very serious voiceover explaining what happened. And it's it's a joy, really. So [00:25:30] help yourself to that. Anyway, this Pieing incident was orchestrated by an infamous writer, critic, and pie thrower named Noele Gordon. Okay, according to this guy's Wikipedia page, since 1969 he has pied more than 25 people quote in the fields of culture, politics and beyond. Granted, this is mostly in the French speaking world, and [00:26:00] among his many victims is included the public intellectual Bernard Henri Levy. And so why, you may be asking, am I mentioning Monsieur Levy specifically? Because Noele Gordon has pied him eight times. Eight times he's pied this guy. Okay. And you should look him [00:26:30] up too, because this levy is very kind of handsome and, uh, smart looking.

Caleb Newquist: And he is very smart. He's a he is a public intellectual. The he's one of these new, uh, what's known as the new philosophers in France, apparently very well known. Made some movies, all kinds of stuff, anyway. So why has Godin pied la vie so many times? Well, he explained, quote, he is the worst [00:27:00] for us. He represents empty, vanity filled literature. He is totally in love with himself to the most spectacular degree of imbecility. That's a quote, a great quote, for what it's worth. Anyway, after Godin and his merry band of posters got Bill gates, he gave an interview about it, of course. And, um, here's just a sampling of the exchanges that were in that interview. Okay, here we are. Question. Why did you choose Bill gates? Answer [00:27:30] because in a way, he is the master of the world. And then because he's offering his intelligence, his sharpened imagination, and his power to the governments and to the world as it is today, that is to say, gloomy, unjust and nauseating. Question. You weren't paid by someone from Netscape or Oracle? Answer certainly not. I wasn't even aware of their existence. Question. What were your feelings? Just a second after they touched Bill gates with the pie? Answer. The exhilaration of victory. Exquisite pleasure. Question. [00:28:00] Do you cook the pies? Answer. No. We are very lazy.

Caleb Newquist: We buy the pies in a shop nearby. And I realize that English is probably not his first language. But every response to those questions is perfect. I have no notes on those whatsoever. All that's missing is pie throwers of the world unite. I would have really capped it off nicely anyway. To the best of my knowledge, this is something that is still out there. That is still happening. Uh, yeah. And if it's not, that's a shame. But, uh, nevertheless, I [00:28:30] hope JD Vance is currently at the top of his list. Okay, it's the late 90s, and L.A is a public company. Joe and Paul are hometown heroes, and things are going great. Sales went from 31,000,000 in 19 96 to 60 4,000,000 in 1997, to 212,000,000 in 1998. Okay. Not bad. Also [00:29:00] during this time, the company made a series of acquisitions of its competitors, including Berkeley Speech Technologies in 1996 and Global Link in 1998. All the while, the critics remained unrelenting, noting the company's pervasive related party transactions and the acquisitions the company used to create growth, but it didn't matter. In 1999, the company [00:29:30] reported $344 million in annual sales. It was also that year, 1999, that the bet the farm, I mean wine cellar guy Gaston Bastian, who is now CEO. He said that the company had cracked the market in Asia, where its sales had exploded to more than $150 million versus just $10 million the year before.

Caleb Newquist: So, yes, nearly half [00:30:00] of its revenue, about 43%, was coming from Asia. All this growth sent the stock soaring, taking off in mid 1999, climbing throughout the rest of the year and landing somewhere in the mid $50 range, according to the historical data I found in the year 2000. L and H was off to a strong start and its stock price was still climbing and its market capitalization [00:30:30] reached $10 billion. And Mr.. I'll bet your ass against my wine cellar CEO. He's still wheeling and dealing, you know, making acquisitions. And there were two very notable ones. First was a company known as Dragon Systems. This was a mom and pop operation started by the husband and wife team of Janet and Jim Baker, two legends, two pioneers of computer speech technology. The bakers founded [00:31:00] Dragon Systems in their home in West Newton, Massachusetts in 1982. And yes, they had kids. So this was a legit mom and pop operation. Okay. For many years, the bakers took no venture capital. They grew the business using their own money, and they developed many successful speech to text products for computers. Finally, they ultimately took a big investment from Seagate, which led to their groundbreaking product, Dragon Naturallyspeaking, in 1997. [00:31:30] And there was a there's an article I found about the company and this product at that time, quote, recognized more words than could be found in a standard collegiate dictionary. It was available in six languages, and it could even handle difficult sounding sentences.

Caleb Newquist: And the example in the times article was please write a letter right now to Mrs. Right. Tell her that two is too many to buy. Pretty good. So [00:32:00] I think you could argue, or one could argue quite easily, that Dragon had the best speech recognition technology out there at that time. The other big acquisition was of a company called dictaphone. Dictaphone had a long history of owners and investors, but it got its start with dictation machines and was founded by Alexander Graham Bell. Yes. The guy who invented the telephone. And yes, that guy [00:32:30] co-founded AT&T. So that's the history of that. So L.A. Acquired both these companies in all stock deals for just under $1 billion. The stock hit an all time high of $72.50 in March 2000. That was a 2,500% increase off its IPO price. And so like virtually every high [00:33:00] flying stock L.A. Price came off its highs a bit as critics still questioned the company's business and strategy. In his 1999 annual report, in the first quarter filing for 2000, L.A reported more of its business coming from Asia. But when it released the details of that growth for the first time in the second quarter. That's when things kind of took a turn for the worse. Prior to that point, L and H had been reporting [00:33:30] as a foreign entity, but with the big acquisitions of Dragon and Dictaphone, big parts of its business were now in the US, and that required more detailed disclosures of its business.

Caleb Newquist: And what those details showed was not good. Those filings showed that L and H had $58.9 million in revenue from Korea in the first quarter. This was 53% of its global sales. Okay. [00:34:00] For that period of time, in the first quarter of the prior year, it only had $97,000 in sales from Korea. Now that is a very large increase, an increase of over 60,000%. And so you might be saying, well, what about its business in the rest of the world? Not as good. The Wall Street Journal reported that its total sales in the US, Europe and Rest [00:34:30] of Asia declined 27% in the latest quarter to $51.8 million. Then there were the details of its sales in the prior year, 1999. Here's the journal quote out of 1999. Revenue of $344.2 million. The latest filings disclose Korea contributed $62.9 million, while Singapore contributed 80.3 million, with Singapore just edging out the US as the country's largest [00:35:00] market. The prior year, the two countries had contributed less than $300,000 in sales. While the company paid about $50 million in September to acquire a Korean company, Bumil Information and Communication company, it made no significant acquisition in Singapore during 1999 or this year. Does this make any sense? No. And it will make even less sense when I tell you this quote.

Caleb Newquist: Sales in Singapore plummeted [00:35:30] in the first quarter of 2000 to $501,000, down from 10.4 million a year earlier. But as you might imagine, I'll wager my wine cellar CEO guy had a perfectly reasonable explanation, telling the Journal, for starters, that the US and Europe sales had dropped, quote, because of a shift in strategy. It wasn't going to license its tech anymore. Lnh was going to build its own applications. He expected a rebound in sales for those [00:36:00] markets later in the year. Okay. As for Asia, what had happened was that LNH had sold licenses for its tech in Singapore for the development of local language products. They didn't have any more licenses to sell. So that's why there was such a huge drop in revenue. As for Korea, he talked about the acquisition that was made, how it opened up the market, and that in general, things were just kind of kicking ass. So, you know, all good things. So [00:36:30] that was kind of the story that L.A was selling, except nobody was buying it. The Wall Street Journal ran a follow up article about a month later in August 2000, and the reporters Mark Maremont, Jesse Eisinger, Mi-jung Seong. They talked to many of the Korean customers that L.A had cited that were, you know, important to the booming business there. What did they find out? Nothing good. The article states, [00:37:00] quote, some companies that L.A has identified as Korean customers say they do no business at all with L.A.

Caleb Newquist: Others say their purchases have been smaller than L.A. Says L.A. Officials now acknowledge they made some mistaken initial representations about customers, but the company disputes other accounts given by some of the Korean companies, and it insists its Korean revenue figures are accurate. None of that is [00:37:30] reassuring at all, and I guess I will say that I should say, for the record, that the journal's investigation did turn up some customers who confirmed that they were customers of actual customers of Laneige, but only one, only one would go on record to say that the numbers were actually right. Then there was yet another company that had formed a joint venture with LNR, and the joint venture, [00:38:00] not the company itself, had purchased products from L.A. Okay, fine. But then this same company later retracted the story for whatever reason. And if all of that is is isn't weird enough, let me tell you about the account of one of Larry's big customers. Hung-chang Lin H claimed it was doing between 5 million and 10 million in business with this company. Okay, the [00:38:30] Journal spoke to Larry's contact at hung-chang, and he told them a familiar story that they had a joint venture with Lin H. It wasn't the actual company that was doing the business. But then, you know, then they went back to the CEO and he said he didn't even know about the joint venture.

Caleb Newquist: And one of his minions said that maybe he wasn't fully aware that it had been set up. But then they went back to the Hung-chang guy about the discrepancies and he said, quote, I lied about everything. And [00:39:00] I don't know if I was that reporter, I would just be like, what do you mean? You lied about everything? Why would you lie about everything? Why would you lie about everything to Wall Street Journal reporters. That doesn't make it doesn't make any sense anyway. So like, none of this is good, right? None of this is good. It was so bad, in fact, that Gaston Bastian quit about two weeks later as the CEO, [00:39:30] and about a month after that, the Journal reported that the Securities and Exchange Commission had opened a probe into Elon H. Then on November 9th, 2000, Elon announced that it would be restating its SEC filings for 1998, 1999 and 2000 due to certain quote errors and irregularities. The company also took the opportunity to say that its third quarter revenue was going to be about $40 million less than they initially thought. So, [00:40:00] you know, pile it on bad to worse. Jo Lernout and Pol Hosp both resigned their positions as executive cochairman. But, you know, a lot of good that did because they still retain 30% of the voting rights of the stock, which meant they, you know, they had a lot of say still in who gets to do what.

Caleb Newquist: But then just a few weeks later, at the end of November, the company announced that it [00:40:30] was filing for bankruptcy protection and and that $100 million was missing from its Korean division. About a week later, the Journal ran a lengthy account of the whole ordeal, including how Elon H's new CEO, a guy by the name of John Duerden. He had previously been the CEO of dictaphone. Remember one of the companies that the L.A bought acquired? He had gone to Korea on November [00:41:00] 17th to get the Korean unit to release the $100 million they said they had there because, you know, they needed it to keep from going bankrupt. So duerden Durden. He told the Journal reporters that he he got there, he was waiting for an hour, and he finally met with the head of the Korean unit, a guy by the name Yoo Chul seo. Durden was in the middle of grilling this guy about the $100 million, [00:41:30] only to be interrupted by three goons who kicked open the door and then started shouting and gesticulating. And then they dragged Joo Chul south out of the room. So Durden watches all this. He's completely gobsmacked. And so he told the people that were there to call the police, and then he just got the hell out of there. [00:42:00] He. In that journal article, he says he doesn't know what happened to this guy or the money quote.

Caleb Newquist: The only thing I know for certain, he said, is that the money is not in the bank accounts. Like many of the other corporate stories that we tell on this podcast. It took some time for all the details to become known, and likewise [00:42:30] for accountability to be handed out in the more immediate aftermath of the bankruptcy. Joe and Paul were still hometown heroes, although not without a little bit of, you know, snark. In a January 2001 Associated Press story, one joke that was overheard in Ipra was, quote, now Lynch and Goodyear will develop a tire together. Goodyear does the rubber l and H [00:43:00] the hot air. Good one. Anyway, many of the investors in West Flanders kept up hope that they would get their money back. There were even conspiracy theories that the whole thing was a plot carried out by the Americans. American business, American tech, American government, American media, whatever you like. The idea being that the Americans didn't want a company coming out of a small European country to get all the riches and credit for building a cutting edge technology. One [00:43:30] guy said, are the Americans scared that a Belgian company has become this strong in technology? Probably not. Anyway, in October 2002, the Securities and Exchange Commission announced its litigation against Elon H. Laying out all the details of the questionable things Elon was up to that people had been pointing out for years. But now, instead of things being questionable, they were officially illegal.

Caleb Newquist: Remember those circular related party transactions [00:44:00] where Belgian shell companies did all the research and development, but Elon was basically doing everything else. The expenses stayed off the books and they got the revenue. Do. Yeah, that they basically evolve that into a bigger operation located in Singapore. Then there was all that Korean revenue. What happened? Well, Korea created some sales agreements that allowed customers in scare quotes to defer paying any [00:44:30] licensing fees until they were making money from using Latch's products. But that didn't matter to latch. They still counted these as sales. You know, debit accounts receivable, credit sales. But when would those customers pay up? Who knows? But in order to keep those pesky Uncollectible receivables off the books, the company entered into some deals with banks [00:45:00] where the banks would assume the receivables, give lunch money for the trouble, and if the customers ever did pay up, the up, the bank would get the money. Okay, L and H claimed that these were basically sales of their receivables, but in substance, they basically amounted to loans instead. Except nobody was calling them loans. Of course customers never paid. And the bank was still holding those receivables which L.A then owed to them. And that's [00:45:30] why when L and H said it had $100 million in cash, it couldn't get it. The banks had it. Or at least they had the right to it or what.

Caleb Newquist: Whatever they could get their hands on because it really belonged to them, not to L and H. It took the rest of the decade and then some, to resolve all the criminal and civil cases that L.A failure caused. Finally, in September 2010, Jo Lernout, [00:46:00] Paul Hauspie, and Gaston Bastian, among other defendants, were all found guilty of crimes in Belgium, Lernout and Hauspie were each sentenced to five years in prison, with two years suspended, and then just over a year later, in December 2021, a Belgian court found that six of the LNH board members were liable to over 4000 shareholders, awarding them €655 million. Unfortunately, as one Flanders news [00:46:30] source reported, quote, the compensation ruling is largely symbolic as the six former board members don't have the financial means with which to pay it. So did we learn anything? Yeah, we we, uh, we learned some old lessons, I think. Right. Uh, number one, people get caught up in the thing. In this case, people were caught up in the technology. People [00:47:00] were caught up in national pride, uh, their hometown heroes, etc., etc.. Uh, they they badly, badly wanted this thing in this case, L.A. They wanted it to succeed. Um, there's a lot at stake. I think probably Joe and Paul, these guys probably felt a lot of pressure to make it happen. They were. They wanted to do something good from the place where they were from.

Caleb Newquist: They were hard working guys. And, you know, it just all got the better of them, you know? And so that inevitably [00:47:30] leads to the next lesson, which is faking it till you make it is totally a thing and has been for a very long time. And even to this day, Joe Lernout will say, quote, the technology was real and great, okay. But it doesn't really matter because the revenue was not real. So I don't know. It's just one of those things where so often people are like, oh, the technology is great, or the or the product is great, or this or that or whatever, but the [00:48:00] business model has to work too. And so it isn't enough just to have a great product or just great tech. If you cook the books, doesn't matter how good your product is, bad numbers are bad numbers, and people get real upset about bad numbers. They don't. They don't really take it very well. So yeah. Um, also, in case you're curious, what happened, because the technology was real, [00:48:30] because there was a bankruptcy. What happened? Well, a company called Scansoft acquired its assets, the assets in 2001. Whose? Scansoft. Well, I can tell you very briefly that the origins of Scansoft began with a company called Kurzweil Computer Products. That was a company founded by Raymond Kurzweil. He's this futurist and transhumanist type. Um, he's still around, apparently. And, um, yeah, [00:49:00] he did a lot of entrepreneurial things, and now he's I don't know, one of these futurists.

Caleb Newquist: Whatever. Anyway, he sold this business to Xerox. Xerox later sold that business to a company called Visioneer that specialized in scanning technology. And this newly combined company became known as Scansoft. And then in 2001, Scansoft got L and H assets. And that put it into the speech recognition space. And then [00:49:30] a few years later, 2005 Scansoft merged with a competitor, Nuance Communications. And fun fact about nuance. Nuance. Nuance is natural language processing algorithms help support Apple's voice assistant, Siri. That was in 2013. And in spring of 2021, not that long ago, Microsoft announced that it would be acquiring nuance for $19.7 billion. [00:50:00] So yeah, there you have it. All that all that speech recognition tech. It's out there somewhere in your phones, in your alexas, whatever. Okay, that's it for this episode. And remember, if you win a wine cellar on a bet, make that idiot pay up. If you have questions, comments, or suggestions for stories, drop me a line at Oh My Dollar! at CPE. Com or hit me up on LinkedIn. Oh [00:50:30] my fraud is created, written, produced and hosted by me, Caleb Newquist. Zach Frank is my co producer, audio engineer, and music supervisor. Laura Hobbs designed our logo. Rate review and subscribe to the show wherever you listen to podcasts. If you listen on earmark, you can earn free CPE. Join us next time for more avid swimmers and scams from stories that will make you say oh my fraud!