Speech maker plans to sue banks and former CEO

Lernout and Hauspie Speech Products NV plans to take legal action against the former chief executive of its Korean business unit and four Korean banks, which it accuses of defrauding it of millions of dollars, the company said Friday.

Employees at the South Korean unit of the Belgian speech technology developer colluded with banks and posed as customers, L&H President and CEO Philippe Bodson said Friday in a teleconference.

In November, shortly before filing for bankruptcy, L&H discovered that US$97.5 million was missing from its Korean bank accounts.

Most of the unit’s sales were “faked,” Bodson said. L&H had to cancel 47 sales contracts in Korea, worth US$114 million dollars. The remaining contracts, worth $79 million, might be subject to claims from customers because L&H “did not deliver what we sold them,” Bodson said.

“The fraud was rather complex. L&H Korea had created the appearance of valid licensing and maintenance agreements. The whole idea was to give everybody the impression that there was a contract and that we had received cash. In fact there was no cash, no payment,” Bodson said.

Many contracts were made with small start-ups, which had close ties with L&H Korea management, Bodson said.

L&H Korea had arranged for banks to advance payments for unpaid receivables, known as factoring. The banks, however, were allowed to take the money back when they were unable to collect the money from the clients. Having cash in the bank fooled the accountants auditing L&H, Bodson said.

Through the scheme L&H Korea was able to meet high sales targets, which meant hefty bonuses for the unit’s management. L&H Korea’s former CEO Joo Chul Seo received a bonus of US$25 million in January 2000, Bodson said. Seo was dismissed in November 2000. L&H started in Korea by acquiring Seo’s company in September 1999 for $25 million.

L&H has considered closing down the Korean operation, Bodson said, but instead has decided to consolidate and keep servicing Korea from offices in Belgium or Singapore. L&H will decide this week if it will let L&H Korea go bankrupt in order to have all the creditors surface, Bodson said.

In December the company disclosed the results of an internal audit that found “serious problems” with the vendor’s business practices and recommended disciplinary action against four executives. All of the company’s senior executives have since been replaced.

Lernout & Hauspie, with dual headquarters in Leper, Belgium and Burlington, Mass., can be reached at http://www.lhsl.com/.