Jo Lernout and Pol Hauspie convicted of fraud

The Court of Appeal in Ghent has found that the founders of the former speech technology company Lernout & Hauspie are guilty of financial fraud. They both received three years imprisonment. It is unlikely that the victims of the financial scam, mostly thousands of small private investors, will see their compensation claims lead to any result.

In total, 21 persons faced charges in the trial. They include the founders of the former "pride of West Flanders", Jo Lernout and Pol Hauspie, but also former CEO Gaston Bastiaens and senior manager Nico Willaert.

Jo Lernout, Paul Hauspie and Nico Willaert all received three years' imprisonment and a suspended sentence of another two years. All three have to pay a fine of 24,789 euros. Gaston Bastiaens was handed two years' imprisonment, combined with a suspended sentence of another three years.

"They shamelessly took advantage of the trust that thousands of investors put in them", the judge reading out the verdict told the court.

Jo Lernout and Pol Hauspie were found guilty on several charges. In fact, they were found guilty on most of the charges that they faced. These include meddling with the annual accounts, committing forgery and manipulating stock exchange rates.

However, it could well be that the four convicts will not have to serve time in gaol, as in Belgium sentences of up to three years are usually not carried out. The alternative is electronic surveillance via ankle bands.

Will the small shareholders ever see their money back?

The trial in Ghent is only about the responsibility of the people and players directly involved in the company. In another trial, it will be determined who is entitled to receive compensation, how much compensation will be paid and by whom. It's especially small (private) investors that have been hit hard by the bankruptcy and also the Flemish government.

Chances of any big amounts of compensation being paid out are small though, as the bank that carried out the financial transactions for L&H, the present Dexia Bank, and also the company's auditor KPMG that was responsible for the financial audits have both been cleared.

The public prosecutor had made compensation claims worth 29 million euros against Dexia and 8 million euros against KPMG. As both parties have been cleared, the question is who will have to pay any compensation. The parties that have been convicted are private persons who don't have a lot of financial means left.

The organisations defending the interests of the small shareholders, Dolor and Deminor, are disappointed with the outcome of the trial,  but are not giving up the fight just yet. "First we have to read the whole text (which is some 2,000 pages long). Then we will see which possibilities are left", they say.

Earnings had been overstated

Lernout & Hauspie (L&H) was founded in 1987 by the West-Flemings Jo Lernout and Pol Hauspie. After a difficult start, it quickly grew and in 1995 it was quoted on the NASDAQ for the first time. Its bases were in Ieper (West Flanders) and Burlington, Massachusetts.

At its peak, L&H had a market capital of almost 10 billion US dollars.

For some time L&H was dogged by rumours of financial impropriety, and in early 1999 the Wall Street Journal published allegations by a Goldman Sachs analyst that the company's earnings had been overstated.

Further investigation by the paper uncovered a major financial scandal involving fictitious transactions and improper accounting methods. A trick involving the "recycling" of money through Korean sister companies, allowed L&H to artificially boost earnings and thus push up the value of the company shares on the financial markets.

The company's founders Jo Lernout and Pol Hauspie and its former CEO Gaston Bastiaens were arrested in April 2001. L&H finally went bankrupt on 25 October the same year.
Many people, especially in West Flanders, were blinded by the company's success and lost large sums of money on L&H stock.

The Flemish Government had become a major investor in the company through and during one of L&H's cash crunches. It guaranteed 75 percent of a bank loan to the company. Investors and tax payers alike were hit hard when the company went bankrupt.