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The Reg visits Korea to assess L&H's sales

WSJ misses tale of economy boom

On the face of it, speech and language specialist Lernout & Haupsie's reported sales figures for Korea for recent quarters do look too good to be true. They had gone from a million dollars or so in the first two quarters of last year to $15 million in Q3, $46 million in Q4, with $58 million reported for Q1 this year.

Those who were shorting the stock, together with the odd financial journalist and financial analyst, had been jumping up and down crying foul for some time. Enter the Wall Street Journal's Jesse Eisinger, who was aware of the views of those who, for various reasons, were ranged against L&H. He understandably thought it worthwhile investigating the Korean sales, especially as they were playing such an important role in L&H's bottom line. The result was the WSJ article that we previously discussed.

The same evening that the WSJ article was published, L&H announced that its Q2 Korean sales were $68 million. Eisinger gleefully appeared on CNBC television the next morning and took the credit for having caused a 19 percent fall in the L&H share price (which translates to a $1 billion drop in the value of the company), we thought the time had come to investigate further.

The Reg hits Seoul

We went to Seoul to see if we could determine whether L&H was misrepresenting its Korean sales, or whether there really was a remarkable boom in the speech and language business there. We also wanted to investigate the WSJ's reporting on the matter, since L&H was vehemently denying that the WSJ's story had any foundation.

We were briefed by senior L&H executives in Seoul, had product demonstrations, toured their offices, spoke to many of L&H's staff,and saw L&H products in use at their customers' offices. We also visited L&H customers who had been quizzed by a reporter from the Seoul bureau of the WSJ. We were accompanied by a Korean American interpreter, which proved very helpful in understanding the cultural dimension which was clearly lacking in the WSJ article.

Although we do not have enough quantitative evidence to verify the sales figures that L&H reported, we were impressed by the qualitative evidence we saw of the L&H Korean operation. At L&H's request, KPMG is conducting a special mid-year audit that L&H confidently predicts will confirm its sales figures for the first two quarters.

We quiz the WSJ
Our request to interview the WSJ reporter Meeyoung Song who conducted the telephone survey in Seoul, and the WSJ Seoul bureau chief, was turned down by Dick Tofel, Dow Jones' vp for corporate communications. Tofel would only say that "we are confident about this story, and its sourcing" and that he saw "no reason for any enquiry" into the articles. He declined our requests for further information. The WSJ did not visit L&H's Korean offices or its customers: their enquiries were conducted in rather aggressive telephone calls.

One of the L&H customers we visited was Hung Chang, a public company that manufactures equipment for testing, measurement, communications and satellites, and which was mentioned prominently in the WSJ article. It quoted Kim Ho Kyun (although his business card says "HG Kim") saying that "Hung Chang wasn't using L&H products internally" and that "L&H's $5 million bill was paid by Spia, 'not Hung Chang'".

The WSJ also said that in a follow-up interview, after it had thought it had found a discrepancy, Kim had told the paper: "Assume, he says, 'I lied about everything'". (It's worth noting that "assume" was not in quotation marks.) We asked Kim, who is general manager of business planning, about this. Kim is adamant that he was misquoted, that never used the word "lie", and that the WSJ reporter was not happy at what he told her in three interviews. He finally told the reporter that he had nothing further to say, and asked to be left alone.

Proof that L&H smokes its own dope

At Hung Chang, we were shown a demonstration that used L&H voice recognition technology to open a door if the voice of an approved person was recognised, so the WSJ claim that the company wasn't using L&H products was plain wrong. We must also report that our powers of mimicry were inadequate to break the door control system, although an approved person's voice was recognised without difficulty.

The WSJ also cited an interview with Choi Sang Hyun of Hung Chang in which the WSJ claims he said that L&H's $5 million bill was paid by Spia, a joint venture. Choi claims that he mentioned no figures to the WSJ. Ben Kang, manager of new business development at L&H Korea and the account manager handled the sale, told The Register that he had issued the invoice to Hung Chang. In addition, L&H Korea said that the voice recognition and speaker verification products that were separate from sales to Spia.

Choi's boss, Jan Ho Sohn, the manager of PR and planning and who was referred to by the WSJ as "a third Hung Chang official", told us how he was called five times by the WSJ reporter Meeyoung Song. And that each time she asked essentially the same questions, as though she doubted the truth of this answers. Sohn told us it felt as though he was being interrogated by the police. Sohn also believes that the reporter was trying to grab at something, since at one point she pleaded "give me a story to write". We asked Sohn what he thought of the WSJ's journalistic ethics and reporting standards: he replied that he was "not happy".

We could go on with this and other similar sagas, but we became convinced that the WSJ's Korean bureau had been tasked with trying to prove something that didn't happen to be the case, and misreported the results of its telephone calls to L&H customers.

Class actions filed

As a direct result of the WSJ article, four class action suits were filed on 9 August, all essentially alleging harm to shareholders as a result of supposed misreporting of L&H's Korean results. The same day, Lernout & Haupsie announced that a federal judge in Massachusetts had dismissed an earlier consolidated securities class action suit, but two hours before L&H managed to get its press release out, the first of the new round of class action suits was filed in Pennsylvania. Just over an hour after L&H's press release, a second and similar class action was filed in the Massachusetts District Court, also alleging "false and misleading statements" about L&H's Korean business. Nine minutes later, a third action was announced, again in Massachusetts, followed by a fourth action - trailing by nearly an hour -in Pennsylvania.

Such class actions tend to get consolidated, but the pole position often goes to the first bunch of lawyers to file, and it is a sad reflection on the state of US law. Let's suppose that the mid-year audit shows that the results announced by L&H are true: will the class-action plaintiffs turn their wrath on the WSJ for raising their expectations falsely? Of the more active L&H watchers amongst the financial analysts, Kurt Janssens of KBC Securities, who has visited L&H Korea twice, considers that L&H does have a significant business there and rates the shares as a buy. Rob Stone of SG Cowen also rates L&H as a buy, with Donald Newman of Ladenberg Thalman rating the company as a strong buy. Only Brian Skiba of Lehman Brothers has expressed negative views about L&H, but he has had little contact with L&H executives and has now discontinued his coverage.

WSJ misses the story

The apparent errors in the WSJ's story are serious, but journalistically there's something even worse: the paper missed the main story about the rebound in the Korean economy and the role that speech recognition and translation products and services are playing in this. The Register will bring you some fascinating glimpses of what is really happening in Korea today. ®

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