Connecticut Sues Private Equity Firm

The suit alleges that the firm made investments prohibited under the contract with Connecticut.  Further, that Forstmann Little misled, misrepresented, and concealed information regarding the nature of their investments.  According to the suit, Forstmann Little:

• breached its fiduciary responsibilities, 
•  breached contractual obligations, and 
• violated securities law

In a statement Napier said, “Forstmann Little cheated Connecticut workers and retirees of their hard earned pension money, and they did so in the hopes of a better pay day for themselves. I have a responsibility to protect Connecticut’s pension funds.”

Background

Former State Treasurer Christopher Burnham invested $200 million in two Forstmann Little funds in 1997,

· $130 million was invested in Forstmann Little MBO VII, and
· $70 million in Forstmann Little Equity Fund VI

Last year, Nappier expressed concern over the valuations of two publicly traded companies, XO Communications and McLeod USA, after their stock prices dropped precipitously while the partnership investments were held at cost.

Forstmann Little had made significant investments during that year with state pension funds, $95 million in XO Communications and $31.4 million in McLeod USA. The two financially strapped telecommunications companies later received additional infusions of capital from Forstmann Little.

Write-Down

According to Nappier and Blumenthal, late last year the firm announced a complete write-down of the XO Communications investment as part of a financial restructuring, resulting in a loss to the Connecticut pension fund of $95 million of state funds that Forstmann Little had invested in the company.

The lawsuit alleges that Forstmann Little deliberately failed to inform the State of Connecticut about its plans to render the Partnership investments in XO worthless. It further claims that the firm opted to use other limited partnerships it controlled to eradicate the value of the State of Connecticut’s investment in XO, while benefiting the separate interests of Forstmann Little and its other partnerships.

“This firm treated Connecticut like a patsy. It solicited and took our money with promises that it would apply its time -tested, trustworthy investment strategy suitable for our pension funds,” Blumenthal said.

 “Instead, it squandered our funds on unsafe, speculative telecommunications investments that tanked – lousy companies in a losing industry,” he added.

Forstmann Says

Forstmann Little denied the allegations. In a statement, the firm insisted Connecticut officials knew the risk of their investments beforehand and that those investments were properly executed.

“The State of Connecticut is a sophisticated institutional investor, which was fully informed about the nature and scope of these investments and didn’t question them at the time,” Forstmann Little officials said in the statement. “It is unfortunate that this fund has so far not performed as well as the firm’s previous funds, but the investments were entirely proper.”

The State Treasurer is principal fiduciary of the $20 billion Connecticut Retirement Plans and Trust Funds, which invests pension funds for 165,000 state and municipal employees and teachers.

The suit is being filed in Superior Court in Connecticut.