Federal Judge Sends Connecticut Pension Case to State Court

November 4, 2002 (PLANSPONSOR.com) - A federal judge has sent back to a Connecticut state court a lawsuit by state officials against a New York investment company over millions of dollars in lost pension investments.

US District Judge Janet Bond Arterton of the US District Court for the District of Connecticut ruled that the lawsuit by Connecticut State Treasurer Denise Nappier against Forstmann Little & Co. didn’t have proper federal court jurisdiction, according to a news report from Washington-based legal publisher BNA.

After the suit was filed in state court, Forstmann Little asked to have it heard in federal court. Nappier opposed the request, arguing the state court was the proper venue. In all, Connecticut’s state pension fund lost approximately $95 million in Forstmann Little’s XO investments, the lawsuit alleged.

The BNA report provides this background:

The lawsuit alleged that Forstmann Little induced Connecticut state pension funds in 1997 to invest $200 million in two limited partnerships Forstmann Little had formed.

In connection with Forstmann Little’s investment proposal to the state, the company offered the state a limited partnership interest in a closed-end limited partnership, the stated purpose of which was to invest in “equity of management buyout transactions,” according to the state’s lawsuit.

The state also was offered a limited partnership interest in a closed-end limited partnership the stated purpose of which was to invest in “subordinated debt and equity of management buyout transactions” organized by Forstmann Little, the lawsuit alleged.

On behalf of the two limited partnerships, Forstmann Little in January 2000 invested approximately $1.5 billion in Reston, Va.-based XO Communications Inc., the lawsuit alleged. Of the $1.5 billion, $80 million was provided by the state of Connecticut, according to the lawsuit.

The state’s lawsuit alleged that Forstmann Little invested another $250 million in XO in April 2001, just after it was reported that XO had suffered a wide first-quarter loss. Forstmann Little announced that the additional investment was “equity only,” the lawsuit alleged. But contrary to that announcement, the entire $250 million was used to purchase common stock in XO, according to the lawsuit.

In November 2001, Forstmann Little announced that it had agreed to a restructuring plan for XO, which involved a so-called “pre-arranged” bankruptcy filing, the lawsuit alleged. Under the restructuring plan, Forstmann Little invested $400 million in cash in XO in return for 78% of the equity of XO.

The lawsuit alleged that rather than informing the state about the XO restructuring, Forstmann Little opted to leave the state “in the dark and to utilize 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.”

In addition, the lawsuit alleged that Forstmann Little improperly invested approximately $477 million in convertible preferred stock in a publicly held company called McLeodUSA Inc. McLeod filed for bankruptcy on January 31, 2002.

The case is Treasurer of the State of Connecticut v. Forstmann Little & Co., D. Conn., No. 302cv519 (JBA), 10/15/02).