Forstmann Little Faces CT Fiduciary Breach Trial

May 28, 2004 ( - The trial between New York investment firm Forstmann Little and the state of Connecticut over an alleged breach of contract and fiduciary trust is set to begin.

Connecticut claims the investment firm violated it fiduciary responsibility to the state’s Retirement and Pension Funds by making investments in two floundering telecommunications companies.   Together, the two bad investments cost Connecticut’s pension fund $125 million when the fund lost all of its $95 million investment in XO Communications and 90% of its $31.4 million stake in McLeodUSA, according to a Hartford Courant report.

In the complaint, the state alleges Forstmann Little never apprised officials in the treasurer’s office of the looming XO Communications bankruptcy and that the fund only found out about the company’s failure from The Wall Street Journal’s coverage.   Attorney Charles Lee, who represents Connecticut, says Forstmann Little was not eager to reveal this information due to the large stake the investment firm had in XO Communications.   At the time, Forstmann Little was attempting to takeover the failing telecommunications company, the Courant report said.

Contract Clause

The state says the firm’s large position in the two companies violated a contract between Connecticut and Forstmann Little, entered into in 1997, which stipulated that no more than 40% of its investments in an equity fund and a management buyout fund could be pooled in any one company.   The investment firm disagrees, saying the language of the contract is ambiguous and that in any event, Connecticut officials signed off on the various transactions and accepted approximately $9 million in dividends from the very investments they now challenge.

Prior to the most recent scheduled hearings, Vernon Superior Court Judge Samuel Sferrazza granted Forstmann Little’s motion for summary judgment on two counts of the six-count complaint that allege securities fraud.   However, the judge, who will preside over the latest trial as well, left standing four counts – dealing with breach of duty, breach of fiduciary trust, breach of contract and misrepresentations – saying they present “genuine disputes of material facts.”

Connecticut’s Retirement and Pension Funds exceed $20 billion overall, and cover more than 160,000 participants, according to the Courant report.