Forstmann Little Trial Opens with State of CT Allegations

June 1, 2004 ( - Buyout firm Forstmann Little & Co. sold the state of Connecticut a bill of goods - portraying itself as a "conservative investor" - when it signed on for a mandate with state officials.

In opening arguments Tuesday in a packed state Connecticut courtroom, Gerald Fields, a private lawyer representing Connecticut, said the state wants $125 million back that Forstmann lost in two telecommunications companies that went bankrupt, XO Communications and McLeodUSA, Reuters reported.

Forstmann Little, a firm led by buyout veteran Theodore Forstmann, 64, made spending decisions that were “inconsistent with the conservative investment approach promised by Forstmann to the state,” Fields told the six-member jury.

If the state wins the case, the matter could have broad implications for the largely unrestricted freedom buyout funds have in pursuing investments backed by money from pension funds like Connecticut’s, industry experts said. But much depends on the particular language of the state’s contract with Forstmann, they said.

“The state has a tough case to prove,” said Carl Metzger, an attorney for Testa, Hurwitz & Thibeault, a Boston law firm that specializes in private equity matters. “Typical investment contracts between limited partners (investors) and these types of funds are written very broadly.”

But Fred Bartlit, a Forstmann lawyer, maintained that the Forstmann investments followed the language of its contract with the state. “In a contract, words count,” he said.

Forstmann, who founded his firm in 1978, was not alone in making large bets in telecom investing, but its losses were among the largest suffered by a buyout firm in the sector. Forstmann lost its entire $1.5 billion investment in XO after the Reston, Virginia-based telecom company joined dozens of similar companies in filing for Chapter 11 bankruptcy protection several years ago.