Forstmann agrees to $15m settlement

The legendary New York buyout firm will pay the Connecticut state pension fund to settle a long dispute over disastrous investments Forstmann Little made in telecom companies.

Bringing to a close a long and unprecedented legal dispute, Connecticut treasurer Denise Nappier announced a settlement with Forstmann Little by which the New York private equity giant will pay the state pension $15 million in exchange for an end to further legal action.

The settlement also includes an additional $1.2 million that Forstmann Little had withheld from the state to pay for legal expense.

Nappier’s lawsuit was filed in 2002 over what she described as Forstmann Little’s egregious breaching of the partnership agreement to which the state had committed capital. Specifically, the pension charged that Forstmann Little had improperly concentrated investments in XO Communications, a competitive local exchange carrier (CLEC) and McLeodUSA, another CLEC. XO Communications went bankrupt and McLeodUSA barely avoided insolvency and remains a struggling business.

In court, Forstmann Little founder Ted Forstmann argued that his firm’s telecom investments had been well within the funds’ stated investment strategy, and that each equity tranche counted as a separate investment and therefore did not constitute an over-concentration of capital in any one security.

In July, a Connecticut Superior Court jury found that Forstmann Little was guilty of breaching its investment agreement with the state pension, but did not award the limited partner any compensation, as Nappier and state attorney general Richard Blumenthal had demanded.

Nappier and Blumenthal vowed to continue pursuing the private equity firm for damages. The state treasury had argued that it should receive back $125 million – its estimate of what it lost as a result of the improper investments.

The recent settlement was announced in an exultant press release from Nappier’s office. Calling the settlement a “landmark victory,” Nappier said in the statement: “[W]hat we ultimately achieved with this case is a recognition of the rights of limited partners in the private equity industry, and that’s priceless.”

The state treasurer said the $15 million represented the amount of a third investment Forstmann Little made in a sinking XO Communications – an act that Nappier described as the “most egregious” of the firm’s breaches of contract.

The press release also sounded a conciliatory note: “Notwithstanding the unfortunate conduct in this instance, the firm is among the giants in the industry, and well poised to provide the pension fund with a good return on those investments we are obligated to see through,” said Nappier.