Forstmann breached contract, avoids payout

A Connecticut jury has found New York buyout firm Forstmann Little & Co guilty of having breached two contractual agreements but found no grounds for awarding compensation to the limited partner that brought the lawsuit against it for losses on telecom investments.

Forstmann Little & Co, which was on the receiving end of a lawsuit brought by Connecticut pension fund, one of its limited partners, has been found guilty of breaching a contract between the parties but has avoided a payout thanks to the pension fund’s “acquiescence” and the fact that the buyout firm took legal advice when making its investments.     

According to a Bloomberg report, the jury ruled that Forstmann Little had violated its contract with Connecticut’s pension fund by investing too much money in telecom firm XO Communications from its 1997 fund, in which Connecticut was an investor. In addition, it concluded that the buyout house had made an improper investment in McLeodUSA, another telecom business. The investments were made between 1999 and 2001.

However, the jury decided that no compensation was due to Connecticut because it had “acquiesced” with Forstmann Little’s decision to acquire the stakes and also because the buyout firm had relied on legal advice when making the investments. Connecticut treasurer Denise Nappier had sought $120 million in compensation: equivalent to the amount the fund lost when the tanking investments were written off. Forstmann Little made a $1.5 billion loss on XO – the largest ever made from one deal by an LBO firm.

According to Bloomberg, Connecticut lawyer Gerald Fields said: “We’re obviously pleased that the jury ruled in our favour including that Forstmann Little acted in bad faith. We’re disappointed that they let them out on acquiescence and advice from counsel.”

“We are very pleased that this two and a half year litigation is finally over with a complete victory for Forstmann Little,” Ted Forstmann, the firm’s head, said in a statement. “The state owned these investments for two and a half years and did not complain until the value of those investments, along with the entire telecom sector, began to decline.”

The jury reached their decision over three days after a trial that lasted for a month. Connecticut attorney general Richard Blumenthal said he may appeal “if there are legal grounds”.