In a small courtroom in Rockville, Connecticut, the founder of a very large private equity firm is fighting for money and his reputation.

It is the closest thing this industry has had to a celebrity trial, and while the general public may find all the talk of placement memoranda and leverage to lack sex appeal, private equity market participants following the legal showdown between Forstmann Little and Connecticut Treasurer Denise Nappier are rather titillated by it.

Nappier, an elected official with an eye on higher offices, says she sees her lawsuit as a very straightforward attempt to right a wrong. In a recent statement, she said: “Forstmann Little, as general partner, deliberately deviated from its stated investment strategy and recklessly breached its contractual obligations to Connecticut as its limited partner.”

Connecticut claims its state pension lost more than $120 million thanks to Forstmann Little's illicit investments in XO Communications and McLeodUSA. Nappier wants the money back.

As the trial has unfolded, the definition of “stated investment strategy” has been the main battleground. Connecticut argues Forstmann Little stated in its private placement memorandum that it would make control investments in relatively conservative businesses, and that the two telecom deals in question broke that promise.

Speaking under oath, Forstmann argued his firm had a “great deal of control and influence” over the two companies, despite having minority investments in both. As to the issue of whether the telecom PIPE deals were overly speculative, Forstmann reportedly said: “I really thought these two companies were the safest investments I ever made.”

In subsequent testimony, a former Forstmann Little partner, Erskine Bowles, backed up this assertion. He explained that Forstmann's decision to invest more than $1 billion in McLeodUSA, instead of an originally planned smaller sum, stemmed from a desire to help the company deleverage, thus making the larger investment, in fact, safer.

Forstmann Little's legal team, led by Fred Bartlit (who represented President Bush in the Florida recount controversy) argued that the PPM's language is broad enough to include the two telecom investments. Bartlit also asked, if the firm's actions were so egregious, why have no other LPs joined Connecticut's cause?

The answer to that has more to do with the clubby nature of the private equity industry than with the merits of the suit. But suffice it to say that the other Forstmann Little LPs are watching this case very closely to learn where lies the line between a breach of fiduciary duty and a merely bad investment.