Forstmann Little & Co. recently was found liable of breaching its contract with the State of Connecticut, and also for having breached its fiduciary duty. The verdict came less than two days after a Vernon, Conn., jury had begun deliberations on the case, and was notable for not rewarding damages to Connecticut. The state had been seeking in excess of $120 million.
“The verdicts are bizarre in some respects because it’s hard to imagine that they could characterize Forstmann Little in a worse light as a professional manager of assets,” said John MacMurray, a private equity attorney with Ropes & Gray LLP. “The jury found that Forstmann Little had committed malpractice in terms of being an asset manager, but the actual outcome is that Forstmann Little won the case because there were no monetary damages.”
The case, filed in February 2002, accused New York-based Forstmann Little of breaching its fiduciary responsibility to Connecticut, which had invested $198 million into a pair of Forstmann Little funds. Connecticut also alleged contract law violations, securities law violations and that Forstmann Little had engaged in bad faith practices and unfair dealing. At the time, Connecticut Attorney General Richard Blumenthal said: “We want more than the $100 million-plus they wasted and wiped out. We want to make Forstmann Little the poster child for fair-dealing in the investment community.”
Despite such harsh rhetoric, conventional wisdom said that the two sides would settle their grievance behind closed doors. Some discussions did take place thanks to a court-ordered mediation, but no final agreement could be reached, and opening arguments began on June 1.
From the start, it seemed that Connecticut was losing ground. Superior Court Judge Samuel Sferrazza threw out the allegations of securities law violations in late May, and later said that the prosecution had not presented sufficient evidence to sustain the bad faith and unfair dealing charges. The state also chose not to call Treasurer Denise Nappier or any other investment officer, even though the Treasurer’s Office was named as lead plaintiff in the case.
“We had been preparing that Nappier or someone else involved with investment decisions would testify,” said Bill Bright, an attorney representing Forstmann Little on the case.
Also not testifying was Erskine Bowles, a one-time Forstmann partner and a current candidate for U.S. Senate in North Carolina. The decision renewed accusations that Connecticut was playing partisan politics with the case, since Bowles shares his Democratic Party affiliation with both Blumenthal and Nappier, while Ted Forstmann, senior founding partner of Forstmann Little, is a leading GOP fundraiser. Bowles had been left off the original complaint, and only was added after the issue was used to attack Nappier during her 2002 campaign for reelection. Connecticut officially called the omission an oversight, although a source close to the situation said that it had been deliberate.
“When you have a plaintiff seeking $125 million, you look at the bottom-line result,” explained Bright, a partner in the Hartford office of McCarter & English LLP. “The bottom-line in this case is that no money was awarded to Connecticut.”
Other attorneys following the case, however, say that the “split” verdict is more complicated. While Forstmann Little gets to keep its $120 million, it was forced to incur significant legal bills and now has a black mark on its once-sterling reputation. They also say that the entire episode sends a message to other private equity firms that they should develop risk management precautions before being tagged with a lawsuit of their own.
Connecticut AG Blumenthal said that he was pleased with the verdict, but obviously disappointed in the lack of damages. He added that an appeal was not out of the question. If Connecticut does file an appeal, it would have to do so by early next week.