Verdict: Forstmann Little Guilty…Sort of

Forstmann Little & Co. was found guilty last week of breaching its contract with the State of Connecticut, and 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 $100 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,” says 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.”

Opening arguments didn’t begin until the beginning of June, by which point Superior Court Judge Samuel Sferrazza already had thrown out the charges of securities law violations. Two weeks later, he said that the prosecution had not presented sufficient evidence to sustain the bad faith and unfair dealing charges. The final jury verdict found Forstmann Little liable for two counts of contract breach and one count of fiduciary duty breach. It did not give an explanation for the lack of damages.

Ted Forstmann, senior founding partner of Forstmann Little, issued a statement that declared the jury verdict a “complete victory” for his firm.

Lawyers following the case, however, point out that Forstmann Little now has a black mark on its once-sterling reputation, and that the firm incurred sizable defense costs. 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 had not issued a formal statement as of press time. Also not speaking immediately following the verdict was Erskine Bowles, a former Forstmann Little partner who currently is running for a U.S. Senate seat in North Carolina.