Billionaire investor Ted Forstmann is carrying a heavy burden into a tiny Connecticut courtroom next week – protecting Wall Street’s basic tradition of taking risks.
If he loses his lawsuit over dropping $125 million of pensioners’ money in the market, it could open the floodgates for an unprecedented rampage of investor lawsuits in search of money that vanished in stock gambles.
If he wins, hedge funds, buyout firms and other investment ventures can breathe easier over the way they’ve picked their bets with other people’s money.
Forstmann’s big private equity fund, Forstmann Little & Co., goes on trial Tuesday in Rockville, Conn., where a jury will decide whether his firm improperly squandered $125 million of pension money in Connecticut’s public employees’ retirement accounts.
Legal experts are mixed over the merits of the legal fight, with some saying the pension fund has little chance of recovering investments in the shares of two telecom dogs – McLeod USA and XO Communications, the latter of which went bankrupt.
“It would be difficult to bring a claim against an investment advisor based on bad investment decisions,” said Robert Kaplan, a partner at Kaplan Fox & Kilsheimer.
At best, he said, the pension fund has a possible shot at winning based on a narrow interpretation of terms in a contract the fund signed with Forstmann to handle the pension money.
The fight centers on whether the contract between Forstmann and the state of Connecticut allowed risky bets in such ventures as telecom stocks. Connecticut says there’s a breach; Forstmann denies it.
“The thing about a jury is that it’s made up of middle-class people who don’t like the thought of someone fooling around with pension money,” said Anthony Sabino, partner at Sabino & Sabino and an associate law professor at St. John’s University. “And even if Connecticut loses, it still demonstrates that there’s a new level of scrutiny and oversight emerging about pension funds,” he added.
A source in the Forstmann camp said: “This is a straightforward contract case – it’s as cut and dry as possible.”
Connecticut and its outspoken attorney general, Richard Blumenthal, say the investment didn’t conform to the conservative investment policy the fund had signed on to when it invested $200 million in 1997.
Forstmann lost about $2 billion of all its investors’ money on the two stocks, writing off $1.5 billion alone in the OX debacle.