Posted on 09/04/2002 9:16:20 AM PDT by xsysmgr
EDITOR’S NOTE: This article is based on a piece in the September 16, 2002, issue of National Review.
In what state attorney general Richard Blumenthal described as a "virtually unprecedented" move, the state of Connecticut sued investment firm Forstmann Little for losing more than $100 million in pension funds of state workers. Suing over disappeared dough is nothing new, but this lawsuit has two highly unusual aspects.
First, the suit put the fear of God into general partners (GPs) at investments shops everywhere because seven Forstmann Little GPs were separately named as individual defendants — putting them personally on the hook for any resulting liability for making lousy investments that tanked. Second, and more important, one of the GPs — someone who was present when all the bad investments were made, who was there while much of that cash evaporated, and who even sat on the board of one of the companies that went bankrupt-went unnamed.
Who was that mystery partner smiled upon by Lady Luck? None other than Erskine Bowles, the multimillionaire former chief of staff for Bill Clinton and current Democratic candidate for the U.S. Senate seat now held by the retiring Sen. Jesse Helms (R., N.C.).
Bowles appears to have had more than luck in his corner. The two people responsible for filing the suit — State Treasurer Denise Nappier and State Attorney General Richard Blumenthal — are both elected Democrats. But more on that later.
Like so many other scandals of late, Connecticut's problem with Forstmann Little stems from faltering telecom investments. The two biggest issues are the collective billions Forstmann Little poured into XO Communications — where Connecticut lost its entire $95 million stake — and McLeod USA, in which Connecticut lost 90 percent of its $31.4 million piece of the pie.
Bowles doesn't consider himself responsible for helping to destroy over $100 million in pension money for state workers in Connecticut. He says that he was only "there part-time on and off for a couple of years." Bowles continues his defense by noting that "over a 20-year period" — when Bowles was not a Forstmann Little partner — "[Forstmann Little] had a return of their investment of over 35 percent." In other words, he embraces the period when he wasn't a partner, but dismisses the time span during which he was one.
But Bowles's salary alone belies his claims that he was a part-timer: $4.3 million per year.
By all accounts, Bowles was seen as an asset to the firm, someone who had extensive experience with higher-risk/higher-return investments, a model that Forstmann Little had largely eschewed for most of its history.
It was most likely no coincidence that Forstmann Little significantly shifted course in its investment strategy shortly after Bowles's arrival in January 1999. In fact, in a mea-culpa memo to investors from partner Theodore Forstmann — right after XO "restructured," rendering Connecticut's investment worthless — the firm's namesake justified the investment in the telecom by noting that the addition of Bowles was designed to help "expand [Forstmann Little's] horizons somewhat in order to participate in the very rapid changes taking place in the economy." In a 1999 marketing pitch to existing investors, the firm bragged that Bowles would "give Forstmann Little an opportunity to invest in smaller, high-growth investments."
For most of its 20-year history before Bowles signed on, Forstmann Little pursued a doggedly conservative approach, only investing in large companies with substantial growth potential, high margins, and dominant market positions. And when Forstmann Little invested, it left nothing to chance, taking over management as a condition of investing — something that set Forstmann Little apart from most other investment shops.
Forstmann Little had long stuck to behemoths such as Gulfstream and General Instrument, running them for several years or more and then cashing out for a tidy profit. But when Bowles came on board, Forstmann Little began down the path that has claimed so many venture capital casualties: telecom and high-tech. The firm also ditched its longstanding reliance on controlling companies, expanding its portfolio to include traditional passive investments where the existing management stays in place.
But that's the rub — Connecticut alleges a bait-and-switch, that it signed on for the old, stodgy strategy, but that it got the new, risky plan without its knowledge or permission. Connecticut's suit primarily charges that Forstmann Little and its partners violated the investment contract and significantly misrepresented the worth and type of investments made in XO and McLeod.
The two investments that have landed Forstmann Little in hot water, XO and McLeod, both happened on Bowles's watch — and as a general partner, Bowles would have been involved in significant decisions such as how to invest several billion dollars. Like many of their telecom brethren, both XO and McLeod wrapped themselves in the cloak of bankruptcy protection, virtually eliminating the value of Connecticut's investments in them thru Forstmann Little's funds. In the end, Connecticut's pension fund lost almost all of its total $126 million stake in the two companies.
Forstmann Little placed Connecticut's $200 million into two existing funds where the state was one of several investors. The investment was intended as a conservative addition to Connecticut's overall portfolio, and the state says it was banking on Forstmann Little's staid reputation. The state's lawsuit claims Forstmann Little promised a cautious investment strategy, taking over management of most of the companies in which it invested.
In the XO debacle, Forstmann Little kept throwing good money after bad — into a company it didn't even control. Over 18 months, Forstmann Little's two funds with Connecticut cash invested a grand total of $1.5 billion, all of which was zeroed out less than two years after the first round of investment. In fairness, almost every high-tech stock plunged during that same span, but Forstmann Little kept tossing in more loot. The headline from the Wall Street Journal on April 27, 2001 sums it up quite succinctly: "XO Reports Wide Loss for First Quarter, Gets $250 million in Additional Funding." With knowledge of a nearly half-billion-dollar loss — in just three months — Forstmann Little used money from a supposedly conservative fund filled with money for workers' retirements to prop up a company that was fading fast.
Forstmann Little's strategy with XO was akin to a desperate Vegas gambler who keeps doubling down, notes Wall Street professional Michael Madden of Questor Management. "It's like a poker game where you're so far into the pot, you keep anteing even if you don't have the strongest card."
The other investment that crashed, McLeod, was less of an utter disaster for Forstmann Little, but arguably more so personally for Bowles. He was on McLeod's board for two years, leaving only three months before the telecom filed for bankruptcy.
Although the contract Connecticut had with Forstmann Little appears to clearly limit the firm to investing most of the money in companies where it assumes control of the management, the $1 billion investment in McLeod only bought Forstmann Little 12 percent of the company and two of the 13 seats on the board. (Theodore Forstmann held the other seat.) Thus, Forstmann Little clearly did not buy a controlling stake. It was a traditional equity investment, which is not what Connecticut says it agreed to.
Being on the board of McLeod and a partner with Forstmann Little, no one would have been in a better position to realize the true nature of the investment, yet Bowles is not named in Connecticut's suit.
Given his status as a general partner during most of the relevant time covered by the Connecticut lawsuit — he arrived in January 1999, and departed in October 2001 — Bowles's exclusion from the list of named defendants is curious, to say the least. He joined Forstmann Little eight months before the McLeod investment, and was a partner for almost the entire XO disaster, exiting only one month before Connecticut's stake in XO was completely wiped out.
The omission couldn't be because he's no longer with Forstmann Little, since Steven Klinsky left the firm even before the shoddy investments were made — and he's named in the suit. In fact, another named defendant, Gordon Holmes, wasn't even a partner until after the deals had already been made. (He became a partner as Bowles was leaving in October of 2001.) It should be noted that there was one other GP who was not named — Joshua Lewis — but he was only a partner for about a year, starting after the McLeod deal and departing before the third XO investment. Bowles, on the other hand, was a partner during the time when all the investments in question were made.
Bowles's campaign staff has no comment other than to say that there has been "absolutely" no contact between Bowles or anyone acting on his behalf and the state of Connecticut. State treasurer Denise Nappier has said that Bowles was on the original list of defendants, but his name was dropped by the outside counsel working with her office because of a lack of direct involvement in wrongdoing. But Bowles clearly had more involvement in McLeod than the five partners who are named defendants, but did not sit on the telecom's board of directors. And named defendants Klinsky and Holmes were not even partners when the investments were made, yet Bowles was.
His luck, of course, is pure politics. Neither Klinsky nor Holmes had the good sense to run for statewide office as Democrats this year. They have both been dragged into the lawsuit, despite having far less involvement in the ill-fated investments than Bowles. Who needs Lady Luck when you have fellow Democrats calling the shots?
$4.3 million for a part-time job. Nice work, if you can get it. ;-)
CD
Good idea...and after that, see what you can do about the "front page" of the Times, Post, etc...!!
(this is downright scandalous...if it's not on the front pages, it sure should be!! this is nothing to do with the VRWC...he's a "corporate crook" for goodness' sake, and he's running for the Senate!)
Uh, oh. Yet another perp alert...
Not the thing you want hangin' over yer head going into a Senatorial election, I reckon...MUD
Never--EVER--do business with a Clintonista RAT!!
FReegards...MUD
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