“What are you doing here?” Teddy Forstmann asked, shaking my hand after spotting me in the back of the courtroom during the mid-morning break. We hadn’t seen each other in several years, since a Christmas party at his late brother’s Fifth Avenue apartment, and I shared his feeling that this was an odd venue for a reunion—a tiny courtroom in the comatose town of Rockville, Connecticut, where he was on trial for losing more than $120 million of Connecticut state pension money. He seemed too big for the setting, literally and figuratively: As leveraged-buyout tycoons go, the ruddy, silver-maned Forstmann is tall and powerfully built, and he radiates the nervous energy that can quickly make any room seem small and rapidly shrinking. He’s considered something of a scold on Wall Street, a hectoring moralist who rails against the business practices of his rivals—an old-economy guy known more for building businesses than chop-shopping them for parts, a brilliant crank with a nearly unbroken string of successful investments. Until recently, he’d returned an astonishing 50-plus percent annualized rate of return to the investors in his private equity funds since he practically invented the leveraged buyout—along with his arch-rival Henry Kravis—back in the late seventies. Yet, of all people, here was the high-minded Forstmann standing in the docket representing the sins of Enron-era Wall Street. The man who has long been seen as a maverick and an outsider was, if only by default, bearing the hopes and fears of the investment community on his broad, slightly hunched shoulders.
“If Teddy loses this case, every attorney general in the country will be calling lawyers,” the head of merchant banking at a large investment firm told me recently at a dinner party on the Upper East Side heavily populated by investment bankers. It was the first time I’d heard about the case. The consensus among the group seemed to be that the suit was a piece of political grandstanding on the part of a Democratic state treasurer. Forstmann, it didn’t need to be said, is a big Republican donor and fund-raiser, the national co-chairman of George H. W. Bush’s 1992 campaign, and a kind of kitchen-cabinet member of recent Republican administrations. The fact that, besides being a Democrat, Forstmann’s antagonist, Denise Nappier, was an African-American woman was entered into evidence by one of the guests. QED. Another suggested that Richard Blumenthal, the state’s patrician Democratic attorney general, was singing that catchy pop tune written by Eliot Spitzer, New York’s attorney general, who has conducted a highly visible crusade against white-collar malfeasance. Forstmann, if not beloved by all at the table, certainly had, for the first time in years, a measure of their sympathy. And the merits of his case were almost self-evident. “Investment is about risk,” someone said.
Not that a geyser of Schadenfreude hasn’t spouted up from Wall Street. “Teddy was always lecturing us,” one partner in a San Francisco–based private-equity firm told me. “He was always on his soapbox about how the rest of us use too much leverage and his way is the righteous way.” (With all due apologies for this and subsequent unattributed quotations, none of these guys would speak on the record; they make CIA operatives seem like publicity hounds. “It’s called private equity for a reason,” said another. “We’re totally unregulated. We operate outside the spotlight and we like it that way. Which is one of the things that scares us about this case.”) To say Forstmann is not much liked by his peers is understating a case that is often made with expletives. As he explains it, the investment banks don’t like him because he bypasses them to raise his own debt, and the other private-equity funds don’t like him because he charges lower fees. Envy certainly plays a role in this. His personal fortune is somewhere in the neighborhood of $1 billion. He flies a G5, dates actresses, plays golf with Vijay Singh and shoots in the seventies. In the past twenty years, Forstmann has made some $15 billion for his investors, buying companies like Dr Pepper and Gulfstream that were unwanted or unnoticed by his competition. (Most of these deals, he loves to point out, were ridiculed at the time.)
His detractors think the observant Catholic has a messiah complex. His impatience with opposing points of view, and his tendency to harp on his own accomplishments, can alienate the people he’s trying to impress. At Yale, he was the star of the hockey team, but when the time came to elect a captain, he didn’t receive a single vote. To his credit, though, he tells this story on himself. “I really think Teddy is a genuinely decent and upright guy,” a friend of twenty years says, “but he’s his own worst enemy. His faults have to do with his massive insecurity.”
The day after I learned about the case, I decided to drive up to Connecticut and observe the proceedings. Not necessarily the trial of the century, essentially a contract dispute. Much was at stake legally and financially, but my interest was primarily in the defendant, who had fascinated me ever since I was a guest at his apartment a decade ago, swilling his ’55 La Mission Haut-Brion while he lectured all of us about the free-market system. Although he’d taken me on a tour of his Postimpressionists that night, his prize possession was a tin plate, which he showed me later at his office in the GM building, the plate Nelson Mandela ate from during the twenty years of his imprisonment, inscribed to Teddy by the Nobel laureate in black felt pen. What exactly, I wondered, was Forstmann doing in this courtroom in the middle of nowhere? How had he come to lose so much money? The trial would be in part about the notion of risk, which, as Teddy told me the night I met him, was at the very heart of capitalism. But there was also a sense in which Forstmann’s character was on trial.
At the center of Connecticut’s case was the claim that Forstmann’s firm violated the terms of its contract by departing from its historical investment strategy, outlined in its prospectus, of targeting established firms with dominant market position and significant barriers to entry. Like millions of less experienced investors, Forstmann seemed to have been seduced by the gravity-free, new-paradigm environment of the high-tech boom in the late nineties. Forstmann made his first two investments in telecom in 1999, just as the party hit its peak, committing some $2.5 billion. His firm, Forstmann Little & Co., ultimately lost more than $2 billion betting on two fledgling telecom companies, XO Communications and McLeodUSA, both of which collapsed in bankruptcy in the hungover reckoning of the current decade.
The year 1999, when Forstmann suddenly jumped into telecoms, represented the height of an investment frenzy unleashed by the Telecommunications Act of 1996, which essentially deregulated the nation’s telephone networks, allowing newcomers to compete with the long-distance companies as well as the handful of local carriers that had enjoyed regional monopolies since the breakup of AT&T in 1984. “Suddenly it was like the Oklahoma land rush,” testified Terrence Barnich, a telecom expert hired by Connecticut. Between 1995 and 1999, the capital markets raised more than $100 billion for telecom investment. The telecom boom was the fraternal twin of the dot-com bubble; the digital-information revolution required millions of miles of new highways, interchanges, and overpasses.
This boom period also provided a new standard of wealth and a goad to the LBO barons who had made the big fortunes of the eighties. “You’ve got to remember that for Teddy and Henry, wealth isn’t absolute, it’s relative. And suddenly you’ve got guys like Mark Cuban, who made like $15 billion, and Meg Whitman at eBay,” says one equity-fund manager who, to be fair, probably feels relatively impoverished next to Forstmann and Kravis. “These Internet billionaires showed up one day in blue jeans and T-shirts, and guys like Teddy and Henry in their suits and ties wanted in on that, on the new big returns.”