Allegations of sports betting and more have cast a pall on the buyout king's comeback. True or not, it doesn't look good.
By William D. Cohan, contributor
Last spring, in his office in the GM Building, 45 floors above Fifth Avenue, Ted Forstmann, now 70 years old, began wooing Ben Sutton. Forstmann, the once-peerless buyout king, is the chairman and CEO of IMG Worldwide, the sports, media, and fashion powerhouse he bought for $750 million in 2004 with the last of his buyout firm Forstmann Little's institutional private equity funds. As the trees in Central Park outside the window were starting to bloom, Forstmann told Sutton that IMG wanted to buy ISP Sports, the regional college-sports licensing and agency business Sutton started in North Carolina in 1992.
Forstmann's idea was to merge ISP Sports with IMG's three-year-old college-sports business to form a national sports-marketing company that could offer big advertisers access to the growing ranks of consumers addicted to college sports. Sutton's ISP, with its lock on the Southeast market, was key to Forstmann's plan to build a national footprint.
The strategy was classic Forstmann: visionary, opportunistic, and persuasive. After all, he was the private equity mogul who had made billions for his investors -- and himself -- buying and selling companies such as Gulfstream Aerospace, General Instrument, and Topps; he was also the guy who had persuaded the family members and estate trustees of the late IMG founder Mark McCormack to sell the company to him.
But this was the opposite of the script Sutton had written for himself. IMG was the enemy and, if anything, Sutton wanted to buy IMG's college business. Even so, Sutton was impressed by Forstmann's knowledge of the college-sports market and his vision for the combined businesses.
What sealed the deal for Sutton, though, was Forstmann's invitation for Sutton and his son to attend Wimbledon in July with the never-married Forstmann and his two adopted South African sons, Siya and Everest. The Suttons had a great time, and Ben Sutton was particularly impressed by the interaction between Forstmann and his sons. "In my life, I've kind of lived by the mantra 'Do the right thing the right way at the right time,'" Sutton says. "And I said that to him then: 'We need to do this.'" They shook hands and started to put the deal together; Sutton would become the head of the newly renamed IMG College.
By the end of July, IMG had announced the purchase of ISP Sports for around $100 million (Sutton won't confirm the price). Sutton took most of it in enough IMG stock to make him one of the nine largest shareholders in the privately held company. (Forstmann Little owns around 85% of IMG, with Forstmann himself owning an unspecified chunk of that piece.) Sutton now had his own future and his family's riding on Forstmann and IMG.
But in the beginning of September, while the Justice Department was reviewing whether the combination of ISP Sports and IMG violated antitrust laws, something unexpected happened. James Agate, a scratch golfer, printing company owner, and one of Forstmann's former Los Angeles golfing buddies, filed a civil suit in California state court accusing Forstmann and IMG of some behavior that got Sutton wondering about the deal he had just made.
In the suit -- which, of course, anyone can file along with the requisite filing fee -- the 49-year-old Agate (pronounced AG-ett) said Forstmann and his companies IMG and 24 Hour Fitness (the other remaining company in Forstmann Little's portfolio) had breached promises Forstmann had made to him and his defunct company, Agate Printing. Agate's main claim was that for years Forstmann had agreed to protect Agate Printing against unspecified "future liabilities" and had agreed to steer some printing business his way, but had failed to do so. His demands appeared to amount to less than $10 million -- small potatoes for a billionaire like Forstmann but an unwanted nuisance nonetheless.
A month later, on Oct. 11, IMG closed on its acquisition of Sutton's company. The next day, Agate filed an amended complaint that included a bombshell allegation: that Forstmann had used Agate's company as a betting conduit through which he made hundreds of individual wagers, totaling as much as $7 million, on a plethora of sporting events over eight years.
The allegations immediately made headlines -- mainly for the charge that on June 9, 2007, Forstmann had bet $40,000 that IMG client Roger Federer would defeat IMG client Rafael Nadal to win the 2007 French Open the next day. Agate alleged that on the night before the final match Forstmann had spoken to Federer by phone and obtained "inside information" from him and then increased the size of his bet three times. In interviews with Fortune and elsewhere, Forstmann has acknowledged betting on Federer to win the match but says he did not speak with the tennis star beforehand. "No such call ever happened," Forstmann's lawyers wrote in an Oct. 27 court filing, citing Forstmann's phone records. (In the end, defending champion Nadal won the match in four sets, and Forstmann lost his bet.)
Much has been documented about Agate's allegations against Forstmann, and while the truth is still murky, one thing is indisputable: Thanks to his former golfing buddy, Forstmann, a lifelong gambler -- both literally and figuratively -- has found himself back in the limelight and in the center of an unwelcome scandal. For the first time since Agate filed his allegations against Forstmann, Fortune stitches together the multitude of Agate's accusations against the billionaire, which date back to litigation in 2008 (and involve disputes that go as far back as the late 1990s). Over the course of two lengthy interviews, Forstmann did his best to try to put the matter behind him, acknowledging the bets but repeatedly describing them as financially insignificant to him, merely recreational and simply a way to spice up an otherwise drab weekend.
But the story that emerges from Agate's court filings and from Forstmann is plenty complicated -- not unlike the lives of the two men themselves. The gist seems to be that Forstmann has always liked to gamble on sports, on card games, on his own golf matches -- the words "I bet you" are part of his everyday vernacular -- and for years used Agate to help him make bets on all kinds of professional and collegiate sports. Forstmann says he preferred to bet through Agate, whom he has known since 1988, rather than make bets through a bookie or in Las Vegas. (Agate, in turn, alleges that he passed the money on to bookies in Nevada and Costa Rica.)
The legality of sports betting is complex. Generally speaking, betting for nonparticipants is often legal, but it varies by state. The making of a bet in California or New York can be legal, but the taking is not necessarily. There are many factors, including who made the actual bet, how, where, and with whom.
Legal or not, after Forstmann bought IMG, which represents major sports stars, and then kept placing bets through Agate -- often on IMG's clients -- his gambling fairly reeked of poor judgment. The Tennis Integrity Unit has said such betting violates its rules but that Forstmann's betting occurred before its creation; an NCAA spokesperson says Forstmann is not under its jurisdiction "but that the expectation is that those providing services to the NCAA will not wager on sports." While Agate, by all accounts, including his own, seemed to grow increasingly desperate and unstable, Forstmann has come around to the view that he made a mistake; he has since instituted a ban on college-sports gambling at IMG.
But the broader story and perhaps Forstmann's bigger mistake seems to be this: Somehow, while living the glamorous life of being Teddy Forstmann -- making deals, jetting around the world, playing golf, and dating celebrities (he has recently become embroiled in a tabloid custody battle between model, actress, and Top Chef host Padma Lakshmi, his current companion, and Adam Dell, the brother of Michael Dell, over their infant daughter) -- he became involved with a somewhat questionable, highly litigious character whom a basic gut-check should have told him to avoid. Even if you believe Forstmann's version of events -- a California judge has pushed the dispute between the two men into arbitration, which has yet to begin -- the whole episode is unsavory and has lasting ramifications. Forstmann acknowledges he used poor judgment. But the unanswered question is why Forstmann was involved with Agate at all.
Accusations go beyond betting
When Ben Sutton read the allegations about Forstmann's rampant betting, he called him for an explanation. Betting on college sports sounded wrong to him. Sutton was especially worried that Forstmann might have been betting on college sports at the same time IMG was representing college-sports programs. "I asked Ted," Sutton said. "I said, 'I want to know everything.'" Forstmann reassured his new partner he had done nothing wrong and had not gambled on college sports since becoming active in the college-sports business. Agate's documents suggest Forstmann's last college-sports related bet -- $2,000 on March 31, 2007, that Ohio State would win its NCAA basketball tournament game -- was two months before IMG entered college sports. "I take him at his word," Sutton told Fortune. "I trust him on that and believe him."
Sutton was further heartened by Forstmann's decision on Dec. 3, in the wake of the allegations, to implement at IMG the "anti-gambling policy" that prevents any employee from wagering on college sports of any kind. The new policy does permit employees to gamble legally on other sports in which IMG has a role as long as the employees comply with rules and laws pertaining to such bets.
The details of Forstmann's alleged behavior contained in Agate's second complaint go beyond betting and are plenty sordid. In addition to acting as Forstmann's "betting conduit" during their 20-year relationship, Agate alleged he also was responsible for plying Forstmann with "dates and interludes" with "escorts, models, and other people" -- men to play golf with him and women for unspecified purposes. In exchange for those services, Agate claimed, Forstmann verbally agreed to "personally indemnify" and "hold harmless" Agate Printing from any tax liability arising from the checks and wire transfers Forstmann and IMG made to his company to cover Forstmann's gambling losses and escort services. Agate said Forstmann separately promised to give Agate Printing lucrative contracts. (Forstmann denies the existence of any such agreements.)
In April 2007, Agate says he learned that the IRS was coming after him for $1 million from the revenue that Agate Printing seemed to be generating thanks to the checks coming in from Forstmann's gambling. Agate wanted Forstmann to honor his indemnity agreement and pay the IRS.
In September 2007, according to the lawsuit, Forstmann's lawyers from Kirkland & Ellis offered to settle the dispute by giving Agate $10,000 per month plus the payment of his medical bills and country club fees for a year. After Agate declined the offer, and then declined a higher offer, of $300,000, Forstmann's lawyers allegedly told him he was on his own. Agate claims that when his lawyers pressed them further, Forstmann's attorneys intimidated Agate's attorneys, causing them to quit.
Agate also claims Forstmann bet "several times against" Tiger Woods, also an IMG client, to lose to Vijay Singh, another (now former) IMG client and onetime friend of Forstmann's. Forstmann's lawyers said he never would have bet against Woods since IMG represented him and would benefit if Woods won tournaments. Agate's charge "defies logic and common sense," they wrote. (Of course, by betting for Federer in 2007, Forstmann was necessarily betting against IMG client Nadal.)
Agate's allegations go on, claiming the disagreement with Forstmann led to the dissolution of his marriage and his business, and ultimately required him to seek "professional counseling and therapy from a clinical psychologist."
A l0ng and complicated history
Not surprisingly, Forstmann has a different perspective on his James Agate problem, which can best be summarized as a feeling of being "extorted" by a desperate man. His relationship with "Aggie," as he called him, started in Los Angeles, where Agate was a member of several golf clubs but Forstmann was not. Forstmann says Agate was "not very smart" and "not really fun to be with" but that he was a good golfer and could always organize a game.
Agate was always scrambling for money, Forstmann says, and would occasionally hit up his rich golfing buddy. "He always had financial difficulties, like a lot of young guys that are up and down, up and down," Forstmann says. He said he loaned Agate a total of around $50,000 over the years and "never expected to get it back -- and never got it back." (Agate says the only loan he took from Forstmann was for $15,000 and that Agate took the amount off what Forstmann still owed for gambling losses.)
Their relationship began to change in 2007, Forstmann told Fortune and has detailed in filings in response to the lawsuit, as Agate's financial situation became more dire. Forstmann claims Agate's original beef with him dates back to the Internet bubble, when Agate claimed he was promised a 5% stake in Next Level Communications, a lucrative IPO Forstmann was involved in through his ownership of General Instrument. Agate says he did not receive his shares and was upset Forstmann didn't come to his defense in a subsequent arbitration. Without the money he was hoping to get from litigation, Forstmann says, Agate started asking him for financial help. "People like Mr. Agate look at people like Mr. Forstmann as the lottery," Forstmann's public relations firm said in a statement. (In an interview at presstime, Agate told Fortune that he only asked Forstmann to "honor promises" he had made.)
In February 2008, in a lawsuit filed in state court in California, Agate claimed Forstmann breached an agreement to compensate him for not getting the Next Level stock and then filed an amended complaint that resembled the one he filed in September 2010. "It's just the ramblings of an insane person," Forstmann says.
A few months later Agate decided to drop the case against Forstmann, but soon he was back with news he was going to sue him in New York. For the first time, Forstmann says, Agate threatened to include a copy of Forstmann's betting records. Forstmann says he was incredulous the suit could be refiled in another state, but his lawyers told him he should settle because the release of the bets could be embarrassing. According to Forstmann, Agate was asking for $4 million but agreed to take $575,000. "Which just annoyed the living shit out of me," Forstmann says. But he says he agreed, to "just make it go away forever." Forstmann signed the agreement on April 2, 2009, demanded a letter of apology, and thought, "Well, fuck it. That's the end of it." Agate got his money, Forstmann says, "for doing absolutely nothing except being an extortionist."
But days after Forstmann made his last payment to Agate, in April 2010, as detailed in his court filings, he got an e-mail from Agate wanting more. This time, cleverly exploiting a loophole, Agate threatened to sue Forstmann with Agate Printing as the plaintiff, since the settlement did not properly bar Agate Printing from suing Forstmann in the future. (Forstmann blames his high-priced lawyers for this mistake.) Agate again threatened to reveal Forstmann's betting. This time, Forstmann says, he gave him a few choices for paying up: start a charity and name Agate to run it ("That'd be like putting the fox in the chicken coop," Forstmann deadpans); start a real estate company and put Agate at its head; or sponsor him to play on the World Series of Poker tour. (Agate confirms the list "sounds familiar.")
At that point Forstmann hired private investigators, who revealed, as Forstmann detailed in court filings, that Agate had dozens of addresses in the past 20 years and 19 judgments and liens filed against him, and that he owes hundreds of thousands of dollars in back taxes. (Agate says he's lived in four homes in that time and the others were investment properties; in response to the other allegations, he says, "I am an open book.") Forstmann says a friend in law enforcement, concerned by Agate's e-mails, urged him to hire an armed guard for protection. ("I'll tell you how nuts this is," Forstmann explains, escorting a visitor out of his office. "When you go out the door, you will pass a very big guy with a gun. He is an ex-narcotics detective in the Bronx. And now he's arrived here.")
Forstmann says Agate acknowledged he had "hit rock bottom" last April, writing to him in an e-mail, also included in Forstmann's court papers: "I was evicted from my three previous residences, my car was repossessed, my residence has been burglarized three times (twice while I was hiding in the next room), resulting in a substantial financial loss. I have been kicked out of both golf clubs and no longer play golf. I am still massively in debt to the government ..." This time, Forstmann decided to call Agate's bluff: There would be no payoff.
That's when Agate gave a copy of the proposed suit to gossip website TMZ. Forstmann was served the lawsuit, plus a copy of the still-unfiled complaint with the betting records, two days later on a Saturday in the parking lot of Shinnecock Hills Golf Club, near his home in Southampton, N.Y.
A few weeks later, hearing nothing from Forstmann, Agate filed the amended complaint with the betting information. All hell broke loose.
Forstmann says he believes some of the data -- but not all -- that Agate released is inaccurate. "This may be some bad word use, but if you made me bet on whether it was or was not accurate, I would bet a very big number. It's not at all accurate," he told Fortune. "But it achieved in the press a biblical patina." In December the court threw out Agate Printing's case and placed the matter in arbitration. Forstmann is also seeking arbitration against Agate for violating the terms of the 2009 settlement.
What about the appearance of poor judgment in making bets on sports at the same time that he owned IMG? "I never thought about it that way," he says. "I never thought about it at all. They were minor bets. They were to make boring Sunday afternoons more interesting." He says his French Open bet was simply a way to root for Federer.
That wasn't good enough for one blogger, who called Forstmann the "Pete Rose of tennis." And the seriousness with which Forstmann is taking the dispute is evident in his replacement in this situation of Sard Verbinnen, his longtime PR firm, with Mike Sitrick, one of Wall Street's favorite crisis managers.
Truth be told, Forstmann has been betting his whole life. He says he grew up playing games for money, a skill that helped him get by in his post-college years. "There was a period of time in my life when I actually got along by my wits that way, by playing cards and backgammon and golf and so on [for money]," he says. "That's how I paid the rent." He says he can now afford to make hundreds of thousands of dollars of perfectly legal bets. "You don't think that the fact that you're making a bet is going to get into the newspapers."
Forstmann says he hopes the media attention on his betting will now subside. He prefers to talk about all the opportunities IMG has in front of it. There's Sutton's college-sports unit, which Sutton says is on track. There's IMG's new joint venture to create basketball and soccer leagues in India, and similar partnerships in Brazil and China. Forstmann sees these ventures as the future of IMG as the agency moves from being strictly agents to principals in the business. As its cash flow nears $200 million, by Forstmann's estimates, IMG's value has risen beyond the $750 million he paid for it to closer to $4 billion or $5 billion, ensuring that Teddy Forstmann's tombstone may ultimately read the way he says he'd hoped it would: THANK GOD HE DIDN'T QUIT! -- a reference to the fact that many people thought he was washed up after Forstmann Little lost over $2 billion investing in emerging telecom companies a decade ago.
Which means Forstmann remains a very wealthy man. But James Agate has proved nothing if not a persistent foe. Reached on his cellphone in early January, Agate did not want to talk long. "I am on the side of right here," he said before hanging up, "and another complaint is coming." Unfortunately for Teddy Forstmann, he could probably bet on that.
--William D. Cohan is a Fortune contributor and author of a forthcoming book on Goldman Sachs.
Additional reporting from Daniel Roberts
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