A jury found yesterday that Forstmann Little & Co., the New York buyout firm, breached its contract with Connecticut's state pension fund by investing too much money in Reston-based XO Communications Inc., but the panel decided not to award damages.

A six-person jury in Rockville, Conn., said the XO investments from 1999 to 2001 -- on which the state lost its entire investment -- were "grossly negligent, were done in bad faith" or constituted "willful misconduct." It also ruled that Forstmann Little improperly invested in McLeodUSA Inc., another telecommunications firm.

But jurors did not award damages to the pension fund, finding that Connecticut acquiesced to the investments and that the buyout firm relied on lawyers' advice in making the investments.

State Treasurer Denise L. Nappier had sought the return of more than $120 million, the pension fund's share of losses on XO and McLeod. She filed the lawsuit after Forstmann Little and investors in two 1997 buyout funds saw the value of stakes in the two companies decline by $2.5 billion. The firm wrote off its entire $1.5 billion interest in XO, which has reorganized under new ownership, in the biggest loss recorded by a leveraged buyout firm. Forstmann Little still owns a stake in McLeod.

"We're obviously pleased that the jury ruled in our favor including that Forstmann acted in bad faith," said Gerald Fields, one of Connecticut's lawyers, after the verdict was read. "We're disappointed that they let them out on acquiescence and advice from counsel."

Theodore J. Forstmann declared the verdict a "complete victory" for the firm.

"We are very pleased that this 21/2-year litigation is finally over with a complete victory for Forstmann Little," he said by e-mail. "The state owned these investments for 21/2 years and did not complain until the value of those investments, along with the entire telecom sector, began to decline."

McLeod and XO filed for bankruptcy protection during a wave of such filings by unprofitable, debt-laden companies that were started under the 1996 Telecommunications Act.

Connecticut argued that the investments in XO and McLeod were not permissible under the contract because the firm bought too little of each company to control their strategies. Also, the state said XO and McLeod did not fit the promised profile of Forstmann Little investments because they were not dominant companies in their field.

The buyout firm countered by saying it complied with the investment contract and that it had effective control over the two companies.

Forstmann Little lawyer Fred Bartlit said in his closing statement that the pension fund hired the buyout firm to boost its own performance, which at one point ranked last in the nation.

Forstmann, who founded the buyout firm in 1978, testified that he regretted the losses. He said he originally thought the investments would prove among his best in a career that produced more than $15 billion in gains from holdings in companies including Gulfstream Aerospace Corp. and Ziff-Davis Publishing Co.

Connecticut was the only one of 27 institutional investors in Forstmann's 1997 funds to have sued.

The pension fund's sole trustee, Nappier, was not called to testify. She said when filing the suit in February 2002 that the buyout firm had misled her. Connecticut Superior Court Judge Samuel Sferrazza later threw out such claims.