Bloomberg News

TCW Claims Trade-Secret Theft as Gundlach Seeks Performance Fees

July 29, 2011

July 29 (Bloomberg) -- Jeffrey Gundlach, TCW Group Inc.’s former investment chief, was accused by the firm’s lawyer of plotting with colleagues to steal the company’s trade secrets before he was fired and started a rival money-management firm.

“They tried to steal an entire business from TCW worth hundreds of millions of dollars,” TCW lawyer John Quinn said in his opening statement yesterday at a state court trial in Los Angeles. “They secretly plotted to leave en masse.”

TCW, the Los Angeles-based unit of Societe Generale SA, sued Gundlach, 51, and three other ex-employees in January 2010, a month after he was fired and more than half of TCW’s fixed- income professionals had joined his firm, DoubleLine Capital LP. TCW seeks $375 million in damages, claiming Gundlach stole its trade secrets and clients.

Gundlach, who had worked at TCW for 25 years and who was named Morningstar’s Fixed Income Manager of the Year in 2006, said in a cross complaint that TCW fired him to avoid having to pay as much as $1.25 billion in future management and performance fees for the funds his group managed. Gundlach has since reduced his damages estimate to about $500 million.

DoubleLine’s lawyer, Brad Brian, said in his opening statement yesterday that Societe Generale wanted to monetize, or cash in on, its investment in TCW and “they were not going to let Mr. Gundlach stand in their way.” TCW executives had begun looking at the possibility of forcing out Gundlach as early as June of 2009, he told the jurors.

Lost Business

While TCW knew it would lose business by firing Gundlach, the company did it anyway because the lost business would be offset by not having to pay Gundlach hundreds of millions in dollars in performance fees for his distressed-assets fund that had gone “through the roof,” Brian said.

“They knew they were going to owe him a lot of money,” Brian told the jury.

Brian also said Gundlach and the others didn’t use any proprietary TCW information they had when they formed DoubleLine because they didn’t want to get sued and they didn’t need it.

While he was at TCW, Gundlach managed or oversaw about $70 billion of the company’s $110 billion in assets, according to the May 14, 2010, amended cross-complaint.

TCW clients withdrew about $25 billion after Gundlach was fired Dec. 4, 2009. TCW said in its complaint that Gundlach lied to its clients in a series of webcasts with them in December 2009 to incite them to join DoubleLine and to malign TCW’s newly acquired fixed-income management unit, Metropolitan West Asset Management LLC.

First Witness

TCW called as its first witness Rachel Cody, a former TCW analyst in Gundlach’s group who joined DoubleLine in January of 2010. Cody testified that in February 2009 she overheard people in Gundlach’s group talk about meeting with Western Asset Management Co., which she assumed might involve the whole group moving to the rival Southern California money manager.

TCW claims Gundlach negotiated with Western Asset Management to take his business there. Gundlach didn’t want to sign a new contract at TCW in 2007 because he wanted to be a “free agent,” Quinn told the jurors.

Quinn said TCW Chief Executive Officer Marc Stern, who had returned to the company in June 2009, started to look at alternatives for Gundlach, eventually bringing in Metropolitan West Asset Management because the money manager had become increasingly difficult to work with and openly hostile to Stern.

‘Take His Marbles’

“He was threatening to take his marbles and leave,” Quinn said. “We’re talking about half the company.”

Brian said Gundlach only started to make arrangements for setting up his company, including meeting with Goldman Sachs Group Inc. and registering a new corporation in Delaware, after he became aware he might get fired.

“He wasn’t sure, just as his group didn’t know, what was going to happen,” Brian said. “He wanted to be ready in case he was fired.”

The trial may have undesirable consequences for both sides, said Geoff Bobroff, an independent fund consultant in East Greenwich, Rhode Island. Gundlach, who has attracted $13 billion in assets since his firm opened, may see damage to his reputation, while TCW Group risks the disclosure of its inner workings and details such as fees.

“The monetary piece of the trial is less important than the exposure involved,” Bobroff said in an interview. “TCW wouldn’t like to have the dynamics of their company and workings on display.”

The case is Trust Co. of the West v. Gundlach, BC429385, California Superior Court, Los Angeles County.

--With assistance from Sree Vidya Bhaktavatsalam in Boston. Editors: Peter Blumberg, Andrew Dunn

To contact the reporters on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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