DoubleLine’s Gundlach Says Client Relationships Were His More Than TCW’s

DoubleLine Capital LP’s Jeffrey Gundlach said clients who invested with his funds at TCW Group Inc. counted on him and his team for money-managing “strategies” rather than his former employer.

Gundlach, who started DoubleLine within weeks after TCW fired him in December of 2009, testified yesterday at a trial that pits him and three other former TCW employees against the asset-management firm over claims they stole TCW’s trade secrets to start the rival business and counterclaims that TCW fired them to avoid paying hundreds of millions of dollars in fees.

“The clients, some of them, really felt that if I wasn’t there, the strategies would cease to exist,” Gundlach said in response to questions from TCW lawyer John Quinn regarding contingency plans TCW made in case he was to leave. “I wasn’t going anywhere.” TCW “didn’t have to be concerned about being left in the lurch.”

TCW, the Los Angeles-based unit of Societe Generale (GLE) 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 new firm. TCW seeks $375 million in damages, claiming Gundlach stole its trade secrets, including client portfolio data, to start DoubleLine.

‘Through the Roof’

Gundlach, who had worked at TCW for 25 years and who was named Morningstar’s Fixed Income Manager of the Year in 2006, countersued, saying that TCW fired him to avoid having to pay management and performance fees for the distressed-asset funds his group managed and that went “through the roof.” Gundlach seeks about $500 million.

Gundlach told jurors in California state court in Los Angeles that he didn’t approach TCW’s chief executive officer, Marc Stern, about a negotiated separation of his group from TCW in 2009 because he never made a decision to leave.

Gundlach wrote “the war is on” in a May 2009 e-mail about a meeting Stern sought with Philip Barach, the No. 2 man at Gundlach’s group at TCW, before Stern was named interim CEO the following month. Asked yesterday about that, Gundlach said he thought Stern had not been straightforward in his approach to Barach.

“They should’ve said ‘We want to get rid of Jeffrey and we want you to take over,’” Gundlach said yesterday. “One of my big hang-ups with TCW is that they wouldn’t tell the truth to people.”

‘Very, Very Angry’

In excerpts from his video deposition shown to the jury before Gundlach took the stand yesterday, he said that he was “very, very angry” in September 2009, when he believed Stern was about to fire him.

Gundlach said in the deposition that he spoke with Goldman Sachs Group Inc.’s financial group about “ways to improve things with TCW” and looked at office space for a separate business. He said he was less worried about being fired after TCW was selected for the Treasury Department’s program to buy troubled mortgage securities from banks.

Gundlach also said in the deposition that he immediately reversed a September 2009 instruction to his team to collect TCW information. He disputed that TCW has any proprietary information with the exception of perhaps one software program and a kitchen recipe.

‘Just Data’

“In the things I was involved with, I don’t think TCW had any proprietary information,” Gundlach said in the deposition. He said it was “experience and thinking” that was making money for clients rather than TCW’s analytical systems, which were “just data.”

Cris Santa Ana, a former managing director of Gundlach’s mortgage-backed securities group at TCW, testified earlier during the trial that Gundlach instructed him in September 2009 to start backing up data that “might be useful to have” in case Gundlach was fired. Santa Ana is a co-defendant and cross- complainant with Gundlach.

Santa Ana, who was fired together with Gundlach and joined DoubleLine, said that he downloaded or asked others to copy client contracts, portfolio holdings and contact information, as well as files of trade orders and TCW’s entire mortgage-backed securities database. Santa Ana said he downloaded part of the data to an external hard drive.

Smuggled in Bra

A TCW vice president testified that she smuggled Santa Ana’s hard drive out of TCW’s office in her bra the evening of Dec. 4, 2009, the day he was put on leave and escorted from the building. Santa Ana testified that he and other former TCW employees that joined DoubleLine didn’t use any of the TCW’s proprietary information at the new firm.

TCW argues that Gundlach wouldn’t have been able to get DoubleLine started within weeks after he was fired if he hadn’t had access to TCW trade secrets and confidential information.

Gundlach’s lawyers have argued that TCW Chief Executive Officer Marc Stern started to investigate ways of replacing Gundlach as early as June of 2009. Gundlach, who managed more than half of TCW’s $110 billion assets under management, was put on leave the day TCW announced it had bought Metropolitan West Asset Management to manage its fixed-income funds.

Brad Brian, a lawyer for Gundlach, told jurors at the start of the trial that TCW didn’t want to pay hundreds of millions of dollars in performance fees for the distressed-asset funds that Gundlach had set up and that had performed beyond expectation.

TCW lawyers have argued that Stern started to look for a replacement for Gundlach because he had become increasingly difficult to work with and hostile to Stern, and because he had threatened to leave.

TCW executives, including Michael Reilly, chief investment officer of TCW’s equities group, and Garrett Walls, a former marketing executive, testified earlier during the trial that they had each expressed concern about Gundlach to Stern in September 2009, citing “disrespectful” behavior and concern for the health and stability of TCW.

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

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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