TCW Chief Stern Testifies He started Monitoring Gundlach’s E-Mails in 2009

TCW Group Inc. Chief Executive Officer Marc Stern said he started monitoring the e-mails of Jeffrey Gundlach in September 2009, three months before Gundlach was fired and started DoubleLine Capital LP.

Stern testified for a second day in the trial that pits TCW against Gundlach and three other former employees who joined DoubleLine. Stern told jurors in state court in Los Angeles that he wanted to find out what was happening after Gundlach appeared to have lost interest in a number of issues that had come up in what Stern said had been a “hostile” meeting on Sept. 3.

“It got me to think what else might be going on,” Stern said. “I didn’t get the whole picture.”

Under questioning by TCW lawyer John Quinn, Stern said that Gundlach had asked for the Sept. 3 meeting because thought he was about to get fired. Gundlach and senior members of fixed- income group at TCW raised various issues at the meeting, including increased representation on the firm’s management committee and a possible acquisition of TCW, Stern said.

At a follow-up meeting the next week, Gundlach and his people showed no interest in discussing these topics any further, Stern said.

“I was stunned,” Stern said, when Gundlach asked who had called the meeting. “I believe we all looked at each other.”

Real Estate Agents

After the second meeting, he instructed TCW’s in-house lawyer to monitor Gundlach’s e-mails, Stern said. He found out that Gundlach was still in talks with Western Asset Management Co., who he knew Gundlach interviewed with earlier that year, and that he was in contact with real estate agents, Stern said.

TCW, based in Los Angeles, fired Gundlach, 51, in December 2009 and sued him the following month after more than half of its fixed-income professionals joined his new firm. TCW, a unit of Paris-based Societe Generale SA, seeks $375 million in damages, claiming Gundlach stole its trade secrets, including client portfolio data, to start DoubleLine.

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 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.

A Bigger Problem

Stern said that after the Sept. 3 meeting, where Gundlach’s top lieutenants indicated they would leave too if Gundlach was fired, he knew he had a bigger problem than he thought he did before when he believed he might only lose Gundlach should he either leave or be terminated. He began taking steps to bring in a whole new asset-management team for the fixed-income assets, Stern said.

TCW eventually bought Metropolitan West Asset Management LLC to manage its fixed-income assets on Dec. 4, the day Gundlach’s employment was terminated.

After Gundlach left, Stern said he was forced in January 2010 to cut the fees for the distressed-asset funds that Gundlach had managed and to allow clients to withdraw their investments from the funds, which they normally wouldn’t be allowed to do, because of pressure generated by Gundlach’s comments to the investors.

Under cross-examination by DoubleLine’s lawyer, Brad Brian, Stern denied that TCW already was planning to fire Gundlach before the Sept. 3 meeting. Stern said that people in and outside TCW had been advising him to terminate Gundlach and that he had been unwilling to do so.

Handwritten Notes

The jurors were shown handwritten notes from an Aug. 27 meeting Stern had with senior executives at TCW that included a line that said: “Unfortunately, we’ve had to terminate JG for cause.”

Stern denied that someone had been scripting a press release at that meeting.

Stern also said he didn’t tell regulators or the U.S. Treasury Department, which had contracted TCW to participate in its Public-Private Investment Program to buy toxic mortgage assets from banks, about his concerns that Gundlach, who managed the PPIP fund, might leave or could get fired for doing something illegal or that crossed the line.

The chief executive testified last week that he was worried about such a “horror scenario” after he returned to active management of TCW in June of 2009. Stern testified that his number one concern was whether Gundlach, whose group managed more than half of TCW’s $110 billion assets under management, would stay at the company.

The DoubleLine lawyer also questioned Stern about his claim that TCW didn’t fire Gundlach to save money. In an October 2009 e-mail to one of Societe Generale’s executives shown to the jurors, Stern compares the 10 percent cut of TCW’s fees MetWest was to get with the 35 percent that Gundlach’s group received after their compensation was paid.

That amounted to $50 million in savings per year for TCW, Brian said.

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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