TCW CEO Stern Says Gundlach’s Firing Had to Be ‘Surprise’

TCW Group Inc. Chief Executive Officer Marc Stern testified that the firing of Jeffrey Gundlach, who was the asset management firm’s chief investment officer, had to be done in a way that made it a surprise.

Stern told state court jurors in Los Angeles today that his October 2009 trip to Paris to talk to TCW’s parent company, Societe Generale (GLE) SA, about buying Metropolitan West Asset Management LLC was kept “confidential” from Gundlach. TCW bought MetWest to manage the fixed-income funds that had been run by Gundlach on Dec. 4, the day he was fired.

“The element of surprise was essential to the preservation of the company,” Stern said in response to questions from Brad Brian, a lawyer for DoubleLine Capital LP, the firm Gundlach started after he was fired by TCW. Stern said it would be “on the margin” advantageous to TCW to allow Gundlach little time to set up competing funds if he was going to be terminated.

TCW, based in Los Angeles, sued Gundlach, 51, in January 2010, after more than half of its fixed-income professionals joined his new firm. TCW 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.

‘For Cause’

Stern testified today that he didn’t tell Gundlach at a Sept. 3, 2009, meeting, at which he assured Gundlach he wasn’t going to fire him, that others at TCW had been urging him to do so or that terminating Gundlach “for cause” had been discussed at a meeting the previous month.

In a Sept. 7, 2009, e-mail to Societe General shown to the jurors, Stern said it was likely that TCW will have to “part ways” with Gundlach.

Yesterday, Stern told the jurors that in January 2010 he was forced 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 after he was fired.

Today, Duke Heger, a TCW executive, testified about a comparison he did of projected fees under the original and revised terms for the distressed-asset funds. His analysis showed that TCW would have received $56 million in management fees for 2010 under the terms in place while Gundlach was still with the firm compared with $20 million after the fees were cut.

Performance Fees

The projected performance fees for the funds in 2012 were $50 million under the revised terms, compared with $367 million under the original terms, according to Heger.

Under questioning by DoubleLine lawyer Mark Helm, Heger said the entities contractually entitled to the management and performance fees from the funds were TCW Asset Management Co. and TCW Special Mortgage Credits Fund II LLC, rather than TCW Group, the parent company.

TCW had tried to amend its complaint to add those entities. Judge Carl West denied the request on July 21, a week before opening arguments in the trial.

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

To contact the reporter 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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