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TCW Rests Case in Trade Secrets, Fees Lawsuit Trial With Jeffrey Gundlach

TCW Group Inc. rested its case in the trial that pits the asset-management firm against its former chief investment officer, Jeffrey Gundlach.

Former TCW president Bill Sonneborn, now chief executive officer of KKR Financial Holdings LLC, was the last witness TCW called to support its claims that Gundlach and three other former employees stole TCW’s trade secrets to start DoubleLine Capital LP, the rival asset-management business Gundlach set up 10 days after TCW fired him in December 2009.

“I encouraged him to terminate Jeffrey,” Sonneborn told the jurors, recalling an August 2009 conversation he had with TCW CEO Marc Stern. Sonneborn, who had left TCW in 2008, said he told Stern that Gundlach was becoming a disease or a cancer for the company. Sonneborn said Stern was unwilling to fire Gundlach at that time because he was too important for TCW.

TCW, the Los Angeles-based unit of Societe Generale (GLE) SA, sued Gundlach, 51, in January 2010, after more than half of its fixed-income professionals joined DoubleLine. TCW’s damages expert told jurors in California state court in Los Angeles that the company suffered $344 million in damages from Gundlach’s alleged interference with contracts and $222 million from a claimed breach of fiduciary duty.

Fixed Income Manager

Gundlach, who had worked at TCW for 25 years and 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.

DoubleLine called its first witness today, Paul Deitch of Oaktree Capital Management LP, who testified that Oaktree helped set up DoubleLine in December 2009 and got it up and running in exchange for an equity stake in the company.

DoubleLine’s people were far from ready to start an investment company when he first met with them the week after Gundlach was fired, Deitch said.

“We had a lot of work to do,” Deitch said, adding that Oaktree had 57 people, including eight project managers, working on DoubleLine. “It was the Number 1 project.”

Gundlach, who testified for four days, has denied that DoubleLine used any of TCW’s trade secrets or proprietary information and said that DoubleLine employees were told to turn over any TCW files they might have had. Gundlach told the jury that the success of his funds was due to “experience and thinking” rather than to analytical systems.

‘Might Be Useful’

Cris Santa Ana, a former managing director of Gundlach’s mortgage-backed securities group at TCW, testified 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.

Gundlach’s fixed-income group managed more than half of TCW’s $110 billion assets under management before he was fired.

Stern testified he became suspicious in September 2009 and started checking Gundlach’s e-mails. Stern said he discovered that Gundlach and people from his group were copying TCW files and looking for office space.

TCW claims it fired Gundlach because he was allegedly stealing trade secrets and confidential information as he secretly set up a rival firm. DoubleLine has argued that Stern started looking into alternatives for Gundlach as early as June of 2009, after Stern returned to active management and before Gundlach’s people copied any TCW files.

TCW acquired Metropolitan West Asset Management LLC on Dec. 4, 2009, the day Gundlach was fired.

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.

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

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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