TCW Tells Jury Jeffrey Gundlach Stole Trade Secrets to Start DoubleLine

Ex-TCW Group Inc. chief investment officer Jeffrey Gundlach engineered a scheme to use his former employer’s trade secrets to start his own firm in 2009, TCW’s lawyers told a Los Angeles jury in closing arguments.

The California state court jury must try to decide whether Gundlach secretly plotted to set up DoubleLine Capital LP while still at TCW or whether the company breached its contract with him, as Gundlach alleges, and fired him to avoid having to pay him hundreds of millions of dollars in fees on the distressed- asset funds he set up in 2007 and 2008.

TCW, the Los Angeles-based unit of Societe Generale SA, sued Gundlach, 51, in January 2010, after more than half of its fixed-income professionals joined DoubleLine. TCW claims it suffered $344 million in damages from Gundlach’s alleged interference with clients’ contracts and $222 million from a claimed breach of fiduciary duty.

“They secretly stole, they secretly set up a Delaware company,” TCW lawyer John Quinn told the jury today. “They were preparing to eliminate TCW as a competitor.”

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.

Six Weeks

The jury heard more than six weeks of testimony as the two sides provided conflicting views of Gundlach’s falling out with TCW Chief Executive Officer Marc Stern in 2009, which ended with Stern’s buying Metropolitan West Asset Management LLC to run TCW’s fixed-income group and firing Gundlach in December 2009.

TCW claims Gundlach had been increasingly hostile to Stern and difficult to work with. Stern testified that he hadn’t wanted to fire Gundlach because he was the most important portfolio manager at TCW, managing more than half of the firm’s $110 billion in assets under management.

Gundlach referred to Stern and TCW founder Robert Day as “dumb and dumber,” Quinn said today.

Stern testified that he became suspicious of Gundlach after a series of September 2009 meetings and instructed TCW’s in- house lawyer to start monitoring the e-mail of Gundlach and others in his group. The investigation showed Gundlach’s people were downloading TCW’s proprietary information and looking for office space, Stern said.

‘The Godfather’

“He was the pope and the godfather, he was above it all,” Quinn said. “You haven’t heard him repent for anything.”

Gundlach has denied that DoubleLine used any of TCW’s proprietary software systems and data.

Brad Brian, DoubleLine’s lawyer, said in his closing statement today that handwritten notes from an August 2009 meeting of TCW’s senior executives show they had already decided to fire Gundlach before there was evidence of his people copying TCW data or registering a company in Delaware.

It was “telling,” Brian told the jurors, that none of the executives, including Stern, could recall during their trial testimony what was said during that meeting. “They’re trying to cover up that they decided to fire him,” Brian said. It’s “a conspiracy of silence.”

Brian said TCW executives don’t want to admit they had made up their minds about firing Gundlach months before they did because it would undermine their damage claims in the case.

‘Self-Inflicted’

“Their damages are self-inflicted,” Brian said. “They knew if they fired Gundlach, they were going to lose clients and lose assets.”

DoubleLine’s lawyers have argued that Stern started looking to replace Gundlach as early as June 2009, about the time Stern returned to active management. Gundlach and other senior managers at TCW had opposed Stern’s return out of retirement and had wanted the firm to be run by a management committee instead.

Gundlach had negotiated for him and his group to receive 60 percent of the performance fees for the distressed-asset funds he set up in 2007 and 2008. The funds invested in mortgage- backed securities that were downgraded and dropped in value with the collapse of the U.S. housing market.

As the funds performed better than expected, Paris-based Societe Generale (GLE) and TCW wanted to replace Gundlach with a less expensive asset manager, DoubleLine’s lawyers said. TCW has argued that Gundlach isn’t entitled to management and performance fees from the funds after his firing.

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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