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TCW’s Stern Says He Fired Gundlach Because Firm Was ‘Threatened’

TCW Group Inc. Chief Executive Officer Marc Stern said he fired Jeffrey Gundlach in December 2009 because Gundlach was plotting the take TCW’s clients and portfolios to his own firm.

Stern testified yesterday in the trial that pits Gundlach and three other former TCW executives against the asset-management firm. Stern said he made the decision to fire Gundlach, TCW’s chief investment officer and head of its fixed-income group, because the company was being “threatened” and “in the process of being destroyed.”

“He was the most important portfolio manager at the firm, managing 60 percent of the assets,” Stern told the jury in California state court in Los Angeles.

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 Capital LP.

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.

‘Right Arm’

Stern told the jurors that he had no intention of getting rid of Gundlach in the summer of 2009, after Stern had been asked to return to day-to-day management of TCW. Gundlach and other group managers at TCW had opposed the return of Stern, who had retired as president in 2005, and had wanted instead a management committee to be put in charge.

“It would be like cutting off your right arm,” Stern said under questioning by TCW lawyer John Quinn. “He was the most important person at the firm.”

Gundlach’s fixed-income group managed more than half of TCW’s $110 billion assets under management. He has denied that he wanted to leave TCW and testified that he only started to make plans to set up his own company, including registering a shell company in Delaware and looking for office space, in late 2009 because he was afraid he was getting fired.

Stern testified that his “single most important concern” when he returned to TCW in June 2009 was whether Gundlach was committed to staying at the company. Gundlach was an at-will employee without a signed contract in 2009 and had been in talks with a rival asset manager earlier that year, Stern said.

‘Horror Scenario’

In his trial testimony, Gundlach said that he spoke with Western Asset Management Co. about moving the funds he managed at TCW over there in February 2009, after Societe Generale had announced they wanted to exit the asset-management business. A proposal he got from Wamco in June 2009 was a non-starter and he didn’t read a follow-up proposal, Gundlach said.

Stern also said he was concerned for a “horror scenario” where TCW might have to fire Gundlach for doing something illegal or something that crossed the line in a regulated industry.

The jurors were shown Stern’s notes for a June 2009 meeting with TCW Chairman Robert Day, shortly before Stern’s official start as chief executive, that referred to “Project G.”

Stern said the project involved finding a way to make Gundlach committed to staying at TCW as well as creating a contingency plan should Gundlach leave or be terminated. He got a list of mortgage-backed securities managers that he might “parachute in” to take over Gundlach’s group but didn’t contact any of them, Stern said.

Stern is expected to continue his testimony when the trial resumes Aug. 24. He hasn’t yet been cross-examined by DoubleLine’s lawyers.

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

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