Tuesday, September 27, 2011

The best bond fund manager Jeffrey Gundlach's story

TCW Group Inc. decided to oust Jeffrey Gundlach despite being warned that firing the fund manager could trigger redemptions of as much as 70 percent, according to testimony during the six-week trial of the bond- fund manager and his former employer.
Gundlach, who started his own firm within weeks of being ousted and has since attracted $16 billion in assets, yesterday won a $66.7 million jury award against his former employer for unpaid wages, which he has to share with three of his colleagues. He was also found to have breached his fiduciary duty to TCW and misappropriated its trade secrets. The Los Angeles jury awarded the company no damages on the breach claim. A judge will determine damages on the trade-secret claim.
“This trial brought home all of the ugliness and the dirty laundry in the business,” Geoff Bobroff, an independent fund consultant in East GreenwichRhode Island, said in an interview. “This would be the most bitter case I’ve seen brought to trial.”
The trial shed light on a decade of tensions between TCW and Gundlach, a former trader who became the company’s star performer over an almost 25-year career there, eventually managing two-thirds of the company’s money. TCW painted him as an arrogant man interested in enriching himself, and a former executive at the firm described him as a “cancer.” Gundlach and his attorneys claimed TCW cheated him out of hundreds of millions of dollars and reneged on a promise not to dilute his stake in the company.
Founder Robert Day at one point contemplated getting rid of Gundlach, 51, then selling the firm to BlackRock Inc. (BLK), according to evidence presented during the trial. His ouster in December 2009 cost the firm $566 million in damages, TCW said in court documents.

TCW, the Los Angeles-based unit of Societe Generale SA, sued Gundlach in January 2010 after more than 40 of its fixed- income professionals joined DoubleLine Capital LP, the asset- management firm Gundlach started after TCW fired him.
The jury found that Gundlach, who countersued, and DoubleLine didn’t act willfully and maliciously in misappropriating trade secrets. Susan Estrich, a lawyer for TCW, said the company will ask the judge to award it $89 million on the trade-secret claim.
“We are very pleased and gratified with the verdict,” Estrich said outside the courtroom. “This was about liability, about standing up for what is right.”
Gundlach said the verdict was “a major win” for DoubleLine.
“In a society governed by lies, truth is considered a cancer,” Gundlach said in a telephone interview.
Gundlach joined TCW in 1985 on a 90-day probation, for about $30,000 a year. TCW needed someone with a “quant” background, which Gundlach had as a Ph.D. candidate in mathematics at Yale University. He didn’t complete his doctoral thesis on the “non-existence of infinity,” which was then considered an unpopular line of thinking among mathematicians, Gundlach said in a 2009 interview.
Gundlach started the TCW Total Return Fund in 1993 and the fund grew as Gundlach’s acumen in picking mortgage-backed securities helped the fund beat peers. By 2001, when Societe Generale acquired TCW, Gundlach had become a substantial shareholder in TCW, with a 4 percent stake.
A consultant who was hired by TCW to advise on options told chief executive officer Marc Sternthat Gundlach’s departure would trigger client redemptions of 60 percent to 70 percent over three years, while keeping 40 percent of clients assets would be a “huge success,” according to court records. The consultant, Woody Bradford, testified that he advised Stern in October 2009 that the best option would be to work out an “arrangement” with Gundlach.
“The case demonstrates the difficulty of running a business when one individual or a group of individuals rise to prominence,” said Bobroff. “That’s a reason why most firms are moving to team management rather than have one or two star managers.”
Public spats are rare in the asset-management industry, where companies typically resolve disputes behind closed doors. In one example that shocked fund managers nearly four decades ago, John Bogle was fired by Boston-based Wellington Management Co. after clashing with the company’s board of directors. He went on to form Vanguard Group Inc. in 1975, which has since become the biggest U.S. mutual fund company.
The relationship between Gundlach and TCW started to sour in 2001, when Societe Generale (GLE) acquired the firm. Gundlach said his stake in TCW fell from 4 percent to the “high 2s,” despite an earlier promise made by Stern that he would “never have the stock taken away” from him, according to court transcripts.
Tensions abated in 2005 after Stern stepped down from active management and the firm created a new leadership team, with Robert Beyer as chief executive officer, William Sonneborn as president and Gundlach as chief investment officer.
“I was really happy” after the change, Gundlach said in his testimony. “I thought it was the greatest thing.”
The new leadership team didn’t last long. A month after unauthorized transactions by traderJerome Kerviel spurred losses at the Paris-based Societe Generale in early 2008, Beyer and Sonneborn tried to engineer a management buyout of TCW from the parent, Gundlach testified. The move angered the French bank because of its “timing,” according to Gundlach.
Sonneborn, who described Gundlach as a “cancer” to the company in conversations with Stern, according to court transcripts, left TCW for private-equity firm KKR & Co. in 2008. Beyer retired in 2009, and Stern returned to lead TCW in June 2009 after Beyer’s departure.
DoubleLine’s attorneys said executives at TCW and its parent had already decided at that time to fire Gundlach. He and other senior managers at TCW had opposed Stern’s return out of retirement and wanted the firm to be run by a management committee instead. TCW said Gundlach’s demands to restructure the leadership and compensation intensified in 2009.
TCW, which said that Gundlach made the equivalent of $20,000 an hour, at one point in the trial compared him to Gordon Gekko, the fictional character who gave the “Greed is Good” speech in Oliver Stone’s 1987 film “Wall Street.” TCW also said Gundlach openly disparaged TCW executives, referring to Day and Stern as “Dumb and Dumber.”
Stern testified that he became suspicious of Gundlach after a series of meetings in September 2009 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.
While Gundlach was in talks to join rivals such as Western Asset Management Co. and Pacific Investment Management Co., Day contemplated forcing Gundlach out and selling the firm to BlackRock, according to evidence shown at the trial. Executives at Societe Generale thought the idea of selling TCW to BlackRock “is not really feasible at a good price,” according to an e- mail that was made public.
When those plans fizzled, TCW dismissed Gundlach and acquired MetWest, court documents show.
Gundlach went on to form DoubleLine in December 2009. More than 40 people, including Gundlach’s co-manager on the TCW Total Return fund, Philip Barach, joined him at DoubleLine.
Gundlach’s DoubleLine Total Return Bond fund has surged to $11 billion in assets since it was started in April 2010, a record for the fastest growth among startup mutual funds. TCW’s Total Return Fund has dropped to $5.3 billion from a peak of almost $12 billion before Gundlach was ousted. The DoubleLine fund is up 12 percent in the past year, twice the return of the TCW fund and beating 99 percent of rivals, according to data compiled by Bloomberg.
Brad Brian, DoubleLine’s lawyer, said in his closing statements 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. 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.
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. When the funds performed better than expected, Societe Generale and TCW wanted to replace Gundlach with a less expensive asset manager, DoubleLine’s lawyers said.
TCW argued that Gundlach wasn’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).
(Source: Bloomberg, September 16, 2011)

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