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 Greenwich, Rhode 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)

Gundlach Answers TCW, Files Own Case

Star bond-fund manager Jeffrey Gundlach fired another round at his former employer, claiming in a complaint filed Wednesday that TCW Group Inc. sought to deprive him of his share of fees generated by funds he managed.

TCW, a Los Angeles-based money manager, in December dismissed Mr. Gundlach, its chief investment officer, saying that he had threatened to leave and take key personnel with him. The firm later claimed in a lawsuit that Mr. Gundlach and his group had stolen proprietary information from the firm in laying the groundwork to launch a rival money-management firm, DoubleLine Capital.

Jeffrey Gundlach

Mr. Gundlach, who launched DoubleLine in the weeks after his dismissal, also filed an answer Wednesday to TCW's January complaint, saying the allegations were false and designed to interfere with his firm's business. He said in an interview that the TCW litigation had affected DoubleLine, adding that the dispute "extends the timeline of ramping the business."

The dispute has had fallout for both sides. Investors have yanked roughly $6 billion from TCW's flagship Total Return Bond Fund, which Mr. Gundlach managed, in the wake of his departure. That fund now has less than $5.9 billion in assets, down from roughly $12 billion. And since TCW claimed in its lawsuit that Mr. Gundlach not only stole its property but also kept drugs and pornography in his TCW offices, the bond-fund manager finds himself defending his character while trying to persuade investors to entrust their money to his new firm.

The bond-fund manager's complaint against his former employer claims that TCW agreed in early 2007 that Mr. Gundlach and his group would receive a chunk of the management and performance fees generated by funds they managed. Over time, these funds performed so well that the money owed under this fee-sharing agreement reached at least $600 million "and easily approaching $1.25 billion and beyond," the complaint said.

Mr. Gundlach's complaint charged that TCW schemed to deprive him and his group of this compensation, alienating the investment chief by marginalizing him and refusing to address his concerns about the future of the firm. After dismissing Mr. Gundlach, the complaint claims, TCW repudiated any obligation to pay the fees it had promised Mr. Gundlach and his group.

"We will address Mr. Gundlach's counterclaims in the appropriate venue, which is the court," TCW said in a statement. The firm added that "Mr. Gundlach's spin regarding the reasons for his termination are completely erroneous," noting that Mr. Gundlach earned $40 million last year and $135 million over the past five years.

In denying the allegations in TCW's complaint, Mr. Gundlach addressed the charge that he and his group had stolen proprietary TCW information. DoubleLine retained an outside firm to collect and return any computers or devices belonging to TCW, the court filing said, and took other steps to avoid using TCW's proprietary information.

In an interview last month, Mr. Gundlach said that he had no knowledge of anyone intentionally downloading information that was intended to be used at DoubleLine. In launching the new firm, Mr. Gundlach said, he and his group contacted clients by looking them up on Google.

In the January interview, Mr. Gundlach acknowledged he had made "very preliminary" inquiries into starting his own business while still employed at TCW. Able Grape LLC, the company that would ultimately become DoubleLine, was registered in Delaware on Oct. 23.

(By ELEANOR LAISE, from WSJ, February 27,2010)

Jeffrey Gundlach at DoubleLine

TCW Total Return Bond Fund, which was managed by Mr. Gundlach, grew to $12 billion in assets before the investment chief's departure from the firm.

More than 40 former TCW team members have joined Mr. Gundlach's new firm, DoubleLine said.

TCW fired Mr. Gundlach on Dec. 4 and simultaneously announced the acquisition of rival fund firm Metropolitan West Asset Management LLC.

"We fully expected some resignations," which is why some MetWest managers immediately assumed investment responsibility for TCW high-grade bond assets, TCW spokeswoman Erin Freeman said in a statement. "We are making every effort to retain staff," she said.

DoubleLine plans to offer core bond and mortgage-backed securities products, and aims to serve large institutional as well as retail investors. The firm has secured backing from Los Angeles-based Oaktree Capital Management, which specializes in bonds and alternative investments.

On December 23 DoubleLine LLC, a fixed income investment manager, announced that the Securities and Exchange Commission has approved the firm's application for registration under the Investment Advisers Act.

Formed earlier this month by Chief Executive Officer Jeffrey Gundlach and President Philip Barach, DoubleLine is already actively managing client portfolios. The staff at DoubleLine includes more than 40 portfolio managers, traders, analysts and trading assistants, a number DoubleLine expects to grow as the firm develops its suite of investment strategies focused on Core, Mortgage-Backed, Investment Grade Corporate, Emerging Markets and other fixed income products and strategies.

"The principals of DoubleLine are gratified to have received approval of our registration application under the Investment Advisers Act," Mr. Gundlach said. "The approval has occurred on a timeline that will allow us to continue to welcome, without interruption, those many clients with whom we have developed relationships of great personal trust and confidence over the years. Our team looks forward to the successful launch of DoubleLine funds early in the New Year."

About DoubleLine LLC

DoubleLine LLC is an investment management firm formed recently by CEO Jeffrey Gundlach and President Philip Barach. The company is privately held, with Mr. Gundlach its largest shareholder, and Mssrs. Gundlach and Barach holding a combined controlling interest. DoubleLine's headquarters is in Los Angeles, CA. Its offices can be reached by telephone at (213) 223-2346 or by e-mail at info@doubleline.com.

Jeff Gundlach's swan song at TCW: Too Good To Be True

Jeff Gundlach's swan song as TCW. Last masterpiece from the mortgage bond expert while still a TCW employee. Before Gundlach's unceremonious firing, and subsequent departure of his closest lieutenants.
Full report.

Too Good To Be True

(from ZeroHedge, December 7, 2009)