TCW, ‘bond king’ Gundlach set to square off in court
A Los Angeles courtroom is about to become a venue for Wall Street’s dirty laundry.
In a trial expected to be closely watched by the financial industry, L.A. money management giant TCW Group is suing its former chief investment officer, Jeffrey Gundlach, alleging that he and his aides conspired to steal massive amounts of TCW proprietary information in 2009 to set up a rival firm.
Gundlach, a star bond fund manager, has denied TCW’s allegations and has countersued. The 51-year-old math whiz accuses his former employer of firing him to cheat him out of a huge chunk of promised income.
The civil case, set to begin Monday in Los Angeles County Superior Court and take at least five weeks, has many of the ingredients of a Shakespearean tragedy: outsized egos, frustrated ambition, a hero’s fall from grace, betrayal and revenge.
The trial essentially will require a jury to decide which of two very well-heeled parties is lying and should fork over hundreds of millions of dollars in damages to the other.
The potential spoils in the case also include the $13 billion in assets that Gundlach has attracted in just 19 months on his own.
Most of that money has come from individual investors and financial advisors who were willing to take a chance on Gundlach’s new mutual funds despite TCW’s legal onslaught against him — including allegations that he kept hard-core pornography in his TCW offices.
Investors’ faith in Gundlach has been rewarded: The flagship mutual fund he launched in April 2010, DoubleLine Total Return Bond, has gained 12.5% over the last 12 months, beating virtually all of its peer funds, including the ones he left behind at TCW.
Clients’ assets with Gundlach aren’t in danger, but a victory for TCW in the case could make it difficult for him and his firm, DoubleLine Capital, to hold on to current investors and attract more.
For TCW, which manages about $120 billion, losing the case could mean the company would have to pay substantial additional compensation to Gundlach, who earned $134 million from 2005 to 2009 alone.
Typically, corporate legal disputes like these are settled quietly, rather than litigated, to avoid reputational damage to both sides.
“They should find a way to make this thing go away,” said Kurt Brouwer, head of financial advisor Brouwer & Janachowski, which manages $1 billion for clients. The Tiburon, Calif., firm has about $90 million invested with Gundlach.
But this battle has become extraordinarily vicious, even by Wall Street’s cut-throat standards.
On one side is Gundlach, who in his 24 years at TCW mastered the complexities of mortgage-backed bonds and deftly navigated TCW’s flagship bond mutual fund, TCW Total Return Bond, through the housing crash. The portfolio beat nearly all of its peer funds in the five years that ended in 2009, gaining an average of 7.1% a year.
Gundlach, who declined to be interviewed for this story, has never been shy about acknowledging his own brilliance. In managing money, he told The Times in 2009, “I’m very capable and confident in looking at the facts and analyzing them. I come to a conclusion, and 70% of the time when it comes to investment ideas it seems to be right. And 70% of the time is a money machine.”
His stellar record directing bond portfolios brought tens of billions of dollars to TCW from institutional and individual clients. His staff came to refer to him as “the Pope” and “the Godfather.”
On the other side are TCW’s strong-willed founder and chairman, Robert A. Day, and the firm’s chief executive, Marc Stern.
The 67-year-old Day, once a mentor to Gundlach, is the scion of two blue-blood L.A families, the Days and the Kecks. He launched TCW as Trust Co. of the West in 1971 and sold a majority stake in the company to French banking titan Societe Generale in 2001.
New Jersey-born Stern, 66, a lawyer by training and one of Day’s longtime deputies at TCW, is a major figure on the arts scene; he chairs the L.A. Opera.
The trial also will pit two of L.A’s premier law firms head to head: Quinn Emanuel Urquhart & Sullivan for TCW and Munger Tolles & Olson for Gundlach.
On Wall Street, many people who have watched the case unfold believe it is as much about personal animosities as it is about money — but that both parties will try to downplay that with the jury.
“It seems to me that TCW has a very strong case,” said Eric Jacobson, a veteran bond-fund analyst at Morningstar Inc. in Chicago. “But anything that suggests a motive of vengeance on the part of TCW is going to work against it.”
At the same time, he said, Gundlach will have to guard against appearing arrogant or overly confident, traits that might make him “simply come off as unsympathetic to the jury.”
Gundlach and his attorneys have repeatedly accused TCW of engineering a public smear campaign against him. When TCW filed suit against Gundlach in January 2010, it included the allegation that pornographic magazines and DVDs, and drug paraphernalia, were found in his TCW offices downtown and in Santa Monica.
Gundlach said at the time that TCW was resorting to “gutter tactics.” Later, he said that whatever the company found in his offices were “vestiges of closed chapters of my life.”
TCW sought to have that part of the suit included in the trial, but has been rebuffed by presiding Judge Carl J. West.
The trial will center on why TCW ousted Gundlach on Dec. 4, 2009. In its lawsuit, the firm alleges that Gundlach and key members of his bond team began to plot in the fall of 2009 to leave en masse and form DoubleLine. Some of Gundlach’s team members began downloading millions of pages of TCW proprietary information on bond holdings, clients and prospective clients, the suit says.
Once it discovered Gundlach’s plans, TCW says, it had no choice but to dismiss him. The firm simultaneously bought another L.A. bond manager, Metropolitan West Asset Management, to replace him.
Susan Estrich, a lawyer for TCW at Quinn Emanuel, denied that TCW held a personal grudge against Gundlach. “But certain conduct cannot be tolerated,” she said. “When senior officers of a company steal 9 million documents, plot to leave the company and its investors in the lurch, the company cannot sit on its hands.”
On Dec. 14, 2009, 10 days after he was fired, Gundlach launched DoubleLine. Within a few weeks the majority of his TCW bond team members jumped ship to join him. And with Gundlach gone, some TCW investors quickly fled, yanking $25 billion from the company by mid-February 2010.
Gundlach has denied that he sought to sabotage TCW. But he has said he was “distraught” when Stern was named chief executive in June 2009 because, he said, TCW had promised to turn the reins over to a younger generation of managers, including himself.
His suit against TCW alleges that he was fired because TCW and Societe Generale wanted to avoid having to share up to $1.25 billion in future fees from assets Gundlach managed.
Lew Phelps, a spokesman for DoubleLine, said TCW in mid-2009 “convinced the firm’s parent company, Societe Generale, to approve a plan to fire Jeffrey, cheat him out of his compensation and steal all the profits. We also will show that TCW’s claims against Jeffrey are trumped-up pretexts designed to conceal their own misconduct and interfere with a more able competitor.”
As for the alleged theft of TCW data, Gundlach’s countersuit asserts that even though information was downloaded it wasn’t used and was quickly returned to TCW.
Brouwer, the financial advisor, said he wasn’t dissuaded from investing with Gundlach because of TCW’s allegations. He said he considered the suit to be “basically sour grapes.”
Nor did the legal challenge keep Barron’s magazine earlier this year from crowning Gundlach “King of Bonds” — an honorific that for the last decade or more has usually gone to bond guru Bill Gross at the Pimco funds in Newport Beach.
Although Gundlach’s healthy ego is well-known on Wall Street, Brouwer said it’s also what has drawn many investors to him. In money management, Brouwer said, “You have to have somebody who has a very strong faith in his view of the world.”
