TCW's sensational allegations against Jeffrey Gundlach and his new firm, DoubleLine Capital LP, likely will harm both companies.
“None of that is usually good on either side. That's not good for anybody. What happens is nobody gets the assets then,” said Theodore “Ted” L. Disabato, managing director of Disabato Advisers LLC, Chicago.
Mr. Disabato said it's possible the allegations of TCW property theft, drug use and pornography might be successful in keeping DoubleLine from taking TCW business.
TCW Group Inc., Los Angeles, filed suit on Jan. 7 against Mr. Gundlach, DoubleLine, three former TCW senior officers that left to join DoubleLine and others, accusing them of theft, fraud and breach of fiduciary duty.
In addition, the lawsuit alleges that marijuana, drug paraphernalia and pornography were found in Mr. Gundlach's office after he was fired as TCW's chief investment officer on Dec. 4. TCW is seeking more than $200 million in damages in the lawsuit, filed in California Superior Court.
DoubleLine and Mr. Gundlach released a statement Jan. 7 announcing plans to sue TCW, but a lawsuit had not been filed as of press time on Jan. 8.
The TCW suit claims that after Mr. Gundlach was terminated, he “was able to invite hundreds of TCW clients to webcasts in which he touted the capabilities of his new enterprise and disparaged those of his former employer.”
The lawsuit claims the defendants conspired to steal proprietary TCW information; used confidential TCW information after leaving the company; and solicited business from TCW clients by making false statements about the firm.
“The sudden appearance of this new entrant in the money management business has been hailed by the financial press as a testament to Gundlach's organizational skill and financial savvy. The truth is much shabbier,” the suit states.
Repeated attempts to reach Mr. Gundlach were not successful.
DoubleLine issued a statement that said, “The allegations in the complaint are meritless and will be proven so in a court of law. TCW's lawsuit is a blatant attempt to damage DoubleLine's business and clients. DoubleLine and Mr. Gundlach are asserting their legal rights in a lawsuit to be filed shortly, which will demonstrate the thoroughly baseless nature of TCW's claims and seek redress for TCW's deplorable conduct. The false and hyperbolic personal attacks by TCW are obviously a gratuitous and irrelevant gutter tactic, which merely underscores the weakness of TCW's claims.”
The TCW lawsuit also claims that Mr. Gundlach was terminated because the firm discovered evidence that he and the three ex-TCW senior officers conspired to misappropriate TCW's confidential information and take it with them to a new company.
“Another compelling reason for TCW's termination of Gundlach's employment was Gundlach's essential unfitness to remain a senior TCW officer and fund manager,” according to the lawsuit. “His behavior had become erratic, increasingly and openly confrontational and starkly inconsistent with the conduct of a senior officer responsible for the management of billions of dollars of client funds and the supervision of TCW employees.”
The suit says that after Mr. Gundlach's departure, staff “discovered inappropriate contraband in his TCW offices, consisting of marijuana, drug paraphernalia, including paraphernalia bearing evidence of recent use, and a collection of 12 sexual devices, 34 hardcore pornographic magazines and 36 hardcore sexually explicit DVDs and videocassettes.”
The lawsuit also alleges that Mr. Gundlach began undermining TCW senior management in spring 2009, threatening to leave the firm and take key employees with him.
TCW spokeswoman Erin Freeman declined to comment.
The suit gives pension plan clients of the firms further reason for pause.
The $11.6 billion Kansas Public Employees Retirement System, Topeka, placed TCW on “probation” because of the departure of portfolio managers, CIO Robert “Vince” Smith said. TCW managed about 20%, or $463 million, of the system's fixed-income portfolio as of Nov. 30. He said the board would decide what further action to take Jan. 14-15.
Asked specifically about the lawsuit against Mr. Gundlach and DoubleLine, Mr. Smith said: “We'll look at the factors and decide what to do.”
Bill Wallace, spokesman for the $15 billion Texas Municipal Retirement System, Austin, which hired TCW in September to run $750 million in core-plus fixed income, said the firm was placed on watch last month because of the personnel changes.
He said the system would discuss the situation at its Jan. 15 board meeting.