Trial details TCW-Gundlach clash

With weeks of testimony still expected in the case of TCW vs. Jeffrey Gundlach, the first few days of the trial provided a glimpse into the animosity that existed between TCW Group management and its mortgage-backed securities star.

Just who was out to get whom in 2009 — whether TCW officials plotted to oust Mr. Gundlach or Mr. Gundlach schemed to break away from TCW — is one of the questions the jury in California Superior Court in Los Angeles will have to determine.

TCW, which filed the original lawsuit, is charging that Mr. Gundlach and his associates stole trade secrets as part of a plot to move the mortgage-backed securities business to a new firm, DoubleLine Capital LP. TCW is asking for $375 million in damages.

Mr. Gundlach, who was TCW's chief investment officer and a member of its board, is maintaining he and his team are entitled to more than $500 million in back wages. He contends he was fired because TCW didn't want to pay up and because he opposed the return of Marc Stern, the company's former president, to the CEO position in late May 2009.

With their opening arguments and first witnesses, TCW attorneys painted a picture of Mr. Gundlach as a man with an enormous ego who spent months, while employed by TCW, working secretly to set up the rival firm.

Attorneys for DoubleLine portrayed Mr. Gundlach as the victim of a plan to deprive him of incentive fees he had earned because of the huge success of some of his mortgage-backed securities funds. They said French bank Societe Generale, TCW's owner, decided it wanted to reduce its costs and bring in a cheaper replacement, forcing Mr. Gundlach out.

TCW lawyer John Quinn said Mr. Gundlach called himself “the pope” and “the godfather” and refused to meet with investment prospects he considered too small — like a possible $400 million investment from Novartis AG — because “this sounds like too small a group to have an audience with the pope.”

He said Mr. Gundlach referred to Mr. Stern and TCW founder and Chairman Robert Day as “dumb and dumber.”

But the name-calling wasn't all on one side, according to Brad Brian, attorney for DoubleLine. In his opening arguments, he said Mr. Stern had his own name for Mr. Gundlach, citing an e-mail in which the CEO had called Mr. Gundlach, “King Jeffrey.”

One of the new claims made by TCW in the trial is that CEO Robert Beyer resigned in May 2009 in part because of the difficulty of dealing with Mr. Gundlach.

In one incident, Mr. Quinn said, Mr. Gundlach walked around the TCW trading floor waving a Federal Express envelope, claiming he had an offer to join fixed-income rival Western Asset Management Co.

When Mr. Beyer confronted Mr. Gundlach about whether he was planning to join the firm, Mr. Quinn said that Mr. Gundlach responded, “Well, maybe I will.”

Mr. Beyer warned Mr. Stern that the toughest problem he would have if he returned to TCW would be dealing with Mr. Gundlach, Mr. Quinn told the jury.

Indeed, the conflict between Messrs. Stern and Gundlach started before Mr. Stern assumed the leadership of TCW.

Mr. Gundlach was one of five signers of a letter to top officials at Societe Generale, urging them not to bring back Mr. Stern and questioning his leadership abilities.

He also wrote an e-mail to another TCW employee, Senior Vice President Barbara VanEvery, on May 29, 2009, saying, “I might possibly be able to work with them (Messrs. Stern and Day), but I wouldn't work for them in any way,“ according to Ms. VanEvery's testimony last week.

Mr. Brian in his opening arguments said that Mr. Stern, upon his arrival at TCW, became involved in secret meetings, dubbed “Project G,” part of a plan to terminate Mr. Gundlach.

He added that when DoubleLine presents its case, he will show e-mails from Societe Generale officials stating the need “to force Mr. Gundlach out.”

Mr. Quinn confirmed the existence of “Project G”. He told the jury that, “from the time he came back, Mr. Stern also had to face the possibility that Mr. Gundlach might do something so over the line they would have to fire him.“

But Mr. Quinn insisted the preferred option was to keep Mr. Gundlach, because “no matter how you ran the numbers, Mr. Gundlach was extremely successful, extremely profitable for the firm.”

Mr. Gundlach's team accounted for 60% of the assets under management and 50% of the revenue at TCW, Mr. Quinn said. At the time of Mr. Gundlach's dismissal, the company had more than $100 billion in assets under management.

But Mr. Brian insisted that part of the reason Mr. Gundlach was dismissed is that TCW didn't want to pay him and his team hundreds of millions of dollars in incentive fees. Another reason, he stated, was that Societe Generale officials were angry at Mr. Gundlach's reaction to Mr. Stern's appointment and Mr. Gundlach's objection to their business plan to sell TCW or do an initial public offering.

Within a few months of Mr. Stern's return, discussions within TCW on whether Mr. Gundlach should be dismissed had intensified. The notes of a TCW attorney who participated in an Aug. 27, 2009, meeting at which Mr. Stern and other top TCW officials were present included the wording of a draft press release that stated, “Unfortunately, we've had to terminate Mr. Gundlach for cause,” according to Mr. Brian's opening argument.

Mr. Quinn acknowledged the meeting, but insisted Mr. Stern resisted terminating Mr. Gundlach because it would be too costly for the firm.

Ms. VanEvery, who is now DoubleLine's communications director, testified that in August 2009, Mr. Gundlach told her he wanted an “amicable” breakup with TCW. During her testimony, however, she acknowledged a September 2009 e-mail she wrote to Mr. Gundlach telling him: “I would definitely make it my mission to stick it to them,” referring to TCW management.

The situation apparently deteriorated after a Sept. 3 meeting. Mr. Quinn told the court that at that meeting, Mr. Stern offered to make Mr. Gundlach co-CEO but he refused. Mr. Gundlach had brought six of his team members to the meeting, all of whom threatened to quit if he were fired, the lawyer said.

The meeting ended on a seemingly positive note, with Mr. Gundlach telling Mr. Stern he thought they could work together, Mr. Quinn told the jury.

“Well, Marc Stern is nobody's fool,” Mr. Quinn told the jury. “He wasn't fooled by Mr. Gundlach's assurances ... He now realized the problems were worse with Mr. Gundlach than even he realized.”

Mr. Quinn said the CEO began to suspect that Mr. Gundlach and his key associates “were up to something” and that “their plans (to leave) were more advanced that they were letting on or he had reason to suspect.”

Mr. Quinn said because of those suspicions, Mr. Stern then ordered that the computer activity of Mr. Gundlach and team members be reviewed, Mr. Quinn said.

He said an initial review showed that Mr. Gundlach and other team members were collecting and copying client lists, contracts and trade tickets.

“He realized Mr. Gundlach was secretly setting himself up in business from within, building that business from inside TCW, and using TCW employees,” Mr. Quinn told the jury.

Neither side disputes that Mr. Gundlach met with officials of investment bank Goldman Sachs & Co. in October 2009. What happened at that meeting, however, is in dispute.

TCW's Mr. Quinn said Goldman Sachs was asked at the meeting whether they would be willing to help raise financing or be investors in a new asset management company. Mr. Quinn said Goldman refused to help because officials felt TCW needed to be aware of what was going on.

Mr. Brian said one of the options discussed with Goldman Sachs was giving a 10% share of the new firm's fees to TCW if an amicable separation couldn't be worked out with Societe Generale and TCW. There was never a plan to leave TCW, “high and dry,” he said.

Mr. Gundlach's associates, however, were already shopping for office space for a new investment firm, according to testimony of a real estate agent and a key associate of Mr. Gundlach.

Ms. VanEvery, who is also Mr. Gundlach's girlfriend, signed an agreement with a real estate agent to look for the commercial space on Sept. 29, 2009. E-mails presented at the trial show Ms. VanEvery asked Mr. Gundlach how much space there would have to be in the office for a sculpture by Donald Judd.

Mr. Judd is a modern artist whose sculptures generally start at $1.5 million and can go as high as $5 million; Ms. VanEvery testified that Mr. Gundlach wanted to install the sculpture in the new office.

She also testified that Mr. Gundlach arranged a team-building trip in October 2009 for six members of his mortgage-backed securities group to Marfa, Texas, to view Mr. Judd's work at a museum.

Mr. Quinn said the trip to Marfa, on a private jet paid for by TCW, did involve team building — “a team-building activity for DoubleLine.”