Updated with correction
Jeffrey Gundlach, fired TCW chief investment officer, testified Monday that the computer systems at his new firm, DoubleLine Capital, were built from scratch, countering a central argument from TCW that he and key associates had stolen trade secrets to start the new money manager.
Testifying Monday in California Superior Court in Los Angeles, Mr. Gundlach likened the creation of the DoubleLine system to Ernest Hemingway losing the manuscript of the novel, “The Sun Also Rises.” Mr. Gundlach said he suspected Mr. Hemingway would have been able to use his memory and ability to rework the novel instead of having to start from scratch, and Mr. Gundlach said he and his associates likewise used their memory and experience at TCW to build the DoubleLine system.
He testified that the computer software and data systems were bought from a third-party vendor. TCW claims Mr. Gundlach and his associates took DoubleLine's system from TCW.
Key associates of Mr. Gundlach, also former TCW employees who joined DoubleLine after they were fired in December 2009, admitted to taking millions of documents and data from TCW. But they insist that none of it was used by DoubleLine.
In cross-examination by DoubleLine attorney Mark Helm, Mr. Gundlach said he was able to get DoubleLine off the ground quickly after being fired by TCW in December 2009 because of a cash and manpower infusion from another money manager, Oaktree Capital Management.
DoubleLine was in business within a month of Mr. Gundlach's termination from TCW, and TCW has argued it would have been impossible to start the firm so quickly without stealing trade secrets.
In earlier testimony, Mr. Gundlach reiterated that he had begun developing a backup plan to form his own money management firm because of concerns he was going to be dismissed.
Mr. Gundlach's testimony came after TCW attorney John Quinn confronted him about an exchange of e-mails with Philip Barach, the top lieutenant on Mr. Gundlach's mortgage-backed securities team at TCW in mid-September 2009.
The e-mails revealed that Mr. Barach was approached by officials of Societe Generale, TCW's parent, about staying with TCW even if Mr. Gundlach were no longer there. After Mr. Barach e-mailed Mr. Gundlach about the meeting, Mr. Gundlach responded: “The whole thing is just pitiful. You deserve better, I deserve better, we deserve better.”
Mr. Barach wrote back, “I agree. But at least we have the luxury of time to plan and prepare.” Mr. Barach is now president at Mr. Gundlach's new firm, DoubleLine Capital.
Mr. Gundlach reiterated during his testimony that he wanted to stay at TCW, but was developing the backup plan because he was worried about being dismissed.
But when Mr. Quinn showed Mr. Gundlach an agreement he had signed the next month with a New York law firm to secure registration for a new money management firm, Mr. Gundlach said he didn't remember the memo. He said “embarrassingly,” he didn't know until Dec. 4, the day he said he was fired, that registration was needed to open a money management firm.
TCW is suing Mr. Gundlach and key associates, accusing them of stealing trade secrets in a plan to start rival money manager DoubleLine. The firm was formed days after Mr. Gundlach and the others were fired. Mr. Gundlach is countersuing for more than $500 million in compensation.
Mr. Gundlach also testified that he made an offer at a Sept. 3, 2009, meeting with TCW CEO Marc Stern to buy a 51% stake in the money management firm for $700 million. But Mr. Gundlach admitted his deal was dependent on a $350 million loan from Societe Generale.
Mr. Quinn also brought out that Mr. Gundlach had been negotiating to bring part of his mortgage-backed securities businesses to Western Asset Management Co., a division of Legg Mason, as early as February 2009. According to e-mails displayed at the trial, Mr. Gundlach wrote to co-defendant Barbara VanEvery in February 2009 that WAMCO had proposed giving him and his team 80% of the revenue they would bring over to the firm. Mr. Gundlach rejected WAMCO's offer in mid-June 2009 because he and WAMCO couldn't agree on terms.
Mr. Gundlach said TCW would have shared in some of the revenue under the agreement.
“The idea was that it could be a win-win situation for everybody,” Mr. Gundlach testified.
Mr. Gundlach also disclosed that DoubleLine had revenue of $10 million in 2010 and $25 million so far this year.
Mr. Gundlach's testimony will continue Tuesday.