Making his first appearance in the trial in Los Angeles that pits Mr. Gundlach against TCW, Mr. Stern said he did not want to terminate Mr. Gundlach because he was the most important portfolio manager at the firm, managing 60% of its assets. “It would be like cutting off your right arm,” he said.
But in the spring of 2009, Mr. Stern testified, he began to realize he might not have a choice. He said he first became concerned in May of 2009 when he learned Mr. Gundlach had yelled to fellow employees on several occasions that he was planning to leave TCW for Western Asset Management Co. or Pacific Investment Management Co. (Mr. Stern had been president of TCW from 1990 to 2005; he returned to the company as CEO in late May 2009.)
Mr. Stern said Mr. Gundlach's behavior had become increasingly “bizarre” and he was concerned that Mr. Gundlach would “do something illegal and I'd be forced to terminate him.” He said Mr. Gundlach, who ran the mortgage-backed securities team, would talk down to members of the equity team, saying “they weren't important … their assets would go down to zero.” Mr. Stern also said he was told Mr. Gundlach had stated, “He was the only important person at the firm.”
Top TCW officials and others outside the firm were recommending that Mr. Gundlach be terminated, Mr. Stern said. Among those recommending that action, he said, were Blair Thomas, head of TCW's energy and infrastructure team and outside business associates of Mr. Stern, such as Howard Marks, founder of Oaktree Capital Management.
Ironically, Mr. Marks is one of the backers of Mr. Gundlach's firm, DoubleLine Capital, which was started within days of his firing from TCW.
Mr. Stern recounted a meeting during the summer of 2009 between Mr. Gundlach and other top TCW officials to discuss the recent acquisition of real estate investment manager Buchanan Street Partners. At that meeting, Mr. Stern testified, Mr. Gundlach became “very, very angry” that he recommended that Messrs. Attanasio and Chapus monitor the company. He said Mr. Gundlach got out of his chair, went red in the face and told Mr. Chapus, “I am the only one … that knows anything about real estate.”
Mr. Stern said no one at TCW's owner, Societe Generale, ordered him to terminate Mr. Gundlach, instead leaving the decision to him. Mr. Stern said he was still intent on trying to keep Mr. Gundlach, even offering to quit so that Mr. Gundlach would stay. “I would have been happy to be the sacrificial lamb,” he said.
Mr. Stern said he became more convinced that Mr. Gundlach had to go in early September.
TCW claims Mr. Gundlach and key associates stole TCW trade secrets, including client portfolio data, to start DoubleLine Capital. Mr. Gundlach's countersuit seeks about $500 million in compensation.
The trial was recessed until Aug. 24, when Mr. Stern will resume testifying.