TCW CEO Marc Stern testified Wednesday that he waited until Dec. 4, 2009, to begin termination proceedings against Chief Investment Officer Jeffrey Gundlach because the deal to replace Mr. Gundlach with a new bond management team wasn't sealed until that day.
On his second day on the witness stand in the California Superior Court trial pitting TCW against Mr. Gundlach, Mr. Stern said the money management firm could have been at risk if it did not have bond manager Metropolitan West Asset Management in place to replace Mr. Gundlach. TCW is suing Mr. Gundlach, accusing him of stealing trade secrets, and is seeking damages of almost $400 million. Mr. Gundlach is countersuing for compensation totaling more than $500 million.
Mr. Stern said the decision was made to fire Mr. Gundlach because it was determined he had violated his fiduciary duties. In a memo that was displayed to the jury, Mr. Stern wrote to TCW's owner, French bank Societe Generale, on Nov. 27, 2009, that examples of Mr. Gundlach's violations included possible downloading of TCW files and documents.
In his testimony, Mr. Stern said he was intent on keeping Mr. Gundlach because he was the most important person at the firm, and his team contributed a large portion of the company's revenue. But he said his feelings started to change in the fall.
Mr. Stern said he instructed TCW's lawyers to start monitoring Mr. Gundlach's e-mails following several meetings Mr. Stern had with the CIO and his team members in September 2009. It was at those meetings that Mr. Stern said he became more concerned that Mr. Gundlach had a possible plan in place to leave the firm. At the first meeting, on Sept. 3, Mr. Stern said Mr. Gundlach asked if he was going to be fired. Mr. Stern said he replied no, but then was told by a group of five or six of Mr. Gundlach's key lieutenants on the mortgage-backed securities team, who also attended the meeting, that they would leave if Mr. Gundlach left.
Mr. Stern said that at the Sept. 3 meeting, the group asked if several of them could be put on a management committee to help with the governance of TCW. Mr. Stern said he would get back to them and was receptive to the idea and held a follow-up meeting on Sept. 8. But at the Sept. 8 meeting, members of Mr. Gundlach's team backed off their original demands. “It got me to think what else might be going on,” Mr. Stern said. “I didn't get the whole picture.”
Mr. Stern said after the e-mails were monitored, he was warned that Mr. Gundlach had been in contact with real estate agents and had been having conversations with a rival fixed-income manager, Western Asset Management. Mr. Gundlach had previously testified at the trial that he was looking for real estate space to form his own firm as a contingency plan in case he was terminated. He formed a rival asset management firm, DoubleLine Capital, within days of Dec. 4, when TCW said he was put on administrative leave. Mr. Gundlach maintains he was fired that day. TCW claims he was terminated on Dec. 11.
Mr. Stern said even after Mr. Gundlach was put on administrative leave Dec. 4, he still hoped to keep him in a limited role as a “face-saving solution.” He said he saw Mr. Gundlach as possibly managing the Treasury Department's investment with TCW as part of the Public-Private Investment Program. The Treasury Department froze the assets in the program after Mr. Gundlach was terminated and subsequently withdrew its funds.
Mr. Stern testified that originally, talks in the fall of 2009 with MetWest were a defensive move. He realized that it would be a good strategic acquisition for TCW and he said that while TCW's fixed-income portfolio was focused on Mr. Gundlach's strategy of mortgage-backed securities, MetWest had a much broader array of investments.
After Mr. Gundlach was put on administrative leave, there were concerns that TCW sustained losses in fees following conference calls that Mr. Gundlach made with investors. Mr. Stern said Mr. Gundlach held calls with investors in the special opportunities credit funds on the same days that TCW held its own conference calls, and Mr. Gundlach subsequently told investors in the closed-end funds they should be allowed to dictate their own terms. Following those conference calls, Mr. Stern said investors demanded that TCW lower its fees and the firm was forced to lower its management fee to 1% from 2% and its performance fee to 5% from 20%. Mr. Stern did not say how much money was lost because of Mr. Gundlach's alleged actions.
During cross-examination, lawyers for Mr. Gundlach and DoubleLine Capital began to press their case that he was fired so TCW could save on compensation and incentive fees.
In a videotaped deposition played in court on Wednesday, Mr. Stern said any fee savings by the acquisition of MetWest was offset by revenue lost from Mr. Gundlach's departure. On the stand, Mr. Stern denied that cost-savings had anything to do with Mr. Gundlach's dismissal.
However, DoubleLine lawyer Brad Brian presented a document that Mr. Stern gave to Societe Generale officials in October 2009, in which Mr. Stern stated cost-savings was a potential motivation for dismissing Mr. Gundlach. The incentive fees paid to MetWest would be 10% compared with 35% paid to Mr. Gundlach's team, according to that document.
However, earlier in the trial Richard Villa, TCW's chief financial officer, said there was only a seven percentage point difference in total compensation between the two teams.