TCW CEO Marc Stern testified Thursday he crafted a plan in October 2009 to fire Jeffrey Gundlach that would catch the chief investment officer by surprise.
During cross-examination in California Superior Court in Los Angeles, Mr. Stern described how he went to Paris in mid-October 2009 to meet with top officials of French bank Societe Generale, TCW's parent, and get their approval of that plan.
Mr. Stern said he developed a plan with an “element of surprise” to prevent Mr. Gundlach from taking countermeasures and leaving TCW before a replacement could be named to head his mortgage-backed securities team. Mr. Gundlach was terminated in December 2009.
“We felt we were in a very vulnerable position,” Mr. Stern testified. “The entire company could be destroyed.”
Mr. Stern's testimony comes in a trial that pits TCW against Mr. Gundlach and his new firm, DoubleLine Capital. TCW has accused Mr. Gundlach and key associates of stealing trade secrets that they used to get their rival firm off the ground within days of leaving TCW and is seeking almost $400 million in damages. Mr. Gundlach is countersuing, looking for more than $500 million in compensation.
It was not made clear during Mr. Stern's testimony whether Societe Generale officials gave formal approval to the plan at that meeting.
Memos presented during the cross-examination by Mr. Gundlach's attorneys show company officials were concerned in the months preceding Mr. Gundlach's termination about his potential behavior if he were dismissed. He would engage in “volatile and divisive” behavior, TCW Executive Vice President Joe Burschinger predicted in one memo. Other memos show that Mr. Stern and other TCW officials were concerned Mr. Gundlach, along with clients, would initiate a lawsuit if a firing occurred.
Memos submitted into evidence show that TCW hired communications firm Abernathy MacGregor Group in early September 2009 to create a strategy to deal with “a story of this magnitude.” Mr. Stern testified that Abernathy was hired partly in response to Mr. Gundlach's situation.
The memos also hinted at evidence that TCW was very concerned about severe losses among its institutional separate account clients following a termination. One analysis by a consultant hired by TCW, Woody Bradford, said that TCW would lose 60% to 70% of its institutional account business following a termination of Mr. Gundlach. Mr. Bradford said if TCW kept 40% of the business it would be a “huge success.”
TCW had reported it lost about $25 billion in institutional separate account business after Mr. Gundlach left.
Mr. Stern also acknowledged under cross-examination that he didn't realize he would lose most of Mr. Gundlach's mortgage-backed securities team if he terminated the star money manager. A TCW analysis said Mr. Stern thought only one of Mr. Gundlach's key lieutenants would be subject to flight risk.
Around 45 of Mr. Gundlach's associates left TCW to join him at DoubleLine, including most of the mortgage-backed securities team.