Settlement brings dawn of new day for TCW, DoubleLine

The settlement between TCW Group Inc. and DoubleLine Capital LP that shut the door on one of the most vicious legal disputes in money management history provides both firms a fresh start.

Experts said Jeffrey Gundlach will get a chance to show just how big he can build his Los Angeles money management firm, unencumbered by the legal battle over the stealing of trade secrets from his former employer, TCW Group. TCW's owner, French bank Societe Generale SA, under pressure on other fronts, also will be helped by the end of the legal dispute.

“Both firms have benefited from the slate being cleared,” said Geoffrey H. Bobroff, president of manager consultant Bobroff Consulting Inc., East Greenwich, R.I. He said DoubleLine will be in a better position to attract institutional business, while Societe Generale will find it easier to sell TCW or launch an initial public offering, as has been rumored.

Details of the settlement, announced Dec. 29, could not be learned A jury in September found Mr. Gundlach and his key associates had stolen trade secrets to start their rival money management firm. California Superior Court Judge Carl West was supposed to rule before February on how much in “reasonable royalties” to award TCW, which was seeking more than $80 million.

Mr. Gundlach, DoubleLine's co-founder, CEO and chief investment officer, rejected the notion that the lawsuit or its settlement had any impact on his firm.

“DoubleLine has been one of the most successful investment management startups in the history of the industry in terms of both performance and growth in assets under management,” he said in an e-mail. “Elimination of the nuisance created by TCW is irrelevant to DoubleLine's future just as the nuisance was a non-issue in the establishment of our strong culture of teamwork, client focus and investment excellence.”

TCW officials won't talk directly about the settlement.

“Despite all the noise, the past two years have been very strong ones for TCW,” company spokesman Peter Viles said in an e-mail. “We've re-established our credibility in the institutional marketplace, we've more than tripled the size of our mutual fund complex, and we've expanded our international distribution platform. All of these trends give us strong momentum as we move into 2012.”

TCW lost around $30 billion in assets after institutional clients fled following the termination of Mr. Gundlach, its star money manager, in December 2009. TCW also lost about 45 members of Mr. Gundlach's team, who followed him to DoubleLine. TCW was able to begin rebuilding its asset base in mid-2010.

Mr. Gundlach started DoubleLine just days after his termination. In January 2010, TCW filed suit against Mr. Gundlach and his new firm, accusing them of stealing company trade secrets to help DoubleLine get off the ground quickly. Mr. Gundlach countersued, maintaining he and key associates were owed about $500 million in compensation.

A jury in September found in favor of TCW on the trade secret charges, but also awarded Mr. Gundlach and his associates $66.7 million in compensation from TCW. Before the settlement, TCW had said it was planning to appeal that award.

Mr. Gundlach, known as much for his ego and arrogance as his expertise in mortgage-backed securities, certainly has reasons for his bluster. In its two years of existence, DoubleLine has amassed $22 billion in assets under management. Most of that, however — more than $17 billion — is in mutual funds.

The fact that the lawsuit is now yesterday's news — and won't drag on with years of appeals — makes it easier for institutional investment consultants to consider DoubleLine, said Jeffrey MacLean, Los Angeles-based president and CEO of investment consultant Wurts & Associates.

Mr. MacLean said he has been meeting with DoubleLine officials, and Wurts would consider suggesting DoubleLine to clients for appropriate mandates in the future. “The ending of the lawsuit makes it easier for us to recommend his firm,” he said.

The settlement removes concerns over the business risk for DoubleLine, agreed Michael Rosen, principal and chief investment officer of investment consultant Angeles Investment Advisors, Santa Monica, Calif.

Mr. Rosen said one issue for managers involved in lawsuits is whether the legal proceedings will distract the investment team. He said apparently that was never the case with DoubleLine, given its strong investment performance. (DoubleLine's Total Return Bond fund, its largest mutual fund at $15.2 billion, returned 9.2% in 2011, putting it first among 114 peer funds, according to Lipper Inc.)

The consultant said there were also concerns about TCW's performance without Mr. Gundlach and his team, but those concerns were allayed after TCW acquired Metropolitan West Asset Management LLC. MetWest had an overall solid track record and has continued to perform well at TCW.

While Mr. Rosen said neither DoubleLine nor TCW was ever taken off Angeles' list of recommended firms, resolution of the suit is a positive factor.

Mr. MacLean said MetWest had been on Wurts' list of recommended managers before it became part of TCW, and that has continued. But he said that continuing turnover among investment personnel over the years at TCW has raised concern about its stability and led to other company strategies not being suggested to Wurts clients. “We are watching them from afar,” he said.

One executive familiar with TCW's operations who asked not be identified acknowledged the firm was placed on the watchlists of some consultants after Mr. Gundlach was terminated but said the firm has gradually moved back to normal status. The executive believes the settlement should resolve any additional issues consultants still might have with TCW.

Mr. Bobroff noted that resolution of the lawsuit also makes things easier for Societe Generale. The bank is under pressure by regulators to shore up its resources, and rumors have been swirling for several years that it was looking to sell TCW. Societe Generale officials denied in November that TCW was up for sale, but have indicated an IPO might be in the offering in two or three years.

With the market unfavorable for IPOs now, an interim solution for Societe Generale might be for a private equity partner to acquire a stake in TCW until the IPO market stabilizes, said John Temple, a managing director at investment bank Cambridge International Partners, New York. If that became the case, the private equity partner would want any outstanding lawsuits resolved, he said.

While the terms of the settlement are confidential, Mr. Bobroff said he doesn't believe much money traded hands. With both sides facing payouts, it was best for TCW and DoubleLine to clean the slate and move on, he said.