While Washington's budget battle hogs the headlines, many on Wall Street are riveted by another epic duel-the courtroom fight between star bond-fund manager Jeffrey Gundlach, founder of DoubleLine Capital, and his former employer, Trust Company of the West.
Following jury selection, opening arguments began last week in Los Angeles Superior Court in the case, which stems from TCW's dismissal of Gundlach in December 2009. Los Angeles-based TCW is seeking $375 million in damages from Gundlach and DoubleLine, and has charged that Gundlach and three underlings stole TCW trade secrets and other proprietary information in order to set up DoubleLine and siphon off TCW clients. "We will show that Gundlach is a liar, cheat and thief who along with his firm must pay for their misdeeds," says Susan Estrich, a member of TCW's legal team at Quinn Emanuel Urquhart Sullivan.
Gundlach, 51 years old, has filed a counterclaim seeking more than $500 million that he says he and 40 ex-TWC employees who left with him are owed in accrued and deferred management and performance fees as a result of huge prospective gains in four funds they managed that were buying up cheap mortgage-backed securities in the aftermath of the financial crisis. Instead, the funds were mostly terminated when investors demanded their money back on account of the departure of Gundlach and his team. "TCW was actuated by greed in trying to glom our group's fees," says Gundlach . "It was this and nothing else that caused them to fire me. Our group was running 70% of their $110 billion in assets at the end, and they resented how much we were going to get paid."
Judge Carl W. West has ruled that jurors won't get to hear the most salacious claims in the case: TCW's disclosure that it discovered a trove of sexual aids, videos and magazines, as well as marijuana, in a raid on Gundlach's private office after he was fired, and an allegation by Gundlach's legal team in a pre-trial filing that TCW routinely overlooked sexual misconduct and other misdeeds involving some of its key employees. But plenty of other juicy revelations are likely to make Trust Co. of the West v. Jeffrey Gundlach the Casey Anthony trial of the financial world.
Friction between TCW and Gundlach, whom Barron's crowned " The King of Bonds " in a Feb. 21 story of the same name, long predated Dec. 4, 2009, the day of Gundlach's summary dismissal. Handicapping the outcome of the trial isn't easy, but certain claims argue in Gundlach's and DoubleLine's favor.
Take, for example, TCW's charge of the theft of trade secrets, including client lists, transaction information and proprietary security-valuation systems, described by Estrich as "nine million pages in all that stacked one on top of each other would rise to more than two times the Empire State Building." Much of that material, such as contact information and mortgage data, is easily obtainable from private vendors. Gundlach's legal team claims no use was made of this material by DoubleLine, and that all of it was expunged by a data-remediation firm.
What's more, TCW appears to have possessed no magic trading tools and methods. That, at least, is the conclusion one could draw from the relative performance of the two DoubleLine funds that Gundlach manages, the $8 billion DoubleLine Total Return Bond Fund (ticker: DBLTX) and the $302 million DoubleLine Core Fixed Income Fund (DLFNX).
Since its inception in April 2010, Total Return Bond has waxed its look-alike fund at TCW, also started by Gundlach, by notching a total return of 23.2%, versus the 12.8% generated by MetWest, the bond managers brought in by TCW to replace the Gundlach team. There is also a disparity between Gundlach's performance and that of the MetWest team in the 13 months since DoubleLine's version of TCW's core fixed-income fund was launched. The DoubleLine fund has returned 14.14%, TCW's MetWest, 9.6%. "We're not saying that Gundlach isn't a fine manager," Estrich rejoins. "It's just that he stole some of our recipes."
TCW'S CASE MIGHT HAVE ANOTHER, bigger problem. Buried in the court transcripts of the blizzard of pre-trial motions is a reference to notes of a meeting on Aug. 27, 2009, of TCW top managers, including CEO Marc Stern. The topic of discussion: whether Gundlach could be terminated for cause because of his behavior, and how to couch a news release announcing his firing. TCW lawyers have tried on three occasions to get Judge West to exclude this evidence at the trial, claiming the telephonic participation of TCW Corporate Counsel Michael Cahill at the meeting cloaked the discussions in attorney-client privilege. Yet the judge has remained unpersuaded.
The meeting notes could damage TCW on several counts. First, they cast the company as the victimizer, not the victim, and suggest that planning was under way three months before Gundlach's ouster to dump him and find a pretext. More important, TCW apparently was in violation of a partnership agreement with the U.S. Treasury Department related to a Public-Private Investment Program, or PPIP fund that Gundlach and his team managed. The company never informed government officials, even before the government made two capital infusions, that Gundlach was on thin ice with TCW management, which had been in negotiations with MetWest as of September 2009 to replace Gundlach's group. The Treasury froze the fund five days after it learned that Gundlach had been fired, and liquidated it in early January, ordering its capital returned because of the loss of the "key man" in the partnership contract. The sequence of events suggests the Treasury might have been the target of a months-long bait-and-switch attempt.
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