TCW Sues Former Star Manager Gundlach

BOSTON (Reuters) – Trust Company of the West sued its former chief investment officer, Jeffrey Gundlach, accusing him of stealing confidential data, lying to potential clients and keeping drugs and pornographic materials in his office.

TCW, the U.S. asset management unit of French bank Societe Generale (SOGN.PA), said in its lawsuit filed on Thursday that the award-winning bond fund manager had misappropriated trade secrets, interfered with the firm’s contractual relationships with clients and committed civil conspiracy among other charges.

Drugs and pornographic materials, discovered in Gundlach’s office after he was fired, violated the firm’s employment regulations, the lawsuit said.

The firm said in the lawsuit that an examination of Gundlach’s office on Dec. 4, the day he was fired, revealed “plastic containers and bags containing green leafy substances and seeds, some explicitly labeled marijuana, as well as three tin foil tubes, the ends of two of which were burnt.”

According to the lawsuit, the office also contained dozens of pornographic magazines and videos.

TCW said in the lawsuit that Gundlach was fired for threatening to take actions that would have jeopardized the firm’s ability to manage clients’ fixed income assets.

Gundlach, who joined TCW in 1985, said in a telephone interview Thursday evening, “I am not distracted by frivolous, pointless, irrelevant and untrue allegations from the TCW lawsuit. Any significant allegations will be proven to be untrue through a legal process.”

A statement earlier in the day from DoubleLine Capital LP, the firm Gundlach opened days after being fired, said the lawsuit’s allegations were without merit.

“The false and hyperbolic personal attacks by TCW are obviously a gratuitous and irrelevant gutter tactic, which merely underscores the weakness of TCW’s claims,” DoubleLine said in the statement.

The lawsuit is the latest move in a battle for customers between TCW and its one-time star manager, who has hired away more than 40 of his former colleagues. Since Gundlach’s departure, TCW clients have withdrawn billions of dollars from the Los Angeles-based firm’s bond funds.

“Given the circumstances, this was always in the cards,” said Aaron Dorr, managing director at Jefferies & Co, who works on fund company mergers and acquisitions. “Asset management businesses are people driven. It always makes for interesting battles when people decamp.”

Gundlach, who was named Morningstar’s bond fund manager of the year in 2006, oversaw about $65 billion of TCW’s $110 billion of assets before he was fired.

At the same time Gundlach was fired, TCW announced it had purchased cross-town rival Metropolitan West Asset Management LLC, which won Morningstar’s top honor in 2005. The fixed income firm, led by Tad Rivelle, managed about $30 billion.

The 39-page complaint filed on Thursday in California Superior Court in Los Angeles also named Gundlach’s new firm, DoubleLine, and three other former TCW employees who joined Gundlach as defendants.

“GREEN LEAFY SUBSTANCES”

The lawsuit seeks unspecified monetary damages, ownership rights of Gundlach’s new firm and other remedies. TCW said the “measurable” harm it had suffered already exceeded $200 million in addition to uncalculated “intangible” losses.

In the complaint, TCW said it found evidence that several of Gundlach’s colleagues who joined him at DoubleLine had spent weeks downloading investment positions, analytical software and proprietary information about clients to portable computer drives.

ABLE GRAPE LLC

Gundlach and other colleagues confronted TCW Chief Executive Marc Stern and threatened to quit the firm at a Sept. 3 meeting, according to the lawsuit. After the meeting they “feigned satisfaction” while “secretly plotting their departures,” TCW said in the lawsuit.

The alleged planning included seeking to lease 24,000 square feet of office space, copying 9 million pages worth of information from TCW computers and registering a corporation in Delaware under the name “Able Grape LLC,” according to the lawsuit. The corporation’s name was changed to DoubleLine four days after Gundlach was fired.

Gundlach’s possible departure from TCW was the subject of speculation throughout 2009, as Societe Generale considered reducing its stake in the firm through an initial public offering or private-equity deal.

Gundlach has said he offered in September to buy the firm from the French bank. But a SocGen spokesman has said the bank never received a serious or formal offer from Gundlach. (Reporting by Aaron Pressman and Svea Herbst; Additional reporting by Jennifer Ablan; Editing by Leslie Gevirtz, Phil Berlowitz)

peHUB Note: Gundlach’s new firm receives a “significant minority investment” from Oaktree Capital Partners