Download to read offline
![bloomberg markets april 2010
54
charlienucci
then 45, a former fixed-income money manager, and Stern
stepped aside as president to become vice chairman.
WhentheKervielscandalhitSocGeninJanuary2008,TCWwas
immediatelyaffected.Frenchregulatorsopenedaninsider-trading
probeofDay,thenaSocGendirector,afterheandhisfoundation
sold€148millionworthofthebank’sstockbeforeSocGenpublicly
disclosedthetradinglossesonJan.24,accordingtoregulatoryrec
ords.JoshPekarsky,aspokesmanforDay,saysDayusednoinside
informationwithrespecttothestocksalesandiscooperatingwith
theinvestigation.DayresignedfromSocGen’sboardonDec.31.
udea,46,SocGen’sformerchieffinan-
cialofficer,tookthehelminMay2008
withamandatetostaunchthebank’s
losses.Thecarnagewouldhavebeen
farworseforSocGenhadWashington
failedtoexecutea$182billionbailout
ofAmericanInternationalGroupInc.
in2008.SocGenheld$16.5billionin
credit-defaultswapsissuedbyAIG,
thelargestsuchexposure,according
tofilingswiththe SecuritiesandExchangeCommission.Under
adealarrangedbytheFederalReserveBankofNewYork,then
ledbyTimothyF.Geithner,theinsurersettledtheswapswith
SocGenandother AIGtradingpartnersat100centsonthe
dollar.Thedecisionspurredaccusations
fromU.S.CongressmembersthatGeith-
ner,whoisnowtheU.S.Treasurysecre-
tary,gavethebanksa“backdoorbailout”
attheexpenseoftaxpayers.(See“The
[Redacted]BailoutofAIG,”page61.)
Gundlach,too,wasinvestinginthe
exoticinstrumentsthathelpedfuelthe
crash.Underhisdirection,TCWbecame
theNo. 1managerincollateralized-debt
obligations,with$41.3billionunderman-
agementasofSept.30,2007,accordingto
datafromStandard&Poor’s.Thatincluded
$35.1billionofCDOscomposedofasset-
backedsecurities,includingmortgages.
GundlachsayshisCDOsrotatedoutof
high-riskhomeloansearlyinthecredit
crisisandescapedtheworstofit.
InJanuary2009,SocieteGeneralesaid
TCWwouldbespunoffinastockoffering
sometimeinthenextfiveyearsaspartofa
reorganizationofitsassetmanagement
division.Gundlachsaysheassumedthe
FrenchwouldsellTCWiftherightoffer
wasmade.AttheendofMay,Daysum-
monedGundlachtohishometomeetwith
himandStern.ThetwomentoldGundlach
thatBeyer,TCW’sCEO,wasabouttoan-
nouncehisretirementattheageof49and
SternwastobenamedCEO.Gundlach
blewup.“Iwaslike,‘No!No!Whatdoyou
meanyou’recomingback?Youturnedthis
overtothenextgeneration.Thisisallcom-
pletelytheoppositeofwhatIwasledtoex-
pect,’”Gundlachsays.Beyerdeclinedtocomment.
ThetwomenofferedtomakeGundlachpresident,whichhe
saysherejected.Gundlachhadneverforgottenthedilutionofhis
equitystakein2001,andhesaysheaccusedSternofstealing
$15 millionfromhim.Themeetingendedbadly.“Gundlach’s
claimsarewithoutmerit,”TCWspokeswomanFreemansays.
InlateAugust,Gundlachsays,heheardrumorsthatSternhad
convenedateamoflawyerstofirehim.OnSept.3,themoney
manageraskedSterntojoinhimandmembersofhisteamina
conferenceroomoffthetradingfloortocleartheair.Themood
wastenseasthemoneymanagerandtheCEOfacedoneanother,
accordingtoanaccountbyGundlachandBarach.Gundlach
askedSternwhetherhewasplanningtofirehim.Sternreplied
no.GundlachaskedwhetherSocGenwasgoingtosellthefirm.
Sternagainansweredno.Gundlachthenmadeanoralofferto
buy51percentofTCWfor$350million.Andseveralofhistop
lieutenants,includingBarachandmoneymanagerLouisLucido,
voicedsupportfortheirboss.“Justsoyouknow,ifanything
happenstoJeffrey,we’regoingwithhim,”Lucido,nowexecutive
vicepresidentatDoubleLine,sayshetoldStern.
O
Tania Modic’s
Western Invest-
ments Capital
placed money
with TCW.](https://image.slidesharecdn.com/6e132054-b2c7-4b59-85fc-f2f404b28340-150201134036-conversion-gate02/75/gundlach-pdf-6-2048.jpg)
gundlach pdf
- 1. bloomberg markets month2010 48 More than 40 members of Gundlach’s TCW team have joined him at DoubleLine. By Edward Robinson and Sree Vidya Bhaktavatsalam BONDS AND BETRAYAL Photograph by david strick
- 2. JeffreyGundlach’sreturnstopped thoseofBillGrossbeforehewasfired bySocieteGenerale–ownedTCW.Ina brawlthat’sshockingthe$11trillion mutualfundindustry,hefacesalle- gationsofstealingtradesecretsand keepingmarijuanaattheoffice. 49 APRIL 2010 bloombergmarkets effreygundlachhasablackeyeand acutonthebridgeofhisnose,andhe wincesasherubshisside.“IthinkI crackedarib,”Gundlach,50,saysas hegingerlytakesaseatinaconfer- enceroominaLosAngeleshigh-rise inJanuary. Gundlach,amoneymanagerwho ranthesecond-largestmortgage bondfundworldwide,gothurttrip- pingoveracomputercableinhisoffice,notin afistfight.Butheisexchangingblowswithhis formerinvestmentfirm,TCWGroupInc.,in abrawlthathasshockedthebond-trading worldwithallegationsofdouble-dealing,drug useandworkplacepornography.Thefeud reachesfromTCW’sheadquartersinLos AngelestoParis,whereSocieteGeneraleSA, thefirm’scorporateparent,hasbeenpum- meledintheglobalcreditcrisis.France’s No. 2bankhaswrittendownatleast11billion euros($15billion)afterlosingadditionalbil- lionsina2008tradingscandal. J
- 3. bloomberg markets april2010 50 Arelentlessself-promoterwhodescribeshimselfasa“money machine,”Gundlachoutperformed99percentofhisrivalfixed- incomemoneymanagersfrom2005to2009,accordingtodata compiledbyBloomberg.Hislieutenantscall him“theGodfather” fortheloyaltyhecommandsandtherichstreamofassetmanage- mentfeeshebringsin.“Iamamazinglybrilliantanalytically,” saysGundlach,awirymanwhoseshortbrownhairhugshisskull likeahelmet.“I’mtheguywhomakesitraininthedesert.” TCW Chief Executive Officer Marc Stern fired his rainmaker on Dec. 4. Stern, 65, who former colleagues say is as hard-charging a figure as Gund- lach, referred to the ousted money manager as a “prima donna” on a conference call with TCW em- ployees on Dec. 7. A month later, TCW accused Gundlach in a law- suit of stealing trading and contact data for thousands of clients so he could open his own firm, Los Angeles–based DoubleLine Capital LP. Gundlach,whoduring24yearsrosefromajunioranalystto manageabout70percentofTCW’s$110billioninassets,denies theallegationsinthelawsuit.InacountersuitfiledonFeb. 10, GundlachcontendsTCWoustedhimlargelytotakecontrolof the15fundsheranandkeep$600millionto$1.25billioninfees histeamwasduetobepaidoverthenextfewyears.Thefeudhas woundedTCW,whichinFebruarytooktheunusualmoveof slashingitsfeesintwoofGundlach’sformerfundstoinducein- vestorstokeeptheirassetsatTCW.Withyearsofbadbloodbe- tweenGundlachandStern,thisbattleisn’tjustbusiness—it’s personal. “It’s a bitter divorce,” says Neil Rue, a managing director at Pension Consulting Alliance Inc., a Portland, Oregon–basedfirmthatadvisesinstitutionalinvestors. Thisisastoryrootedinoldgrudgesovermoneyandthepe- rennialtensionbetweenthesuitsintheexecutivesuiteandthe investmentwizardsonthetradingfloor.ItbeginsinJuly2001, whenSocieteGeneralepushedintoU.S.assetmanagementby acquiringTCW.OriginallyknownasTrustCompanyoftheWest, thefirmwentontoinvestmoneyforinstitutionssuchastheCal- iforniaStateTeachers’RetirementSystemandCornellUniver- sityandcountedHenryKissingerandEnronCorp.founder KennethLayasdirectorsinthe1980sand1990s.TheFrench bankawardedfreshequityinTCWtoitsseniorofficersand skippedoverthemoneymanagers,formerTCWexecutivessay. ThemovedilutedGundlach’sexistingstake,andthemoney managersaysheneverforgotthesnub. Paris-basedSocGen,a146-year-oldretailbankthathadlong laggedbehindrivalsinmergersadviceandunderwriting,became oneoftheworld’stopissuersofequityderivativesafter2000. TheninJanuary2008,asthecreditcrisiswaspickingupmomen- tum,SocGendisclosedthatithadlost€4.9billionunwindingun- authorizedbetsthattraderJeromeKervielhadmadeonstock indexfutures.Kerviel,33,maintainsheactedwiththeknowledge ofhissupervisorsandhasn’tbeenaccusedofpersonallyprofiting fromthetrades.Followingthescandal,CEODanielBoutonre- signedandhissuccessor,FredericOudea,movedtospinofffar- flungassetmanagementunitssuchasTCW. For Gundlach, who ran his investment team as a quasi- autonomousfiefdomandwhohaspersonallyearned$134mil- lion since 2005, Oudea’s course augured the end of his independence. Last September, the money manager, who spe- cializes in mortgage-backed securities, threatened to lead a mass defection of his 65-member investment team to his own firm, Stern wrote in January in an e-mail to Bloomberg News. “This would have had an adverse and negative reaction on our fixed-income business,” said Stern, who declined to comment further. Gundlach denies the allegation, saying he wanted to protect his TCW business, not quit. OnthesamedayinDecemberthatGundlachwassackedfor allegedlystealingclientinformation,TCWannounceditwasac- quiringMetropolitanWestAssetManagementLLC,acrosstown rival,totakeoverhisfunds. On a conference call with TCW’s 700 employees on Dec. 7, Robert Day, the firm’s founder and chair- man, said terminating Gundlach was necessary for the good of the company, according to a recording of the meeting. JasonLaVeris/FilmMagic GUNDLACH’S LIEUTENANTSCALL HIM‘THEGODFATHER’ FORTHELOYALTYHE COMMANDSANDTHE STREAMOFFEESHE BRINGSIN.‘I’MTHEGUY WHOMAKESITRAIN INTHEDESERT,’THE MONEYMANAGERSAYS. Marc Stern, CEO of TCW, fired Gundlach.
- 4. april 2010 bloombergmarkets 51 Day, 66, had been a father figure to Gundlach early in the money manager’s career. Now, three days after Gundlach’s termina- tion, Day likened his one-time protege to a soldier who rocked George Washington’s boat as it crossed the Delaware River in 1776. “Your choices are very simple,” Day told his employees. “You shoot the soldier and throw him overboard, otherwise everybody in the boat goes down.” Day declined to comment for this article. Hours after he was fired, Gundlach returned to a private of- fice he used in Santa Monica to find the lock on the front door removed. Inside, he says, about seven private investigators hired by TCW were searching through his desk and had broken open his filing cabinets. Gundlach says he protested the intru- sion and one of the investigators told him to leave the office im- mediately. The TCW men discovered marijuana stored in jars, drug paraphernalia, pornographic DVDs and a dozen “sexual devices,” according to the company’s lawsuit. TCW alleges that Gundlach’s possession of the material at an office it considered part of the firm’s workplace violated its employment rules and showed he wasn’t fit to manage money for clients or supervise employees as the chief investment officer of the company. undlach says the drugs, porn and sex toys are relics from a closed chapter in his life and were stored in a crate. He says TCW disclosed their existence to damage his reputation with investors. “It’s ancient stuff, like a box in an at- tic,” he says. “But they figured, ‘Let’s try and destroy the guy and throw some slander and sleaze on him.’” Gundlach,whofavorscustom-made Brionisuits,isequallyathomeopiningonthenuancesofthe yieldcurveorthegeometryofPietMondrian’sgridlikepaintings, whichhecollects.He’salsobluntandpronetopoundingtheta- blewhenmakingapoint.Onthetradingfloor,Gundlachopenly chastisesco-workersformistakesoreventheirchoiceofnecktie, formercolleaguessay.“He’saprincipledandhonestguy,but sometimeshegetshimselfintotroublebyspeakinghismind withoutanysugarcoating,”saysFrederick Horton,amoneymanageratTCWfrom 1993to2005andnowamanagingdirector inNewYorkatStrategosCapitalManage- mentLLC.“Itcancomeoffasarrogance, butIdon’tthinkhemeansitthatway;it’s justpartofhismakeup.” Investors say Gundlach’s performance backs up his bluster. His former flagship mutual fund, the TCW Total Return Bond Fund, gained 20 percent in 2009, more than double his peers’ average of 8.6 percent, according to Bloomberg data. The portfolio’s 7.8 percent annual return during the decade ended on Dec. 4 beat the 7.6 percent performance of the Pimco Total Return Fund run by Bill Gross, co–chief investment officer at Pacific Investment Management Co. in Newport Beach, California, according to Morningstar Inc. In July, the U.S. Treasury selected TCW largely on the strength of Gundlach’s record as one of nine managers for its Public-Private Investment Program to buy distressed mortgage assets. Gundlach got into the investing business by chance. He was born in 1959, in Buffalo, New York, into a German-American family of scientists. His father, Arthur, was a chemist at a paint manufacturer, and his uncle Robert Gundlach, a physicist, was the primary inventor of the modern photocopier at Xerox Corp., according to the National Inventors Hall of Fame. After graduating from Dartmouth College in New Hampshire with a bachelor’s degree in philosophy and mathematics, Gundlach AntoineAntoniol/Bloomberg Frederic Oudea, CEO of SocGen, wanted to spin off TCW. G THEMAKINGOFAFEUD •Jan.26,2009:SocieteGeneraleannouncesplanstospinoffTCW; Gundlachfearsalossofcontrol. •Sept.3:GundlachconfrontsCEOSternaboutrumorshewillbefired, spurringTCWtostartaprobeofthemoneymanager’steam. •Dec.4:TCWfiresGundlach,whoformsDoubleLineinthenexttwoweeks. •Jan.7,2010:TCWsuesGundlachforallegedlystealingtradesecretsand possessingdrugsandpornography. •Feb.10:Gundlachcountersues,accusingTCWofoustinghimtokeep millionsinfeeshe’sowed.
- 5. bloomberg markets april2010 52 enrolled in Yale University’s Ph.D. program in theoretical mathematics. His thesis, “The Probabilistic Implications of the Non-Existence of Infinity,” went against 20th-century mathe- matical canon, which is based on the assumption that infinity exists. He left Yale before completing his degree and moved to Los Angeles in 1983. Gundlach led a carefree existence on the West Coast, playing drums for a rock band called Nuisance. One evening in 1985, he watched the TV program Lifestyles of the Rich and Famous and saw that investment bankers were the top-paid professionals in America. Inspired, he flipped through the Yellow Pages, calling investment firms. Gundlach, then 26, landed a 90-day proba- tionary position as a quantitative analyst in the fixed-income unit at Trust Company of the West for $30,000 a year. ayfoundedTCWin1971.He’sthe grandsonofWilliamKeck,thefounderof SuperiorOilCo.inCoalinga,California, whichwassoldtoMobilCorp.in1984for $5.7billion.DaystructuredTCWasa confederationofsemiautonomousbou- tiquesratherthanahighlycentralized firm,saysaformerTCWexecutivewho knowshim.Dayplayedapaternalroleat TCWbybestowingautonomyandgener- ousfee-sharingagreementsonhisfavoredmoneymanagers,with somekeepingmorethanhalftherevenuetheirteamsgenerated, theexecutivesays.AtChristmas,hethrewagalaathisBeverlyHills homeforhistoppeopleandtheirfamilies.A10-piecebandand circusclownsentertainedguests. AtTCW,Gundlachsayshedevouredthe1972 classicprimer onbonds,InsidetheYieldBook,andstudieditsformulas.Heem- bracedmortgagebondsandsetouttosolvewhathecalled“the conundrumofprepaymentrisk.”Manyinvestorsavoidedmort- gagebondsinthosedaysbecausewhenever interestratesfell,borrowersrefinancedto settlehomeloanslongbeforetheirterms expired.Thatwipedoutgains,including thosebasedonhigherinterestpayments. Gundlachsaysmostmoneymanagers erredbyusingpastpatternstopredict ratemovesandprepaymentlevels.There aretoomanyvariablestomakeaccurate forecasts,fromFederalReservepolicyto thehousingmarket,hesays. Soworking with fellow money man- ager Philip Barach, Gundlach developeda systemcalled“scenarioanalysis.”Itmixed bondsofvaryingcreditriskandduration togethertoaccommodateanyratemove. Thosebondsthatunderperformedwhen ratesfellwereoffsetbyenoughwinnersto produceprofits,Gundlachsays. InMarch1989,DayagreedtoletGundlach lead his own mortgage-backed securities investment team and retain about half of its asset management fees to distribute to his people as compensation, the money manager says. By late 1992, Gundlach had attracted $10 billion in investor assets and the following June unveiled the TCW Total Return Bond Fund. Day offered Gundlach the option to buy an equity stake in TCW, which was coveted by money managers and senior execu- tives. And the chairman sat his prized pupil next to former U.S. Secretary of State Kissinger, a TCW director from 1981 to 2003, at luncheons following periodic board meetings, Gundlach says. “I was happy,” he says. “I believed.” AcrosstheAtlantic,SocieteGeneraleCEOBoutonwasmoving in2001tobecomeaglobalplayerafterlosinghisbidtoacquireri- valParibasSAtoBanqueNationaledeParisSA.SocGen,which wasprivatizedin1987following42yearsasastate-runinstitu- tion,boughtbanksintheCzechRepublicandSlovenia.InJuly 2001,SocGenpurchased51percentofTCWfor$784millionand agreedtopayabout$425milliontoincreasethestaketo70percent overfiveyears;DayandTCWretainedtheremaining30percent ofequity.Stern,alawyerwhojoinedTCWin1990afterservingas presidentoflifeinsurerSunAmericaInc.,playedakeyrolein negotiatingthedeal,saytwoformerTCWmoneymanagers. SocGengrantednewequitystakesinTCWonlytosenioroper atingexecutives,themoneymanagerssay. Gundlach says he was furious because the issuance of new equity diluted his existing stake by a quarter, decreasing its value by $15 million. Stern had violated a pledge to never diminish his holding, Gundlach says. “That’s absurd,” TCW spokeswoman Erin Freeman says. “Soci- ete Generale’s acquisition of TCW did in- volve some dilution, and it was the same for each shareholder commensurate with the shares owned.” In September 2005, the TCW board elevated Gundlach to chief investment officer as part of a move to bring the next generation to power at the firm. Day re- linquished his CEO title to Robert Beyer, TimRue D FILE:tcwstk7 SIZE:19p6 x 12p7 SECTIONS:feature DESIGNER:ev NOTES: Figures are through Dec. 31, 2009. Source: Bloomberg Jeffrey Gundlach’s returns edged those of Pimco’s Bill Gross in two key performance measures. GUNDLACH TOPS GROSS 21% 14 7 1-year return 3 years 5 years TCW Total Return Bond Fund Pimco Total Return Fund Bill Gross runs the Pimco Total Return Fund.
- 6. bloomberg markets april2010 54 charlienucci then 45, a former fixed-income money manager, and Stern stepped aside as president to become vice chairman. WhentheKervielscandalhitSocGeninJanuary2008,TCWwas immediatelyaffected.Frenchregulatorsopenedaninsider-trading probeofDay,thenaSocGendirector,afterheandhisfoundation sold€148millionworthofthebank’sstockbeforeSocGenpublicly disclosedthetradinglossesonJan.24,accordingtoregulatoryrec ords.JoshPekarsky,aspokesmanforDay,saysDayusednoinside informationwithrespecttothestocksalesandiscooperatingwith theinvestigation.DayresignedfromSocGen’sboardonDec.31. udea,46,SocGen’sformerchieffinan- cialofficer,tookthehelminMay2008 withamandatetostaunchthebank’s losses.Thecarnagewouldhavebeen farworseforSocGenhadWashington failedtoexecutea$182billionbailout ofAmericanInternationalGroupInc. in2008.SocGenheld$16.5billionin credit-defaultswapsissuedbyAIG, thelargestsuchexposure,according tofilingswiththe SecuritiesandExchangeCommission.Under adealarrangedbytheFederalReserveBankofNewYork,then ledbyTimothyF.Geithner,theinsurersettledtheswapswith SocGenandother AIGtradingpartnersat100centsonthe dollar.Thedecisionspurredaccusations fromU.S.CongressmembersthatGeith- ner,whoisnowtheU.S.Treasurysecre- tary,gavethebanksa“backdoorbailout” attheexpenseoftaxpayers.(See“The [Redacted]BailoutofAIG,”page61.) Gundlach,too,wasinvestinginthe exoticinstrumentsthathelpedfuelthe crash.Underhisdirection,TCWbecame theNo. 1managerincollateralized-debt obligations,with$41.3billionunderman- agementasofSept.30,2007,accordingto datafromStandard&Poor’s.Thatincluded $35.1billionofCDOscomposedofasset- backedsecurities,includingmortgages. GundlachsayshisCDOsrotatedoutof high-riskhomeloansearlyinthecredit crisisandescapedtheworstofit. InJanuary2009,SocieteGeneralesaid TCWwouldbespunoffinastockoffering sometimeinthenextfiveyearsaspartofa reorganizationofitsassetmanagement division.Gundlachsaysheassumedthe FrenchwouldsellTCWiftherightoffer wasmade.AttheendofMay,Daysum- monedGundlachtohishometomeetwith himandStern.ThetwomentoldGundlach thatBeyer,TCW’sCEO,wasabouttoan- nouncehisretirementattheageof49and SternwastobenamedCEO.Gundlach blewup.“Iwaslike,‘No!No!Whatdoyou meanyou’recomingback?Youturnedthis overtothenextgeneration.Thisisallcom- pletelytheoppositeofwhatIwasledtoex- pect,’”Gundlachsays.Beyerdeclinedtocomment. ThetwomenofferedtomakeGundlachpresident,whichhe saysherejected.Gundlachhadneverforgottenthedilutionofhis equitystakein2001,andhesaysheaccusedSternofstealing $15 millionfromhim.Themeetingendedbadly.“Gundlach’s claimsarewithoutmerit,”TCWspokeswomanFreemansays. InlateAugust,Gundlachsays,heheardrumorsthatSternhad convenedateamoflawyerstofirehim.OnSept.3,themoney manageraskedSterntojoinhimandmembersofhisteamina conferenceroomoffthetradingfloortocleartheair.Themood wastenseasthemoneymanagerandtheCEOfacedoneanother, accordingtoanaccountbyGundlachandBarach.Gundlach askedSternwhetherhewasplanningtofirehim.Sternreplied no.GundlachaskedwhetherSocGenwasgoingtosellthefirm. Sternagainansweredno.Gundlachthenmadeanoralofferto buy51percentofTCWfor$350million.Andseveralofhistop lieutenants,includingBarachandmoneymanagerLouisLucido, voicedsupportfortheirboss.“Justsoyouknow,ifanything happenstoJeffrey,we’regoingwithhim,”Lucido,nowexecutive vicepresidentatDoubleLine,sayshetoldStern. O Tania Modic’s Western Invest- ments Capital placed money with TCW.
- 7. bloomberg markets april2010 Philip Barach, president of DoubleLine, left TCW to work with Gundlach. 56 davidstrick ternconsideredGundlach’sbehavior confrontationalandinsubordinateand cameawayconvincedthemoneyman- agernowposedathreattothewelfareof thefirm,saysaTCWexecutivefamiliar withStern’sviews.Gundlach’sinformal buyoutbidwasrejected,JacquesRipoll, head of SocGen’s global investment group, wrote in a January e-mail to BloombergNews.TCWlawyersstarted readingGundlach’se-mailsandallegedlyfoundsomeinwhichhe declaredwaronTCWandsolicitedhissubordinates’allegiance tohim,accordingtothecompany’slawsuit.TCWinvestigators monitoredandrecordedhisteam’scomputeractivity. BeginninginearlySeptember,membersofGundlach’steam allegedlystarteddownloadingdataoneveryholdingofevery clientinthemortgage-backed-securitiesgroupandcontactin- formationformorethan24,000TCWclientsfirm-wide,accord- ingtothesuit.Gundlach’sdeputiesalsoengagedacommercial real estate agent to find an office that could accommodate a 50-desktradingfloorandregisteredthename DoubleLine on Nov. 22 in Delaware, the com- plaint says.Attheendofthemonth,Sternbriefed Ripollandreceivedhisblessingtotakethenext step,theTCW executivesays. Afterlunchon Friday,Dec.4, Gundlachwasat hisdeskonthe 16thfloorwhenhe gotacallfrom MichaelCahill, TCW’sgeneral counsel,asking himtocomeup oneflighttotheex- ecutivesuite.Stern wasn’tthere.CahilltoldGundlachhisTCWcareerwasover,the moneymanagersays.TheattorneytriedtogiveGundlachalegal documentdescribinghowheandhisteamtookconfidentialin- formation.Gundlachsaysherefusedtotakeitandturnedtogo, sayinghehadtradestocomplete.Cahilltoldhimhecouldn’tre- turntohisdesk.Gundlachsaysheduckedintoastairwelland Cahillandanotherlawyerfollowedhimdown17 flightstothestreet,demandinghetakethepa- pers.TheygaveupasGundlachtookoffalong FigueroaStreetindowntownLosAngeles.Cahill declinedtocomment. Gundlachsayshedidaskdeputiestofindof- ficespaceandregisterDoubleLineincaseTCW firedhim.Hedeniesdirectingemployeestosteal clientdataoranyothertradesecrets. InthetwoweeksafterGundlachwasousted, morethan40membersofhisTCWteamquitto joinDoubleLine.BarachisnowDoubleLine’s president.OaktreeCapitalManagementLP,a LosAngelesfirmwith$67billioninassets,in- vestedanundisclosedsuminDoubleLinefora 22percentstake. InhisFeb.10answertoTCW’slawsuit, GundlachsaysDoubleLinehashiredafirmto searchcomputersbelongingtoformerTCWem- ployeesandreturnanydatathatmightbeintheir possession.“DoubleLine’sestablishmenthas notinvolvedtheuseofanyTCWinformation whatsoever,”Gundlachsays. Gundlach contends that TCW canned him largely to capture all of the fees from funds that he and Barach set up in 2007 to invest in dis- tressed mortgage-backed securities, including two with $3 billion in assets. Gundlach says the strategy returned 60 percent in 2009. Along with revenue from his other funds, Gundlach says he was personally eyeing a payday of about $500 million over the next few years. “They just wanted to broom-sweep me out and shanghai my business,” he says. S GUNDLACHINVESTED INEXOTICINSTRU- MENTSTHATHELPED FUELTHECRASH. TCWBECAMETHE NO.1MANAGEROF COLLATERALIZED-DEBT OBLIGATIONS,WITH $41.3BILLION UNDERMANAGEMENT.
- 8. 58 bloomberg markets april2010 JeffreyGundlachformedTCW’sflagshipTCWTotalReturnBond Fundin1993.TypeTGLMXUS<Equity>DES<Go>foradescription ofthefund’sassetsundermanagementandreturns.TypeMHD <Go>foralistingoffundholdings. YoucanusetheHistoricalFundAnalysisfunctiontocompare theperformanceoftheTCW TotalReturnBondFundwith thePimcoTotalReturnFund. First,typeTGLMXUS<Equity> HFA<Go>,andthenclickonthe arrowtotherightofVs.andse- lectSingleFund.Finally,enter PTTRXUS<Equity>inthefield thatappearstothefarrightof Vs.andpress<Go>tocompare thereturnsofthetwofunds,as shownatright. YoucanusetheBloomberg Law Search (BBLS) function to search for documents related to legal proceedings brought againstGundlach by TCW. Type BBLS <Go>, click on United States and then on All United States so that the search criterion appears under Selected Sources at the bottom of the screen. Tab in to the Enter Search Terms field, enter JEFFREY GUNDLACH and type <Go> 1 <Go>. To see the docket for TCW’s case against Gundlach, including a summary of pro- ceedings, click on the item titled Trust Company of the West vs. Jeffrey Gundlach et al, Docket No. BC429385. Click on 1 under Docket Proceedings to request a copy of the initial complaint filed on Jan. 7, 2010. BETHWILLIAMS TCW’sFlagshipFund To write a letter to the editor, type MAG <Go> or send an e-mail to bloombergmag@bloomberg.net. Freeman disputes that allegation. “He was let go because he stole from the company,” she says. TCW said it planned to start an equity-based compensation plan in the first quarter to retain employees. “The priority now is to concentrate on moving the business forward,” Ripoll wrote in an e‑mail on Feb. 11. TCW’sstandingwithclientshasbeenshakenbyitsfiringof Gundlach:In December,TCW saiditwouldliqui- dateits$1billion PPIPfundfordis- tressedassetsafter Gundlach’sdis- missal triggereda so-called key- man clauseand promptedtheTrea- surytofreezethe firm’sparticipation intheprogram.In- vestorspulledmore than$6billioninassetsfromtheTotalReturnfundbetweenDec.4 andFeb.8,accordingtoMorningstar.InJanuary,pensionfundsin Colorado,KansasandTexaswithdrewatotalof$1.2billionfrom TCW.“Wedecidedtoterminatebecausewe’renolongergetting theteamwesignedupfor,”saysRobertSmith,chiefinvestment officerattheKansasPublicEmployeesRetirementSystem. InvestorsinTCW’sdistressedfundsarelividthattheirholdings havebecomepawnsinthedispute,saysTaniaModic,CEOof WesternInvestmentsCapitalLLCinInclineVillage,Nevada, whichput$10millioninthefunds.ClientsaskedTCWtopermit themtomakeso-calledin-kindtransfersofassetstoanotherfirm sotheydon’thavetoliquidatethesecuritiesintocash.TCWsaysit declined,offeringanoptiontoslashfeesto1 percentonassetsand 5 percentonprofitsfrom2percentand20percent.Modicsaysit appearsthatTCWwouldratheralienateitsclientsthanseethem transfertheirassetstoDoubleLine,whichiswhatshewantstodo. “Somethinghappenedtogettheirpantiesinatwistbecausetheir behaviorisbizarre,”Modicsays.“Thisshowsgrossdisrespectfor investors.”FreemansaysTCWistreatingitsinvestorsfairly. Gundlachisalsofeelingthefallout.TCWisseekingatleast $200millionindamagesfromDoubleLineandwantsittorelin- quishitsrevenue.ThelawsuithashinderedDoubleLinefrom raisingassetsbeyondthe$3billionbroughtinsofar,Gundlach says.PensionconsultantRuesayshe’sadvisedinstitutionalin- vestorsnottocommitcapitaltoDoubleLineuntilthelitigation playsout. AtDoubleLine’soffices,locatedafewblocksfromTCW, Gundlachstridespastelectriciansworkingonhishalf-completed trading floor and points to a spot where he plans to blow a hole in the ceiling and install a minimalist sculpture by the late artist Donald Judd. Gundlach, after more than two decades managing money, is now starting over. This time around, with a lawsuit threatening his new firm, he may find that repairing a career can be harder than building one. ≤ Edward Robinson is a senior writer at Bloomberg Markets in San Francisco. edrobinson@bloomberg.net Sree Vidya Bhaktavatsalam covers mutual funds at Bloomberg News in Boston. sbhaktavatsa@bloomberg.net TCWINVESTORSARE LIVIDTHATTHEIR HOLDINGSAREPAWNS INTHEDISPUTE.‘SOME- THINGHAPPENEDTO GETTHEIRPANTIESIN ATWIST,’TANIAMODIC SAYS.‘THISSHOWS GROSSDISRESPECT FORINVESTORS.’