Ousted bond manager fights back

Updated 1/12/2010

Stung by a lawsuit from his former employer that reads like a soap opera script, star bond fund manager Jeffrey Gundlach responded Monday to some of TCW’s allegations in a letter to clients and business associates. And on Tuesday, Gundlach followed up that missive with news about the mutual funds he hopes to launch at his new firm, DoubleLine Capital.

As I wrote in a Saturday post about the dispute, TCW says it fired Gundlach after discovering he was planning to start a rival firm, taking with him client data and other confidential TCW documents. The lawsuit also describes Gundlach as erratic and egotistical, and says the company found marijuana and pornography in his office the day they fired him – further evidence, the company says, that Gundlach was unfit to manage other people’s money. Gundlach last week, in a statement, called TCW's claims "baseless" and accused the firm of making "false and hyperbolic personal attacks" that were "a gratuitous and irrelevant gutter tactic."

Gundlach's Monday letter includes more details about his version of the story. Gundlach says that he had been concerned about TCW’s future since a year ago, when TCW’s owner, French bank Société Générale, indicated it wanted out of the money management business. He says he “explored avenues" to purchase the business himself but was rebuffed. He says he had begun to consider other options, adding that if he were to leave TCW, he had expected it would be a negotiated transaction. Though he doesn’t directly address TCW’s accusations of theft, he says TCW's lawsuit contains "innuendoes, smears and gross distortions."

Gundlach calls the pot-and-porn details in TCW’s lawsuit disturbing and an invasion of privacy. He says TCW not only searched locked drawers in his office in the company’s downtown Los Angeles headquarters but also a “small personal office” he kept in Santa Monica. Gundlach says he paid the rent and expenses for that Santa Monica office himself and had “every expectation of privacy in these spaces, which stored vestiges of closed chapters of my life.” (Last week Morningstar reported that Gundlach "stated that the contraband discovered by TCW did not belong to him and may have been left by a cleaning crew." I asked Gundlach's office to elaborate on the apparent discrepancy between the two accounts, but I haven't heard back. I'll update this post if and when I do.) Gundlach writes that TCW refused to allow him to collect his possessions, and the disclosure of them is a “transparent attempt to embarrass me and harm my business.”

A TCW spokeswoman responded Monday evening, "We believe the admissions in Mr. Gundlach's letter and the facts in the complaint speak for themselves."

Gundlach is moving quickly to get his new firm up and running. He writes in the letter that he and his employees – more than 40 people followed him from TCW to DoubleLine – have moved into a new Los Angeles office, put in place four bond teams and set up client accounts. “I assure you that I remain the worthy fiduciary in whom you have entrusted your investments over many years,” he writes. “Together with my team, I navigated the treacherous credit crisis markets and protected and grew your principal while others failed.” Gundlach, who had the title of chief investment officer at TCW, oversaw billions of investments at the firm, starting with the onetime $12 billion TCW Total Return Bond fund (TGLMX). That fund's assets have dropped to $6 billion since Gundlach's departure.

The company’s Securities and Exchange Commission registration, filed Tuesday, reveals that the firm plans to offer three no-load funds: DoubleLine Total Return Bond, Core Fixed Income and Emerging Markets Income.

Total Return will invest more than half its assets in mortgage-backed securities and is co-managed by Gundlach; Core Fixed Income, managed by Gundlach alone, is a diversified fund that will invest in all kinds of bonds. The expense ratio for those funds is either 0.49% or 0.74% depending on the class of shares -- fees that are slightly higher than the 0.44% and 0.73% at Gundlach’s former TCW funds.

Emerging Markets Income will invest in corporate and government bonds in developing countries; its expense ratios are .95% and 1.2%. That fund will be managed by Luz Padilla, former head of TCW Emerging Markets Income (TGEIX). "N" class fund shares will have a $2,000 minimum investment, or $500 for an IRA.

If Gundlach is worried that TCW's allegations might dissuade people from trusting DoubleLine with their money, those concerns are not unfounded. Customers of Gundlach’s three funds at TCW – investors ranging from pension funds to individuals -- are evaluating what to do with their money. People like Michael Rosen, chief investment officer of Angeles Investment Advisors, haven’t decided yet what they’re going to do. Rosen, whose clients have about $100 million in TCW funds, said Monday he’s talked to folks from both DoubleLine and TCW, which bought the highly respected and experienced Metropolitan West Asset Management to take over TCW’s fixed income funds. If the story were simply that Gundlach had left, the decision to pull money out of TCW would be relatively simple, Rosen said. Bringing MetWest managers into the firm makes the decision tougher; his clients also have money with MetWest.

Morningstar’s director of mutual fund research, Russel Kinnel, noted Monday that the personal drama could very well keep customers away from both TCW and DoubleLine. “It probably just means more money to Newport Beach and Bill Gross,” Kinnel said, referring to Pimco, the investment firm founded by bond king Gross. “Pimco’s been raking it in already," said Kinnel, "and now they’re going to rake it in even more.”

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