A few days ago I received an email letter from Marc I. Stern, the Chief Executive Officer of The TCW Group, Inc. In it, Stern announced what will certainly be a contentious and bitterly-disputed lawsuit against Jeffrey Gundlach, the former star portfolio manager of TCW Total Return Bond Fund (TGLMX) and his new company, DoubleLine LLC.
I no longer have a stake in this dispute because our firm sold shares in TGLMX for clients shortly after the announcement of Gundlach’s departure. I also sold shares I held personally. And, it appears that many other shareholders have taken the same step as the fund’s assets are down by nearly $6 billion.
For more on this see my previous posts, Big changes at TCW mutual fund group and TCW: Assets down by $3.5 billion and the one with a literary and historical reference, Apres Gundlach, le deluge [by the way, if my wit escapes you, no worries. Just ask me about it in the comments or send an email].
This piece by Eleanor Laise at the Wall Street Journal gives the detail on the messy breakup that is underway [emphasis added]:
Ousted Gundlach Angled for TCW’s Top Job (Wall Street Journal, Dec. 7, 2009, Eleanor Laise)
A power struggle at one of the nation’s biggest investment firms left its star manager, who oversaw more than $60 billion, out in the cold.
TCW Group ousted its chief investment officer, Jeffrey Gundlach, and announced a deal to buy a rival money manager after what the firm describes as threats by Mr. Gundlach to leave and take some key staffers with him.
Mr. Gundlach, who is widely regarded as a savvy bond manager, successfully navigated the financial crisis and has posted big returns this year on a timely bet on battered mortgages.
Now TCW is scrambling to reassure clients, many of whom invested with the Los Angeles-based firm to get Mr. Gundlach’s expertise. Several other members of TCW’s fixed-income group resigned on Saturday.
When I read this account, I got the sense that the TCW brain trust panicked. I have no inside knowledge of that, but my gut tells me they did.
Disaster
The Wall Street Journal continues:
Mr. Gundlach says he made a bid for TCW in September but never received a response. As for leading the firm, he says, “if I was going to buy the firm, I was going to be the CEO.”
Amid rumors Mr. Gundlach was interviewing at other firms, concern grew at TCW that the money manager would walk out the door and take key talent with him…
So, the senior management at TCW did not want to give Gundlach the kind of deal he wanted and then, it appears, they panicked when it seemed as if he might leave. At that point, they terminated his employment and brought in a new portfolio management team.
Now that he has left, many shareholders are predictably voting with their feet. The new portfolio management team is a competent group, but Gundlach and his team were clearly the attraction. Assets at TGLMX have fallen by nearly $6 billion or so from the peak under Gundlach. No doubt assets are departing from some of the separate accounts Gundlach and his team managed too.
Doubling down on disaster
The departure and loss of assets was bad enough, but did management quietly work to regain trust and rebuld the company? Nope. They decided to double down and sue Gundlach:
Morningstar reported on the allegations behind the lawsuit:
The wake of TCW’s dismissal of Jeffrey Gundlach turned rockier Thursday, with TCW filing a lawsuit against its former CIO and his new firm, DoubleLine, alleging breach of fiduciary duty, unfair competition, and misappropriation of trade secrets, among other complaints…
That things got to this point is an indication of how badly-managed this whole affair has been. Jeffrey Gundlach was clearly the star portfolio manager at TCW and the personality that many of its customers identified as the one who got them the solid returns that TCW Total Return Bond Fund (TGLMX) had earned. But, TCW’s management team seems to have completely misunderstood Gundlach’s relationship with the fund’s shareholders.
Once management realized that a serious public relations problem was happening, did they act decisively to stop it? Nope. Management doubled down once more by making highly inflammatory claims as part of the allegations in the lawsuit:
Pot & pornography?
Morningstar continues:
…Additionally, the complaint said that on the day of Gundlach’s dismissal, it discovered inappropriate contraband in Gundlach’s TCW offices (one located in downtown L.A. and one in Santa Monica), including marijuana, drug paraphernalia, and pornography…
Good grief. Obviously, Gundlach denies these allegations and I suppose he is considering his own lawsuit. But, how do these allegations reflect on TCW’s CEO Marc Stern? If Gundlach was doing drugs [I don't believe he was, I'm just making a hypothetical case] then did or did not Stern know about it during Gundlach’s tenure at the firm? If he did know and shined it on, that’s bad. And, if he didn’t know, that’s bad too.
Adult supervision anyone?
TGLMX has a board of directors. If I were a member of the board of directors, I would want to know which of the two scenarios about the alleged drug use mentioned above is correct. I would also want to know what the heck is going on? Why is this lawsuit going forward? Isn’t there some way to stop this mess?
Here are the board members as listed by Pensions & Investments. If you are a shareholder, then they are the ones representing you:
Patrick C. Haden, the independent chairman of TCW Fund’s nine-member board, did not return phone calls or e-mails seeking comment. Matthew K. Fong, another independent director, in an e-mail response, said all requests for comment were being forwarded to Mr. Haden.
The TCW board has four other independent directors, none of whom responded immediately to e-mailed queries. Three of them "” Samuel P. Bell, Richard W. Call and Charles A. Parker "” are listed as private investors. The fourth, John A. Gavin, is listed as founder and chairman of Gamma Holdings, an international capital consulting firm.
The remaining three directors are TCW executives "” CEO and Chairman Marc I. Stern, Charles W. Baldiswieler, group managing director, and Thomas E. Larkin, vice chairman…
Sounds as though none of the directors is stepping up here and taking the lead in answering questions. In a way, I don’t blame them because it is a mess. But, they are supposed to provide adult supervision for the fund and its shareholders.
Who represents the shareholders of TGLMX?
When it comes to a conflict between the fund’s investment manager (TCW) and the fund’s shareholders, the board is supposed to act in the interests of the shareholders. So far, I have seen no visible indication that they are doing so. I hope I’m wrong.
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Read the last sentence of the Morningstar article quoted and referred to above where Mr. Gundlach blames that planting of the contraband on the cleaning crew. Hilariously lame !
You can’t possibly advise clients without seeing the whole picture here. Whether this was managed well or not at TCW, this guy is obviously troubled and misdirected…and maybe deviant? Most portfolio managers go through patches of good performance. Don’t forget that this is the manager who also blew up a mortgage REIT and the most CDOs in the world, leaving his investors completely wiped out. That billions of dollars found his mutual fund with blind infatuation and no other place to hide in 2009 was lucky for him and would have been fleeting any way. As for the board of directors, so far they have stayed with a team that has a five-star rating, just like Gundlach did. What is so lame about that?
Bill Keene i agree totally with all that you write. My “lame” reference was directed at Gundlach’s lame reply in the Morningstar article to the charges that contraband was discovered in his offices on the day he was fired. Blaming the cleaning staff for leaving the various items of contraband behind is so obviously ludicrous. Its the equivalent of the world famous “the dog ate my homework” excuse. Its simply implausible. Two separate offices in two separate office buildings. Two separate cleaning staffs, and we’re told to believe that each crew coincidently left behind 30+ pieces of pornographic material in each office. It does add up. Why didn’t KURT BROUWER identify and question this fairy tale. Read it for yourself here: http://news.morningstar.com/articlenet/article.aspx?id=321532&pgid=fundarticle
Good writeup and good points. Had to laugh at the contraband. This is LA, but even in middle America you’re likely to find salacious materials in executive offices. Who cares if Mr. Gundlach had that stuff in his office as long as he’s doing his job? And what about TCW’s responsibility to its remaining clients? How is the mud slinging and expensive lawyering going to benefit them?
BTW, I still have money in a TCW fund. They still have experienced portfolio managers, just not the really good ones they lost. Some of them left, not out of loyalty to Gundlach but because TCW doesn’t get it. They treated long-term employees who had given all to the company like crap, interrogating them for hours, escorting them out without a chance to grab their belongings, etc. Why stay with a company that’s more interested in legal posing than in employee morale? Once it became clear that Gundlach had hit the ground running and actually had backing, it was a choice of staying with a stagnant and disfunctional company, or taking a chance for a golden opportunity with a company that has momentum, talent, and connections.
Its awfully hard to swallow that TCW treated long-term employees “like crap” when G was paid $40 million last year alone and $135 million over the past five. Where does one sign up for crap like that? Presumably the others were all well compensated too or they wouldn’t have followed him? However, if they weren’t well comped, was that because their leader G underpaid them? It became clear that G “hit the ground running” only because he and team stole the systems and operational infrastructure necessary to “hit the ground running”. Backing? Watch out for cold feet. TCW stagnant you say? TCW’s preemptive termination of G and simultaneous purchase of MW doesn’t sound like a stagnant company. It sounds like a company proactively shaking things up. Who cares about that stuff in his office you say? People who care about his judgement and fiduciary obligations. Karolein writes: “This is LA, but even in middle America you're likely to find salacious materials in executive offices.” Read paragraph #12 in the complaint again. Are you really so casually suggesting that we’re “likely to find” 12 of [insert name of salacious item], 37 of [insert name of salacious item] and 34 of [insert name of salacious item] in offices throughout America??? Do you really expect anyone to believe that?
Not all of them worked under Gundlach. Not everyone was well-paid. Employees of more than 15 years who did nothing but what they were trained to do were interrogated for hours and walked out without even a chance to grab their personal belongings.
Caprice:: I haven’t seen any of what you write reported anywhere. If they weren’t paid well, they should have taken it up with G. He was the CIO, President and a Board Member. While you’re moralizing, what say you about long term employees illicitly copying systems, databases, analytics and the like?
Whether TCW’s allegations are true is yet to be determined. If you spend time in downtown LA, you’ll hear a little of both sides. Business is business, but some people expect more than money from a job. Even if a few are proven to have done something wrong, others were treated like collateral damage.
Caprice: And readers have no way of knowing if your assertions and representations are true or even accurate. Essentially By your own admission, its downtown LA runor mongering.
Obviously the passage of time will reveal the facts in this case but to Bill Keene’s point about “patches of good performance”, how does a decade as the best performing bond fund qualify as a patch? Ten years seems like more than a patch to me.
All I can say —- Jeffrey Gundlach is the best!!!!!
John and Bill - all I can say is my wife actually worked for Gundlach for almost 19 years as his assistant. Once this is all said and done and her story is told (she actually stayed for a few weeks after he was ousted hoping to get her year end bonus until they drove her out emotionally) it will not be looking good for how TCW treats their long time dedicated employees.
Until then -
Michael:. The passage of time could validate the allegations. Is there any possobility its a fairy tale?
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