Sex, Drugs, and Mutual Funds

TCW strikes back at former fund manager Jeffrey Gundlach in a lawsuit.

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A lawsuit filed by fund provider TCW charges that a an "erratic" and "openly confrontational" Jeffrey Gundlach—the firm's former star manager—helped steal nine million pages worth of information, lied to coworkers, and was found in possession of marijuana and pornography.

The lawsuit, which was filed last week, is TCW's boldest counterstrike to date against Gundlach, who was fired on December 4. The suit spares no details as it paints a surprising picture of Gundlach's alleged life of intricate conspiracies, surreptitious downloads, and personal vices. In doing so, it has immersed the normally buttoned-down mutual fund industry in the type of drugs, sex, and business scandal more commonly associated with tabloid fodder.

[See TCW Launches Emerging-Markets Fund.]

At issue in the lawsuit is Gundlach's establishment of DoubleLine, a money management firm that has lured at least 40 employees and a sizeable number of client accounts away from California-based TCW. Gundlach announced the formation of DoubleLine just 10 days after his ouster, and TCW charges that this "seemingly miraculous" timeline is the result of months of plotting: "In fact, DoubleLine is entirely the product of Defendants' theft of TCW property, fraud and breach of fiduciary duty."

Along with Gundlach, the suit also lists as defendants DoubleLine, three other former TCW employees, and 50 unnamed individuals. One of the more serious charges is that a number of the defendants downloaded and stored away information about 24,000 TCW contacts. "[The] total amount of stolen information, if printed out, would total approximately 9 million pages, or 3,700 banker boxes of documents," according to the suit.

The suit also claims that Gundlach, as far back as spring 2009, began sowing the seeds for his break from TCW by undermining and disparaging the company's leadership. Meanwhile, the suit charges that the defendants even began searching for physical space for DoubleLine well before Gundlach was fired. Specifically, it says that in late September, defendant Barbara VanEvery, at the time a TCW employee, signed a contract with a commercial real estate agent "tasking him with finding a 24,000 square foot commercial trading space" and that she "hired architects to design plans for a 50-desk trading floor." It also alleges that Cris Santa Ana, also a former TCW worker, had downloaded proprietary information on 37 separate days by the time that he was fired along with Gundlach in early December. Santa Ana is currently DoubleLine's chief operating officer.

In laying out a web of secret meetings and internal intrigue, the suit directs its harshest words at Gundlach, the iconic bond manager who had helmed TCW's flagship Total Return Fund. In particular, the suit claims that he lied to TCW employees in trying to convince them to join DoubleLine and that he sent E-mails in which he declared a "war" on TCW.

But that's just the beginning. In some of its biggest dramatic flourishes, the suit portrays Gundlach as an egomaniac who referred to himself as "The Godfather" and "The Pope" and "solicited TCW employees to pledge their allegiance to him." The suit also alleges that TCW discovered a collection of inappropriate materials in Gundlach's two former offices.

"On December 4, 2009, TCW discovered that Gundlach had hid containers of marijuana and related paraphernalia in both his TCW offices. TCW discovered glass jars, plastic containers and baggies containing leafy green substances and seeds, some explicitly labeled marijuana, as well as three tin foil tubes, the ends of two of which were burnt," the suit says. "On that same day, TCW discovered in Gundlach's offices 12 sexual devices, 34 hardcore pornographic magazines, 17 hardcore sexually explicit DVDs and 19 hardcore sexually explicit videocassettes."

Gundlach has denied all of the charges. In an interview with Morningstar, he called them "shabby, groundless, and pointless, serving no purpose but an attempt to embarrass me and [DoubleLine]."

John Frank, the managing principal for Oaktree Capital Management, also expressed support for Gundlach. Oaktree is providing DoubleLine with infrastructure and staff and has a minority interest in the nascent company. "My speculation is that with the outflow of assets that [TCW has] had with the departure of so many key personnel, they thought a lawsuit was the only response they could make to try to preserve their franchise," Frank told U.S. News. "This whole thing is just a seedy sideshow."