In court, ‘bond king’ Gundlach bristles at TCW lawyer over fund risk comment

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Attorneys for L.A. money management giant TCW Group Inc. briefly took their legal battle with former executive Jeffrey Gundlach onto new turf Wednesday, suggesting to jurors that the star bond fund manager incurred excessive risk to produce stellar portfolio returns.

The inference by TCW’s lead attorney, John Quinn, drew a sharp response from Gundlach in court.

“With respect, you don’t know what you’re talking about,” he told Quinn.

Gundlach, 51, was fired by TCW in December 2009 after 24 years at the firm. A month later TCW sued him and three lieutenants, alleging that they conspired against the company to steal its trade secrets and form a rival money manager, DoubleLine Capital.

Gundlach then countersued, accusing TCW of firing him to cheat him out of a huge chunk of promised income. Jurors in the civil trial are hearing both complaints in Los Angeles County Superior Court.

Gundlach, who had been TCW’s chief investment officer, has built a reputation as one of the country’s top investors in mortgage-backed bonds. His DoubleLine Total Return Bond mutual fund, which he launched in April 2010, has surged 25.5% since then, far exceeding all of its major rival funds. The portfolio has swelled to $9.5 billion in assets.

Barron’s magazine this year crowned Gundlach ‘king of bonds.’

Quinn, questioning Gundlach during his fourth day on the stand, suggested that the fund manager had “turbocharged” his DoubleLine portfolio by using high-risk types of bonds and so-called derivative securities. Quinn didn’t indicate to jurors why that assertion was relevant to TCW’s case alleging data theft and breach of fiduciary duty.

“These are much more complex” securities than straightforward mortgage bonds, Quinn said of some of DoubleLine’s holdings.

“No -- they’re just different securities,” Gundlach said. “You either understand them or you don’t.”

Gundlach, a math whiz, has said that his expertise with mortgage bonds stems from his ability to perceive the relative risks and opportunities in individual securities better than the rest of Wall Street. He has referred to himself in interviews as “amazingly brilliant analytically.”

Quinn also raised questions about Gundlach’s role in TCW’s management of “collateralized debt obligations.” CDOs were a notorious example of Wall Street alchemy during the housing boom, seeming to turn bonds backed by subprime mortgages into AAA-rated securities. When the housing market collapsed, CDOs were among the biggest casualties.

TCW under Gundlach became the world’s largest manager of CDOs, which typically were bought by institutional investors such as pension funds.

“You managed billions of dollars in CDOs that had subprime mortgages,” Quinn told Gundlach. But Gundlach said the CDO portfolios were managed by a deputy, Louis Lucido, who now is an executive at DoubleLine.

Quinn then asked Gundlach whether he had no responsibility for CDOs when he was at TCW. “I’m not saying I had no responsibility,” Gundlach said. “I’m saying I didn’t do day-to-day trading.”

Reiterating a comment he has made in the past about losses in CDOs, Gundlach said investors in the securities “knew what they signed up for” in terms of the potential risk.

Gundlach completed his testimony on Wednesday. TCW Chief Executive Marc Stern, who fired Gundlach in 2009, may be called to the stand on Thursday.

-- Tom Petruno

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