Jeffrey Gundlach

TCW fights to keep damning evidence from view

July 23, 2011: 3:40 PM ET

A memo has come to light that seems to contradict an important claim in TCW's case against its former star bond fund manager Jeffrey Gundlach.

FORTUNE -- In the run up to the courtroom battle royale between money management firm Trust Company of the West and bond investing guru Jeffrey Gundlach, TCW has fought to keep evidence out of the case that could be a "smoking gun" in the trial that begins on Monday.

Fortune has learned that a memo and deposition offer evidence that executives at TCW, a division of Societe Generale, were thinking about firing Gundlach as early as August 2009. If this is the case, it contradicts the firm's allegations that it fired Gundlach only after discovering that he stole company information to start his own firm in December of that year. "TCW terminated [Gundlach] because they discovered that he had stolen, he and his folks had stolen, literally 9 million pages of trade secrets and confidential and proprietary information," Susan Estrich, a lawyer representing TCW, told Bloomberg on Friday.

But there is "evidence to suggest that TCW did not conclude until late November 2009" that Gundlach and his alleged co-conspirators had been stealing information from TCW, Judge Carl West, the judge presiding over the case, wrote in a motion this summer.

The complicated battle between TCW and Gundlach (chronicled by Fortune in Firing the $70 billion man) began with the termination of Gundlach, the firm's star money manager, in December of 2009. TCW then sued Gundlach in January, claiming that he conspired with employees to steal client information and technology from TCW in order to form their own firm. TCW seeks $200 million in damages and is accusing Gundlach and three other former employees of civil conspiracy, theft of trade secrets, and unfair competition.

Gundlach, who did form the $13 billion DoubleLine soon after leaving TCW, countersued. He claimed that TCW not only tried to tarnish his reputation by adding salacious material about him in its lawsuit, but that the firm actually fired him so it wouldn't have to pay he and his team between $600 million and $1.25 billion fees. Gundlach is accusing TCW of breach of contract and is seeking $1.25 billion.

A smoking gun?

The information that TCW is fighting so hard to protect is the deposition of Michael Conn, TCW's head of corporate strategy, along with notes that Conn took during an August 27, 2009 meeting. Court documents show that TCW top officers – including Conn, TCW president Marc Stern and three senior executives – discussed at the meeting what would happen if they fired Gundlach.

TCW says that during the meeting legal advice was sought from TCW general counsel Michael Cahill (who attended by phone), which would protect the discussion under attorney-client privilege.

But Judge West disagreed. "The subject of the comments that TCW seeks to redact, and that TCW claims are privileged, do not reflect legal advice of counsel, but rather an apparent justification or explanation of a future act, i.e., the termination of Mr. Gundlach," he wrote in a Motion for Reconsideration, dated Feb 10, 2011.

When TCW asked the court to reconsider its decision to allow the Conn notes as evidence, it seemed to admit that firing Gundlach was discussed in that August 2009 meeting. In fact, TCW may have even been drafting some sort of press release announcing Gundlach's termination.

"The [Conn] notes reflect Mr. Cahill's comments and suggestions how a press release on that topic, or, more generally, how TCW would communicate publicly were it the cause that it later determined to terminate Gundlach's employment," TCW wrote in its motion for consideration dated February 15, 2011. "A lawyer's comment about how to describe an employment action likely to lead to future litigation to his clients is both attorney-client privileged communication and work product."

Other damning passages from TCW's own February 15 motion for reconsideration include:

"The only remaining issue is whether Mr. Cahill's privileged advice to his client on TCW's consideration of terminating Mr. Gundlach's employment retains its privileged status when written down by a TCW employee in the context of a meeting attended only by TCW senior executives."

And:

"The notes reflect Mr. Conn's scribbled notations of legal advice and work product from his general counsel. They capture, albeit in a fragmentary way, Mr. Cahill "thinking out loud." The context is provided only insofar as to establish the point of departure was "any legal issues" around Mr. Gundlach's termination of employment."

TCW reiterates that position today. "We have argued, and continue to believe, that the notes in question were protected by attorney client privilege," TCW's lawyer Susan Estrich told Fortune in an email. She adds that the notes actually support TCW's case because they show that executives had "concerns not about Mr. Gundlach's performance, but his loyalty to the company and his ability to be part of the TCW team."  She adds that TCW CEO Marc Stern was determined to try to keep Mr. Gundlach, "notwithstanding these serious concerns."

Lew Phelps, a spokesman for Gundlach's new firm DoubleLine Capital declined to comment. Phelps said, "We will present our evidence at trial."

Jury selection for the trial begins on Monday July 25.


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