Jeffrey Gundlach once accused his former employer, TCW Group Inc., of diluting his stake in the company. Now the billionaire founder of DoubleLine Capital is battling accusations that he did something similar to executives who helped him build his $96 billion bond giant.
Several former limited partners and related trusts allege in legal filings that the firm and its founder used a lowball estimate to value their shares when they departed and redistributed some of the equity to himself, according to court papers.
DoubleLine and Gundlach, 63, denied any wrongdoing and won a private arbitration proceeding in April of last year, but the former partners are asking the Delaware Chancery court to throw out that decision. A hearing has been set for October.
The former DoubleLine partners, who first raised the issue several years ago, include Joel Damiani, Susan Nichols Steinbach and Philip Barach. They were joined by three of Barach’s family members acting as trustees, as well as Mustapha Baha — whose wife, Bonnie, died in 2016 and was also a partner.
The former partners contended in a January filing that the panel deprived them of the right to a fair hearing because they weren’t allowed to present what they say is key evidence — some of the firm’s communications with its valuators. The communications could have shown that DoubleLine interfered to deflate the evaluations, leaving them “tainted,” the executives claimed. The company did this to reduce the amount of money they had to pay the execs when they left their jobs, the document said.
DoubleLine told the court in a March filing that it had produced valuation reports and almost 500 pages of communications with the valuation firm, and the former executives had no basis for speculating that more documents would have unearthed a “smoking gun.” The firm asked the court to uphold the arbitrators’ opinion, and to award DoubleLine attorneys’ fees.
“The arbitration panel unanimously resolved this matter in our favor long ago,” DoubleLine spokesperson Loren Fleckenstein said in an email message, adding that the firm is just waiting for the court to “formalize the panel’s findings.”
Lawyers representing the former partners and related trusts didn’t respond to messages seeking comment.
The drawn-out litigation is one of several recent spats among mega alternative asset managers.
Hedge fund giant Two Sigma Investments revealed in a regulatory filing earlier this year that disagreements between its founders, John Overdeck and David Siegel, pose a material risk to investors. At private equity shop Blue Owl Capital Inc., months-long tensions between co-founders prompted the firm to re-brand its business units in a public show of unity — including one unit that had been named after one of the co-founder’s children.
Gundlach — who founded DoubleLine in 2009 — has also tangled with his former employer, TCW, which accused him of stealing trade secrets after his ouster. Gundlach, in turn, accused the company of reneging on a vow not to dilute his stake in the firm. In September 2011, a jury awarded him and three colleagues $66.7 million for unpaid wages, though it also found he’d misappropriated trade secrets.
The star bond fund manager and TCW ultimately reached a confidential settlement after the jury verdict and ended the conflict behind closed doors.
The DoubleLine dispute took a formal turn on Dec. 31, 2019, when Baha, on behalf of the Baha Trust, filed a demand for arbitration to challenge the decline of the trust’s equity interest in DoubleLine. It also focused on the drop in valuation of those shares and distributions of those shares to Gundlach to compensate for DoubleLine’s administrative and operational fees. His late wife was a portfolio manager and head of global developed credit.
Barach, Damiani and Steinbach filed a similar demand a year later, making essentially the same claims as Baha and being represented by the same counsel. The two cases were consolidated.
Damiani was a portfolio manager who joined DoubleLine in 2009 and left in September 2020, according to his LinkedIn profile. Barach also joined DoubleLine at its inception and retired in April 2020. Steinbach was a mutual funds treasurer, and it couldn’t be determined when she left the firm.
The group sought damages for breach of fiduciary duty, breach of contract, and breach of the implied covenant of good faith and fair dealing, according to court documents. They claimed that DoubleLine’s valuators found the firm was worth three times earnings, while public comparable companies were valued at more than 20 times earnings.
DoubleLine said in a March filing that the former partners were entitled only to market value of their shares if the firm exercised its right to repurchase them.
DoubleLine’s limited partnership agreement says disputes must go through arbitration rather than a public court, according to the July 2022 filing. The panel found DoubleLine’s partnership agreement “displaced” Delaware law and also determined that state law doesn’t allow “judicial second-guessing” of the firm’s valuation procedure. Arbitrators also found the partners didn’t file their claims over service fees in time.
In October, the court will hear motions for summary judgment, which could potentially resolve the case without a trial.
The case is DoubleLine Capital GP LLC v. Philip Barach, 2023-0415, Delaware Chancery Court (Wilmington).
--With assistance from Chris Dolmetsch, Jef Feeley and Rick Green.
This article was provided by Bloomberg News.