Did Buy-Side Bond Trader Steal Secrets?
Buy–side traders usually don’t land up on the witness stand, especially in the conservative world of managing fixed income funds. However, an unusual drama is playing out in a Los Angeles courtroom. In a civil trial, Jeffrey Gundlach, one of America’s supposedly best-known bond traders, is facing accusations that he and three other employees stole confidential data and proprietary trading systems from their old firm, Trust Company of the West, en route to starting a new competing firm.
According to today’s New York Times:
TCW is suing Gundlach for more than $375 million in damages, accusing them of stealing trade secrets and conspiring to set up a rival firm, Double Line Capital. Mr, Gundlach is seeking $500 million in a countersuit contending that TCW fired him to keep his lucrative fees from his fixed-income funds.
While this case is about the staid world of fixed income trading for a mutual fund, it echoes some of the same themes in the case of the ex-Goldman Sachs programmer who was convicted of stealing high-speed trading software.
As many of us recall, Goldman accused a former software programmer of stealing source code from a high-frequency trading system for a new employer, a start-up competitor, Teva Technologies. The programmer, Sergey Aleynikov, was convicted in December 2010 of stealing proprietary code, and in March he was sentenced to eight years in prison.
However, this is a civil trial, so there is no criminal indictment. Another major difference is that this trail is rife with drama, conspiracy theories and references to art and literature. Gundach, who is described as a figure of controversy in the fund industry, referred to himself as the “pope” and the “godfather,” according to the New York Times articles.
It turns out that Gundlach was in talks to move part of TCW’s fixed-income division to the Western Asset Management Company, known as Wamco, before he was fired by TCW in December of 2009.
From today's :
Gundlach told the court on Monday that he was making plans to leave TCW because he thought that TCW’s parent company, Societe Generale, was preparing to sell the firm. Gundlach also shared that he had made an offer to buy a 51 percent stake in TCW in September of 2009 for $350 million. Gundlach showed emails to the jury revealing that he felt vulnerable at TCW.
But the plot thickens – literally. Lawyers for TCW on Monday tried to show that Gundlach was plotting to leave and start his own firm way before he was fired. Lawyers for TCW contend that Gundlach downloaded information to help his start this new firm.
Sergey Aleynikov also admitted to downloading Goldman’s software; he claimed it was open source code and claimed he was not using it to build a trading system at his new employer. And we know how that ended! The situation with Gundlach is quite different, isn’t it? He’s not an immigrant from the Soviet Union who can be accused of espionage. He’s a long-time employee and bond manager in the white-collar world of mutual funds. He and his team designed the fixed income trading system that made the division successful.
But TCW’s lawyers are trying to show that the trading platform, which contains software to analyze individual mortgages within a mortgage-backed security, could not be easily replicated at DoubleLine without copying, according to the New York Times. The lawyers compared the software to the recipe for Kentucky Fried Chicken.
But if Gundlach could leave the firm and recreate what he and his team had built, why did he download the data and code? Obviously, it’s a lot easier to fry chicken if you have the recipe, than start from scratch.
The discussions about hiring Gundlach were known as “Project Artwork” within Wamco, and Gundlach’s team was known as “Gallery, a nod to his appreciation for fine art.
“Eliminating that vulnerability is the goal now,” he wrote, adding that he had come to this realization during a yoga class.
When asked about one of the claims made by TCW, that computerized systems used at DoubleLine to analyze mortgage-backed securities were copied from similar systems at TCW, Mr. Gundlach said the software was like Ernest Hemingway’s novel “The Sun Also Rises” in that once it was written, it would be easily recreated by the author.
He also dismissed claims that the trading systems were central to his investing process.
“I didn’t even have them installed on my workstation,” he said.
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