CORRECTED - UPDATE 1-U.S. probes Gundlach-TCW split

Wed Dec 8, 2010 12:56pm EST

(Corrects paragraph 4 to show trial to start in 2011, not 2010)

* Gundlach's new and old firms cooperating in probe

* U.S. grand jury looking into allegations from split-up

* U.S. Justice Department declined to comment (Recasts; adds detail on TCW involvement in probe, flows, byline)

By Ross Kerber and Aaron Pressman

BOSTON, Dec 8 (Reuters) - U.S. federal investigators are probing the bitter split-up of star bond fund manager Jeffrey Gundlach and his former employer, Trust Co of the West, according to new information from both sides.

Current and former employees of Gundlach's new firm, DoubleLine Capital LP, have been questioned in connection with a federal grand jury inquiry, the firm said in a Dec. 6 regulatory filing. Los-Angeles-based DoubleLine said it had cooperated with the inquiry.

TCW, which fired Gundlach last December, said it is cooperating fully with the investigation, which it said relates to possible theft of its trade secrets.

The investigation comes in the midst of dueling lawsuits between DoubleLine and TCW, a unit of French bank Societe Generale (SOGN.PA), over Gundlach's firing and the creation of DoubleLine. A trial is scheduled to begin next year.

Gundlach, who started at TCW in 1985, was the top-performing bond fund manager over the decade before he was fired, overseeing about $100 billion. But amid disputes over compensation and leadership appointments, Gundlach and some of his colleagues became increasingly at odds with TCW's senior management.[ID:nN19215863]

When TCW fired Gundlach, a onetime Morningstar bond manager of the year, it alleged that he was about to start a rival firm. Days later, Gundlach opened DoubleLine, staffed with other former employees of TCW.

TCW then sued DoubleLine, alleging Gundlach stole proprietary information, lied to clients and kept drugs and pornographic materials in his office. Gundlach denied any impropriety and countersued, saying he and his team were owed as much $1.25 billion in performance bonuses.

Many investors have ignored the controversy and invested with Gundlach's new firm despite the lawsuits. DoubleLine's mutual funds have attracted almost $3.2 billion in net inflow from investors this year through the end of November, according to Lipper, a unit of Thomson Reuters.

DoubleLine disclosed in April that an employee had been interviewed "by a government agency" but made no mention of a federal grand jury, usually formed to consider criminal charges.

A Justice Department spokeswoman declined to comment on the probe. A representative for DoubleLine had no immediate comment.

Los Angeles-based TCW said the federal criminal grand jury investigation relates to "the theft of trade secrets from TCW by DoubleLine and certain of its principals."

"As the victim, TCW is cooperating fully with the government and is not the subject of the investigation," the firm said in a statement. (Reporting by Ross Kerber and Aaron Pressman; Editing by Lisa Von Ahn and Gerald E. McCormick)

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