Trust Co of the West worked for months in secret to acquire an entire firm to replace its star bond fund manager Jeffrey Gundlach and his mortgage-backed securities department before terminating him, TCW's chief executive testified in court.

I thought the element of surprise was essential to preserving the company, CEO Marc Stern told jurors on Thursday. If we did anything that let Mr. Gundlach know what we were thinking of, the biggest fear that I had -- which is he would leave and we would be without the ability to manage assets -- would be a self-fulfilling prophesy.

TCW ultimately signed an agreement to acquire Metropolitan West Asset Management hours before terminating Gundlach, Stern testified.

TCW is pitted against Gundlach in a high-stakes trial with hundreds of millions of dollars on the line.

TCW fired Gundlach in December 2009 and sued him a month later, accusing him of stealing trade secrets, plotting to form a new company using TCW proprietary information, and gutting the firm of its entire mortgage-backed securities team.

Gundlach fired back with a counter-lawsuit, alleging his former employer owed him hundreds of millions of dollars in compensation and had secretly plotted to fire him while he was still chief investment officer.

Stern and executives from TCW and its parent company Societe Generale SA (SOGN.PA) referred to the MetWest acquisition as Project Angel, while dubbing the consideration of firing Gundlach Project G.

Although MetWest was acquired as a replacement to Gundlach's team, Stern testified on Wednesday that the acquisition did not preclude Gundlach taking on an auxiliary role at the company.

We were hoping to help him save face, Stern said of Gundlach, telling jurors that he hoped to negotiate an arrangement with Gundlach to continue managing TCW's public-private investment program.

Stern's testimony came in response to questions from Gundlach lawyer Brad Brian.

In the weeks following his termination, Gundlach went on to form DoubleLine Capital, along with three of his co-defendants in the case. Roughly 45 TCW employees, largely from the mortgage-backed securities group, followed.

The case in Superior Court of California, County of Los Angeles is Trust Co of the West v. Jeffrey Gundlach et al, BC429385.