- PIMCO / YouTube
Bill Gross is suing PIMCO, the firm he cofounded and left last year.
He claims he’s owed hundreds of millions in unpaid compensation.
One of the most striking things about the complaint isn’t the huge sums of money involved.
It is the way in which the complaint details a series of events which follow the departure of former co-CEO Mohamed El-Erian in January 2014 – that ultimately led to Gross’ exit from PIMCO for Janus Capital in September that year.
According to the complaint, a “cabal” of PIMCO executives who were “driven by a lust for power, greed, and a desire to improve their own financial position and reputation at the expense of investors and decency” plotted to drive him out of the firm.
A Pimco spokesman told Business Insider: “This lawsuit has no merit and our legal team will be responding in court in due course. Our focus remains on our clients and their investment portfolios.”
Gross is referred to in the complaint as “a world-renowned investor” with a “towering reputation.” His track record as an investor is referred to repeatedly.
It seems as if tensions between Gross and El-Erian started when El-Erian tried to diversify PIMCO’s investment portfolio from one focused on bonds, to one with a range of asset classes.
From the complaint [emphasis ours]:
“Mr. Gross was pleased that a succession plan was in place and, for a time, worked in alignment with El-Erian. Cracks soon began to appear in this alliance, however, as El-Erian sought to force PIMCO out of its core focus on bonds and related fixed income securities and instead ~ become a general-purpose investment management firm offering stocks, commodities, real estate, and hedge fund-like products to investors. As time passed, Mr. Gross characterized El-Erian’s plan as similar to the extensive and varied menu at a Cheesecake Factory restaurant, while his own favored approach was “bonds and burgers” a simple, laser focus on a specific type of securities that had been successful since PIMCO’s founding and provided stable returns for investors. In fact, in the three years preceding his departure, Mr. Gross’s flagship Total Return Fund produced returns that were almost double those of the benchmark Barclays US Aggregate Bond Index.”
The way the complaint tells it, Gross thought that diversification was dangerous, but he offered to step back and do “bonds and burgers” at his flagship fund and let El-Erian handle the rest. That didn’t help things, though. Gross’ complaint says the added responsibility just made El-Erian nervous, and when he couldn’t handle the pressure, he left.
From the complaint:
El-Erian, even though he was co-Chief Investment Officer and Chief Executive Officer of PIMCO, was angry and apprehensive at the idea that he would have to bear sole responsibility (and blame) for the high-risk, high-fee investments he had expanded PIMCO into while Mr. Gross would focus his own efforts on PIMCO’s historical bond business.
As a result, El-Erian abruptly announced his resignation from the posts of co-Chief Investment Officer and co-Chief Executive Officer of PIMCO and voiced his intent to leave the company entirely, which he did shortly thereafter.
After that all hell broke loose. Gross accuses PIMCO managing director Andrew Balls of leaking El-Erian’s departure to the Financial Times. The stories that followed, says Gross, were unfairly negative toward him.
“Both the initial Financial Times article and numerous follow-up media pieces heaped praise on El-Erian and cast criticism on Mr. Gross. Glossed over-or even left entirely unmentioned was any comment on E1-Erian’s abrupt departure from a company that he had been hired to eventually lead, or of El-Erian’s abysmal performance on managing his PIMCO fund. Also left out was the comparative fact that In fact, in the three years preceding his departure, Mr. Gross’s flagship Total Return Fund produced stellar returns returns that were almost double those of the benchmark Barclays US Aggregate Bond Index.”
It should be noted that before Gross left PIMCO, the PIMCO Total Return Fund saw over a year of consistent outflows because of underperformance.
The environment at PIMCO after the first leak was tantamount to a witch hunt, according to the complaint. Gross makes it clear in his complaint that he felt targeted by a “a very select group privy to much of the dispute between Mr. Gross and El-Erian and who intended to selectively disclose information presenting El-Erian in a positive light and Mr. Gross in a negative light.”
All the phone lines at PIMCO were checked for calls to media outlets. Investigators finally found that Balls had made those calls on a little-used second cellphone. Balls admitted he made the calls, but he was not punished.
“Instead, they allowed Balls to sign a highly misleading statement admitting only to providing very – general information to the two newspapers, and concealing the fact that Balls’s true conduct was far more serious, calculated, and defamatory. They would subsequently use this statement to mislead others at PIMCO regarding the true extent of Balls’s misconduct.”
That’s when Gross says everyone turned on him. He tried to get Balls fired, and that didn’t work. He tried to get the firm to not pay El-Erian his full $50 million bonus. That didn’t work either.
- Reuters/ Steve Marcus
This is when Dan Ivascyn gets in the mix. The complaint accuses him of running a high-risk, high-fee alternative investment portfolio that produced great returns for the firm.
He operated somewhat independently from the firm, but he wanted more power. Gross also says Ivascyn resented being in the same bonus pool with lower-returning funds.
“Ivascyn hatched a plan to oust Mr. Gross from PIMCO. Doing so would remove an executive philosophically opposed to Ivascyn’s high-risk, high-fee investment model, create an opening for a new Chief Investment Officer, and, most importantly to Ivascyn, free up a significant portion of the bonus pool to be allocated by the Partners Compensation Committee on which he sat.”
Ivascyn and his allies told PIMCO it’s Gross or us, according to the complaint.
After a bunch of negotiating, Gross thought he would be stripped of his management power, but be able to stay at the firm.
He had another thing coming.
“[The] so-called solution effectively was Mr. Gross’s termination from PIMCO, but drawn out in a way that PIMCO could conceal the news from investors, the press, and the market generally. Hodge explained that Mr. Gross would be “allowed” to remain at PIMCO through December 2014. Mr. Gross was told that if he did not accept this new proposal, he would be terminated from PIMCO immediately.”
Gross said he was could not agree to the proposals. He left and joined Janus Capital.