Lust for power. Corporate backstabbing. Unethical behavior.
That’s the tale of greed described by famous bond investor Bill Gross inside the walls of Pacific Investment Management Co., one of the world’s largest investment firms.
In a scathing 19-page complaint filed Thursday in Orange County Superior Court against the firm he founded, Gross is suing for “constructive termination” and breach of contract. The suit accuses current and former Pimco executives of leaking disparaging information and ultimately engineering his ouster last year.
“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, a cabal of Pacific Investment Management Company managing directors plotted to drive founder Bill Gross out of Pimco in order to take, without compensation, Gross’s percentage ownership in the profitability of Pimco,” the suit said. “Their improper, dishonest, and unethical behavior must now be exposed.”
The suit, which seeks unspecified damages “in no event less than $200 million,” laid out details of his clashes with other executives, including former Chief Executive and co-Chief Investment Officer Mohamed El-Erian, over the direction of the firm. The lawsuit takes particular aim at Andrew Balls, a former journalist and Pimco’s chief investment officer for global fixed income.
The suit said Gross’ ouster, among other things, caused him to lose “significant positions” in stock options and other compensation that had not yet vested.
Patty Glaser, a lawyer for Gross, said proceeds from the lawsuit will go to charity, including the Pimco Foundation, which contributes to educational and other causes.
The lawsuit comes just as Newport Beach-based Pimco, long a dominant player in the multitrillion-dollar global bond business, had finally begun recovering from Gross’ dramatic exit a year ago, when the legendary investor suddenly decamped to rival Janus Capital Group.
The noisy exit caused Pimco investors to accelerate what had already been huge withdrawals from Pimco’s flagship Total Return Fund, which Gross had run for decades. The fund, which peaked at more than $292 billion under management in April 2013, reported about $95.5 billion under management as of Sept. 30, with much of the outflow during the months immediately after Gross’ departure.
In a statement, Pimco said, “This lawsuit has no merit and our legal team will be responding in court. Our focus remains on our clients and their investment portfolios.”
A spokeswoman for Pimco’s parent, German insurance giant Allianz, said, “Bill Gross terminated his position at Pimco and immediately moved to a competitor.”
Financial professionals reacted with dismay to the latest turn.
“These aren’t the kind of headlines you want to see if you’re recommending a fund to your client,” said Owen Murray, investment director at a Houston-based financial advisory firm for wealthy individuals.
Morningstar Inc. analyst Eric Jacobson said the suit doesn’t affect the firm’s rating of Pimco or its funds. But, he added, the lawsuit’s allegations that Pimco charged high fees and offered poor disclosure was “one element of potential interest to shareholders.”
The suit confirms many of the allegations that had dripped into public view before and after Gross’ departure and adds new details about clashes between top Pimco figures.
The complaint is unusually detailed and personal, outlining Gross’ rise as a Vietnam-era Navy veteran who dabbled as a professional blackjack player before founding Pimco and becoming one of the most successful bond investors in history.
Gross’ suit calls his opponents “money-driven” and a “cabal” of “conspirators” motivated by “greed” in their goal to oust him and take his share of Pimco’s enormous bonus pool. Gross portrays himself as the victim of a retaliatory campaign by “younger executives” after he pushed for lower fees and opposed moves toward what he believed were riskier investments.
“As long as Mr. Gross remained at the company he founded, these younger executives were unable to transform Pimco, increasing client risk and their own compensation,” the suit said. “As a consequence, Mr. Gross became the target of a power struggle within Pimco, a struggle that eventually led to his wrongful and illegal ouster from the company.”
The suit traces the troubles to 2007 and the return of El-Erian, a well-regarded former Pimco executive then running Harvard University’s endowment fund, who was rehired as Pimco’s co-CEO and co-CIO with the aim of taking over one or both of the top posts.
The suit said Gross supported the succession plan but the two soon clashed over El-Erian’s alleged plan to “force” the firm away from its focus on bonds to become a “general purpose investment firm.” Gross said he compared the El-Erian plan at the time “to the extensive and varied menu at a Cheesecake Factory restaurant,” while his was “bonds and burgers.”
Gross ultimately offered to “step back,” but El-Erian instead abruptly announced his resignation in January 2014 because he was, the suit said, “angry and apprehensive at the idea he would have to bear sole responsibility (and blame) for the high-risk, high-fee investments he had expanded Pimco into.”
El-Erian could not be reached for comment.
The resignation only heightened intrigue at the firm, the suit said. Despite the firm’s intention to keep the resignation secret, the suit said, Balls leaked word to the Financial Times, where Balls had previously worked as a journalist, and the Wall Street Journal. Balls’ role was discovered by an internal investigation.
The suit said Chief Executive Douglas Hodge and the firm’s president, Jay Jacobs, refused to accept Balls’ resignation, despite Gross’ urging, and, “in effect, chose to side with the person who had undermined Mr. Gross and Pimco in public.”
Hodge allegedly pulled Gross aside after a meeting and “warned him darkly, ‘I could fire you, you know,’” according to the suit.
The suit also adds detail to accounts of Gross’ chaotic final week at the firm. The suit said the firm reneged on a deal that allowed Gross to step aside from Total Return, manage a much smaller amount of money, work offsite and be barred from Pimco’s offices.
Instead, Gross was offered a new deal that “was effectively” his termination.
Gross refused. That was his last day.