On October 8, 2015, Glaser Weil Fink Howard Avchen & Shapiro LLP, as attorney for the now deposed “Bond King” Bill Gross, filed suit in Orange County, California. The complaint is a gripping story of a sordid scheme of deceit and greed, of younger versus older – of a power struggle and a palace revolt.
The conspirators, according to the complaint, fought with all means available, including numerous leaks that the Financial Times and the Wall Street Journal published eagerly, and that other media outlets of all kinds picked up, thus turning themselves into often brutal tools for the conspirators and their agenda to destroy Bill Gross.
If the Complaint is right, the media got the story very wrong. But in the end it’s all about money – hundreds of millions of dollars.
We haven’t heard from the other side. We don’t know who is right and what to believe. Gross had made a career out of riding up the three-decade-long bond bull market, got immensely rich doing so, but now got knocked off his horse. The 37-page Complaint explains from Gross’s point of view how it happened. It’s a page-turner, and an eye-opener about what’s going on behind the scenes. This is how it starts out….
- 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 LLC (“PIMCO”) 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. Their improper, dishonest, and unethical behavior must now be exposed.
- Plaintiff Bill Gross founded defendant PIMCO over 40 years ago and has been intimately connected with its investment activities since that time. As a founder and senior executive, as well as a world-renowned investor, Mr. Gross received substantial income as PIMCO grew and established itself as one of the leading fixed income security investment firms in the world.
- Mr. Gross’s ongoing success at PIMCO proved to be his undoing. In the minds of certain younger executives at PIMCO, Mr. Gross’s ongoing presence at the company checked their own financial and career ambitions. Under PIMCO’s profit-sharing plan Mr. Gross was entitled to receive 20% of the entire profit sharing bonus pool each year. By forcing him out of PIMCO, the younger executives would split Mr. Gross’s share of the bonus pool amongst themselves.
- In addition to receiving compensation consistent with his skill and reputation, Mr. Gross was also well-known as an advocate for PIMCO’s investors. He championed reasonable fees for PIMCO’s services and was vocally skeptical inside the firm of a select group of the younger executives’ desire to transform PIMCO into a high-risk, high-fee asset-management company that invested in riskier equities and leveraged real estate investments, as opposed to the stable bonds that built the firm’s reputation.
- 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. 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 he founded and a struggle where PIMCO wrongly and illegally denied Mr. Gross hundreds of millions of dollars in earned compensation.
And so begins the alleged scheme of deception and greed.
The defendants are PIMCO, its owner Allianz Asset Management of America L.P., and “Defendants Does 1 through 100.” They’re sued under “fictitious names” but as soon as “their true names and capacities are ascertained, Plaintiff will amend this complaint by inserting their true names and capacities herein.”
Then the complaint, without missing a beat, names true names and capacities, including that of Mohamed El-Erian.
The section, FACTUAL BACKGROUND AND GENERAL ALLEGATIONS, details Gross’s bio (not marked by any excess modesty) and explains the succession plans at PIMCO that resulted in El-Erian being brought on board. When all their ducks were finally lined up in a row, this happened….
- 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.
- This was not a mere philosophical difference between the two men. Mr. Gross was concerned that PIMCO’s expansion into new investment fields posed a particular liability to the company and its investors should another significant event, such as the collapse of Lehman Brothers, occur. This was of particular concern because many of the new investment areas favored by El-Erian, such as the mortgages and leveraged real estate investments being led by a younger PIMCO managing director named Dan Ivascyn were under the control of portfolio managers who were, to varying degrees, independent from the PIMCO Investment Committee.
- Nevertheless, in light of the ultimate plan to transition responsibilities to El-Erian as a successor, Mr. Gross made an offer to step back from his role on the PIMCO Investment Committee relating to most of PIMCO’s investment offerings and instead to focus solely upon its fixed income security portfolio the very “bonds and burgers” approach that he formed and favored. As part of this offer, Mr. Gross suggested that he could step down from heading a portion of PIMCO’s Investment Committee in favor of El-Erian.
- Far from resolving the divergence between Mr. Gross and El-Erian’s view of PIMCO’s direction, unexpectedly – at least to Mr. Gross – this proposal prompted El-Erian to take a step that was far more drastic and damaging to both PIMCO and its investor clients. 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.
This spawned an alleged intrigue against Gross, fought with numerous “damaging” leaks to the Financial Times and the Wall Street Journal that blamed Gross for El-Erian’s abrupt resignation. The complaint included this gem (emphasis added):
- 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 El-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….
- These stories were fueled by additional leaks and unattributed commentary from both Balls and El-Erian himself. Balls undertook these clandestine actions despite knowing that the public airing of the clash between El-Erian and Mr. Gross, especially in a light so negative to the individual remaining at PIMCO, would be extraordinarily harmful to both Mr. Gross’s personal reputation and his ability to perform his duties as PIMCO’s Chief Investment Officer.
This kicks off the next phase, as the Complaint puts it: “The turmoil surrounding El-Erian’s departure provided fertile cover for individuals seeking to oust Mr. Gross from PIMCO for their own personal financial benefit and egos.”
The Complaint lines up the antagonists, one by one, in true name, how they ganged up on Gross, how they succeeded, and concludes, after many pages, “As a result, he was forced out of the company he had founded and led for over 40 years rather than participate in the deceit and dishonesty that had been outlined, to say nothing of enduring the humiliation PIMCO had planned for him.”
The Complaint lays out three causes of action: “constructive termination,” “breach of written contract,” and “breach of covenant of good faith and fair dealing.”
To read the entire Complaint, download the whole document. We skipped some passages and left off at the bottom of page 9, with this section: “PIMCO Executives Begin to Plot to Oust Mr. Gross.”
The complaint also shows, between the lines and incidentally, just how hedge-fund-like, leveraged, and risky various PIMCO funds have become. Timing couldn’t be better: at the peak of the greatest bond bull market in recent history. For the first time in a generation, folks are contemplating the possibility of losing money on their bonds for years to come. And leverage is going to increase the pain.
Meanwhile, we’re impatiently waiting for the movie. The one remaining question we have: Who the heck will play Bill Gross?
Back to reality. It was a data set we didn’t need. Not one bit. It mauled our hopes. It mucked up our rosy scenario. Read… Last Time that Ratio Soared like this, Stocks Crashed
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Guess Gross is no longer pimping for PIMco or something…
Gross – Be careful what you wish for ‘cos you are open the pandora’s box to the inner workings including front running the trades, insider trading, taking advantage of the muppets, etc.
This guy is older than dirt and has already made an obscene amount of money off of investors. Some people can’t go gracefully.
You are right – Bill Gross is 71 years old and is undoubtedly a mega-millionaire or billionaire. And you’re right that he wasn’t about to leave gracefully. But lots of these old goats cling to power long past traditional retirement age. Warren Buffett is 85 and hasn’t left Berkshire yet, and Sumner Redstone at 92 looks like a corpse waiting for a hearse, but he’s stilling clinging to his positions at CBS/Viacom.
But then you have to ask yourself this question: Would you retire if you were collecting compensation amounting to tens of millions of dollars a year?
All of the people you mentioned built powerhouse businesses and now, since the financial collapse, are presiding over the eventual collapse of those businesses. Buffet is presiding over a declining business primarily due to his lack of appreciation of technology. Redstone is doing the same thing. The world has changed under their feet and they don’t want to accept it.
As to the money they make, they are enriching themselves at the expense of their companies, clients, and even country. The fact that they don’t care is why we are in the state we are in.
I’d say it’s a classic story repeated over and over throughout history. I have no idea who is right or wrong-depends on the circumstances. It must be a hard thing to be kicked out of a company one founded though hardly new, one could posit Durant being kicked out of GM or Steve Jobs from Apple. We probably won’t know the whole story for decades. It has a ring of truth to it, the old school founder vs. the young Turks wanting to take chances and play for big stakes. It’s Henry Ford vs. Edsel Ford all over again. History will tell.
Interesting that Gross does not appear to be suing Allianz SE (Germany), the European giant that owns both PIMCO and Allianz Asset Management of America L.P. Come on, Bill, Allianz SE is where the real money is and where the power lies. Go get ’em, toothless tiger.
Can’t help but wonder if Paul McCulley will be called as a witness or as a defendant. After all, Gross, McCulley and El-Erian were all there at PIMCO at the same time. In fact, although McCulley left in 2010, Gross rehired him in 2014 to take over for El-Erian after El-Erian resigned. Unless settled quickly, this could be uglier than the Denise Richards/Charlie Sheen divorce. Winning!
If you bothered to read the complaint you would see that Allianz Asset Management of America LP, a Delaware Limited Partnership is a named defendant.
The complaint does on its face appear to state a cause of action against the defendants, so it is unlikely a court will dismiss this without a trial. The defendants are going to have to produce defenses and evidence to support them.
This case will not be cake walk for either side
“If you bothered to read the complaint you would see that Allianz Asset Management of America LP, a Delaware Limited Partnership is a named defendant.”
Actually, if you bothered to read my post, you would have seen that I didn’t state that Allianz Asset Management of America LP wasn’t a named defendant. I stated that Allianz SE, the parent company of Allianz Asset Management of America LP, was not named in the suit. Since you missed that, I am posting it again, word for word, below.
Interesting that Gross does not appear to be suing Allianz SE (Germany), the European giant that owns both PIMCO and Allianz Asset Management of America L.P.
I trust you noticed that the named Amerian defentant is an LP. I saw no basis in the complaint for piercing the LP veil. Care to suggest one?
A Hole vs A Holes. Used to be interested in reading these kinds of stories, but nowadays it’s hard to sympathize with these people. A pox on every one of them.
IT’S OBLIGATORY TO SUE YOUR FORMER EMPLOYER SO YOUR LAWYER CAN MAKE A LIVING.
janet yellen take note. raise rates. full employment on its way.
Perhaps it is that when they have mined out all of us regular folks, plutocrats turn on each other. When the placer gold (us) is panned out, they have to go for the mother lode (other plutocrats).
Regards from one panned out stream bed.
Like you, my takeaway from this article is (once again) shock and awe at the money taken out of our pockets by the wealth management industry.
I have not invested in any PIMCO funds, but I do applaud Mr. Gross’ record and philosophy as PIMCO’s Director. Gross was able to outperform his competitors for a hell of a long time while keeping PIMCO in conservative, and un-leveraged bonds.
If one had put one-quarter or one-third of their portfolio in Gross’ control 40 years ago, and cashed in when he exited, that would have worked out quite well!
NY Geezer says:
“I trust you noticed that the named Amerian defentant is an LP. I saw no basis in the complaint for piercing the LP veil. Care to suggest one?”
NY Geezer, there’s no need, since “Defendants Does 1 through 100.” are already named as defendants in the case. Unless you have proof to the contrary, what makes you believe that Oliver Bäte will not ultimately be named as one of those “Defendant Does”?
Rich Black, since you insist on having the last word, it yours. NO MAS.
I would like to observe that this law suit emerged somewhat late after the event, so much so that many probably forgot about it. I must say that I always enjoyed and looked forward to reading Gross’s PIMCO Insights, where the anecdote from life was as good if not better than the financial advice that followed. The point is, he could make a living writing, unlike many who make living by writing. The guy struck me as more philosophical than purely money focused sociopath, or buffoon of which there are plenty, too. Perhaps, we might read about the whole story someday down the road.
Bill Gross built Pimco over a period of 40+ years and, in the process, he justifiably became known as the fabulously wealthy “Bond King”. Unfortunately he missed the emotional immaturity, pettiness, corruption and sheer greed and evil of certain of the executives he hired to help manage Pimco, who at first compared themselves to him and later actually believed they were superior to him and could oust and replace him–and, of course, they not only wanted to, but actually believed they were entitled to, become even richer than him by misappropriating his compensation. Now this may be consistent with capitalist principles, but not when breach of fiduciary duty, non-compliance with contractual terms, conspiracy to leak information to the media, malicious intention to defame, etc., are involved and are proved in a court of law. If any of these executives is adjudged guilty by their peers on a jury in court, then they should be held liable for both civil and criminal consequences, including direct, consequential and even punitive damages. And Mr. Gross–a.k.a. the Bond King–should be fully compensated for the malicious defamation of his character and reputation in the public domain by the guilty executive(s).