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
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.