The drama surrounding the PIMCO founder’s departure has resurfaced, revealing extraordinary excesses in pay and greed at the firm. Just when Bill Gross seemed to have settled into his new role at a little-known competitor, he has hit the company he founded with a US$200 million lawsuit.
The detailed claim says that some of Gross’s former colleagues at PIMCO, including the current chief executive Doug Hodge, who used to be in charge of the Australian business form a regional role based in Tokyo, aligned against him to advance their own careers and capture some of his massive bonus. Gross is now at Janus Capital, running a global unconstrained bond fund.
The lawsuit, revealed last Friday, states PIMCO “wrongly and illegally” denied Gross hundreds of millions of dollars in earned compensation and damaged his reputation.
The Wall Street Journal reported: “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,” the suit says, “a cabal of PIMCO managing directors plotted to drive founder Bill Gross out of PIMCO.” PIMCO said in a statement the lawsuit lacked merit and “our legal team will be responding in court in due course”.
The lawsuit is the latest salvo in a drawn-out and personal battle that shook the investing world last year. Gross, one of the world’s best-known investors, abruptly left the company in September 2014 after increasingly erratic behaviour and disagreements with the firm’s other executives, the Wall Street Journal reported at the time. The upheaval resulted in tens of billions of dollars being shifted around the globe as some investors left PIMCO.
The lawsuit details Gross’s version of the trouble between him and former PIMCO chief executive, Mohamed El-Erian, who left the company in early 2014 after clashes with Gross.
The suit says El-Erian was in line to take the helm of PIMCO until he and Gross disagreed on the direction of the firm. El-Erian wanted PIMCO to shift away from its core focus on bonds and become a more general-purpose investment-management firm that also offers a wider array of riskier investments such as stocks, commodities and hedge-fund products.
As a result of the differences, the suit says, Gross offered to step back from PIMCO’s investment committee in favour of El-Erian. That move prompted El-Erian to abruptly announce his resignation, according to the complaint.
The suit says Gross saw El-Erian’s approach as akin to “the extensive and varied menu at a Cheesecake Factory restaurant,” while he favoured a simpler “‘bonds and burgers’” approach that provided “stable returns for investors.”
Michael Diekmann, the former chief executive of Allianz, flew to California and worked out an agreement with Gross, the suit said. In it, Gross would cease managing the firm’s flagship ‘Total Return Bond Fund’, would be given a portfolio of less than 10 per cent of its assets under management and would be barred from the PIMCO offices.
But current chief executive Doug Hodge and president Jay Jacobs torpedoed the plan and outlined an entirely different role, saying that if he did not accept he would be terminated immediately, the suit alleges.
“At one point, Hodge pulled Mr Gross aside into a separate room and warned him darkly: “’I could fire you, you know,’” the suit says.
The suit alleges that by forcing Gross out of PIMCO, younger executives would be able to split his share of the firm’s famously rich bonus pool. In 2014 Gross was on track to receive a bonus of about $250 million, according to the suit. Gross alleges in the suit that PIMCO has refused to pay him his third-quarter bonus of $80 million, despite leaving days before the end of the third quarter of 2014.
According to CNBC online: “He wants the satisfaction of a judgment that he was forced from PIMCO illegally, forced out in a way that denied him hundreds of millions of dollars he feels he deserved. And he wants to expose the behaviour of the members of the “cabal” at PIMCO he claims 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” in orchestrating his ouster.
“The gist of Mr Gross’s legal claims is that he was effectively fired so that company officials could deny him, “for their own benefit,” a nine-figure payout from a bonus pool he was five days away from getting and had essentially earned. Mr Gross also says he was forced out even though PIMCO was legally obligated to keep him for many more months or years. “Although the sums Mr Gross is seeking in damages are staggering, it is clear from the tautly written complaint that this lawsuit is not at its core about money. This is the story of a man who feels that he and the values on which he founded his firm were deeply betrayed. That betrayal, he claims, hit him personally in the form of the loss of position and the denial of millions in compensation. The deeper betrayal that emerges from the complaint is of the “bonds and burgers” values on which Mr Gross says he built the firm by those who wanted to engage in investment strategies riskier and costlier to the firm’s clients.”
* Greg Bright is publisher of Investor Strategy News (Australia)