What scores Bill Gross's $200-million lawsuit seeks to settle and why the key allegation may have merit

Bill Gross the “Bond King” has filed suit against PIMCO, the giant $1.6 trillion asset manager he co-founded in 1971.

Gross left the company last September amid reports that the Newport Beach, Calif.-based firm was preparing to fire him before open mutiny broke out in the firm’s top leadership ranks over his volatile, un-collegial behavior.

After keeping mum — well, relatively mum — about the circumstances surrounding his exit, at least in public, Gross give full throat to his side of the story in the 19-page lawsuit filed yesterday.See: Bill Gross’s stage antics leave Morningstar conference-goers gobsmacked.

According to the complaint, Gross fell victim to “a cabal” of young, hotshot, risk-taking PIMCO executives who wanted a larger share of the company’s profits. The filing paints Gross as the honest defender of PIMCO investors, a bulwark against greedy PIMCO executives looking to squeeze more money out of investors’ accounts.

“Their improper, dishonest, and unethical behavior must now be exposed,” the lawsuit proclaims.

Suspect timing

Ostensibly, the suit is designed to force PIMCO to pay Gross the $200 million unpaid balance of the 2014 bonus he says he’s owed and to compensate him for hundreds of millions in stock options and equity grants whose vesting was contingent upon his continued employment. Gross argues PIMCO breached a written contract by forcing him out and that this unlawful action was motivated by the greed of the remaining executives who wanted to divide his share between themselves. See: Bill Gross jabs what he sees as PIMCO’s potential doomsday strategy of using derivatives to boost liquidity.

Either these allegations have merit or you have to buy a pretty big coincidence, according to Thomas B. Lewis, attorney at Stevens & Lee of New York.

“This will not play well with a jury. The complaint [makes it look like PIMCO executives had] a calculated plan to not pay an earned bonus. The company will have reasons why Mr. Gross should not be paid his bonus but I believe the company has a difficult hurdle based on the timing.” See: At Morningstar, PIMCO CIO and CEO preach collective manager brainpower but individual manager accountability as post-Bill Gross formula.

Man behind the curtain

While there may be ample justifications for Gross’s legal arguments, the majority of the background story in the complaint serves as a platform allowing Gross to vent and to rebut the public’s perception of his departure from PIMCO.

Like the newsletter items he is famous for, Gross’s complaint strays far afield before coming to its point.

It begins, for example, by slamming Mohamed El-Erian, Gross’s one-time heir apparent, as an irresponsible investor who was at first blind to, and then overcome by, the risk he took on. See: The real Bill Gross story with big help from the Wall Street Journal’s reporting.

Gross is dismissive of El-Erian’s purported wizardry in managing Harvard’s endowment in 2006, saying his former protégé “witnessed” a 23% return on the strength of a market bubble and heavy exposure to high-risk derivative assets. It was this terrific one-year return that Gross says made El-Erian unhealthily enamored of riskier assets.

Upon his return to PIMCO in 2007, Gross says, El-Erian “sought to force” the company to expand its arsenal to investment products beyond bonds. Many of these alternative investments — mortgages and leveraged real estate are cited as examples — were embraced, Gross alleges, by El-Erian but were not approved by the PIMCO Investment Committee. Gross says that these products made him fear for the company in the event of a Lehman Brothers-type catastrophe. See: Wall Street thriller 'Margin Call’ is a cautionary tale — even for RIAs.

According to the lawsuit, Gross’s offer to let El-Erian take his place heading a portion of PIMCO’s investment committee forced El-Erian to, in effect, directly own the success or failure of his risky expansion projects. In Gross’s telling, the prospect so distressed El-Erian that he was prompted to leave the company entirely.

Pulling out the El-Erian chair

The lawsuit reads:

“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.”

In a statement to the Wall Street Journal in February, Gross said “For more than 40 years, PIMCO has delivered superior results for our clients, consistently and during periods of extraordinary market volatility. We hold ourselves to the highest standards of excellence and performance, and I ask of others only what I demand of myself: hard work, dedication and intense focus on putting our clients first.”

Mohamed El-Erian did not respond to requests for comment.

Leaks and investigations

Gross’s lawsuit claims that two hours after El-Erian’s resignation was announced internally to managing directors, it was leaked to the Financial Times by PIMCO executive Andrew Balls. It also argues that Gross never received fair treatment from the press because reporters were so eager to gobble up leaks and anonymous commentary from Balls or El-Erian himself, comments which cast Gross in a negative light.

Articles on the subject, Gross’s lawsuit claims, unreasonably left out El-Erian’s “abysmal performance” managing a PIMCO fund and Gross’s “stellar” returns over the same period. See: Bill Gross jabs what he sees as PIMCO’s potential doomsday strategy of using derivatives to boost liquidity.

PIMCO’s CEO, Doug Hodge, and president, Jay Jacobs, investigated the leaks, the suit says, and Balls confessed to being the source. Balls then offered his resignation, but Gross claims PIMCO leadership declined to accept it. Instead, according to the suit, Hodge and Jacobs allegedly struck a secret deal to keep him employed in return for silence about their efforts to cover up the source and extent of the media leaks.

Andrew Balls is currently CIO of global fixed income at PIMCO.

The lawsuit says that El-Erian’s resignation and the subsequent leaks made Gross a thorn in the side of PIMCO management. Gross apparently wanted El-Erian punished for abetting Balls and suggested the company deny El-Erian part of his bonus for the first quarter of 2014.

PIMCO declined to do so, but, ironically, did refuse to pay Gross his bonus when he left six months later.

Total Fund shenanigans?

The lawsuit lays much of the blame for Gross’s actual ouster at the feet of Daniel Ivascyn, 46 and the current CIO of the firm. The suit paints Ivascyn as the avaricious leader of an “alternative assets” hedge fund fiefdom within PIMCO. It claims Ivascyn became frustrated that his fund’s huge profits were split among all partners instead of accruing in greater portion to those who generated those profits and demanded change.

One of Ivascyn’s alleged executive allies comes in for even harsher criticism in the lawsuit and raises serious questions about the ethics of PIMCO’s management fees.

Gross’s suit claims Brent Harris, the PIMCO executive in charge of mutual funds, new products, and the Total Return Fund fees was “particularly proud of his efforts to raise the annual fees on various funds, such as the Total Return Fund, through creatively labeling such fees 'administrative costs.’”

Again, according to the suit, Harris turned on Gross after he, Gross, suggested that fees need be reduced, which Harris took to be “a direct, personal attack on Harris’ ongoing financial benefit from PIMCO and prompted Harris to become one of the most vocal supporters for ousting Mr. Gross.” See: With kid gloves and after great patience, Morningstar yanks gold-level rating on PIMCO Total Return Fund and predicts possible exit of 'tens of billions’ in assets.

Double-cross at high noon

By summer 2014, even Gross conceded the need to reduce his involvement in the company, and negotiations to accomplish this transition began. In formal discussions with PIMCO’s former CEO, Bill Thompson, and the former head of Allianz’s Global Investors, Jocquim Faber, Gross agreed to extensive restrictions on his power within the company.

The basic outline of the deal, according to Gross’s lawsuit, called for Gross’s position at PIMCO to diminish drastically. He was asked to resign as chief investment officer, as chairman of PIMCO’s investment committee and to step down from the firm’s executive committee and compensation committee. Gross also agreed to give up managing the crown jewel of the bond fund universe, the PIMCO Total Return Fund, and to instead take over a portfolio a tenth the size. Gross says in the lawsuit that he even agreed to halve his percentage share of the bonus pool and accepted a ban from PIMCO offices.

Gross’s lawsuit calls these terms “humiliating” and but says he nevertheless accepted them when they were offered by Michael Diekmann, CEO of Allianz, over breakfast on Sept.18, 2014. The two agreed to meet later that day at noon.

The suit claims that PIMCO executives talked Diekmann of the deal within hours. When Gross arrived at PIMCO to meet again with Diekmann, it was Doug Hodge who did all the talking. According to the lawsuit, Hodge said the deal had changed and that Gross could either stay at PIMCO until December or leave immediately. The suit says PIMCO wanted to manage Gross’s exit in a drawn out way such that it “could conceal the news from investors, the press, and the market generally.”

Eight days later, Bill Gross announced he was leaving PIMCO to join Janus Capital Group Inc. in Denver. He currently manages its the Janus Unconstrained Global Bond Fund (JUCAX). See: How Janus CEO Richard Weil’s Bill Gross hire completes the PIMCO-ization of the Denver equity shop.

The lawsuit was filed on behalf of Bill Gross by lawyers from Glaser, Weil, Fink, Howard, Avchen & Shapiro LLP.

A spokesman for PIMCO refused all questions for this article, saying only “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.”