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Practice Management > Compensation and Fees

Gross Sues PIMCO: Seeking Justice or Revenge?

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One year after he was pushed out of the bond fund shop he founded, Bill Gross is suing PIMCO and its parent company, Allianz, for “hundreds of millions of dollars,” according to the lawsuit filed in a Southern California court.

Patty Glaser, the lead attorney representing Gross, who is now with Janus Capital, says proceeds from the lawsuit will go to charity, including the PIMCO Foundation.

In the suit, which is now available online, the fixed-income expert says he was wronged and deserves compensation. But does this legal and public relations strategy – which comes about 15 months after Gross famously donned a pair of sunglasses during his presentation at the annual Morningstar Investment Conference – make sense?

“There’s really been nothing out there that has justified his position or told his story, so this [suit] could be helpful in that it gets his side of the story out there. And there is the issue of money, too,” said Patrick Burns, an attorney based in the Los Angeles area who represents breakaway brokers and others.

“He’s trying to get across the justifiable reasons for his defense and why he had to leave,” Burns explained. “He also explains that [PIMCO] was going in different, risker directions and that he was not on board with that. Plus, without his [taking] 20% of the bonus pool, there’s a bigger slice of the pie for others.”

(Gross claims that he should have received a bonus of at least $200 million for his contributions through Sept. 26, 2014.)

Shakespearian Plot

Gross’ complaint reads like “Hamlet:”

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

He is the victim, according to the suit.

“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,” the suit states. “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 contrast, the lawsuit portrays Gross as a warrior for 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,” the lawsuit states. Furthermore, as long as 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.”

PIMCO’s view of the matter, according to spokesman Michael Reid, is that the 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.”

Turning the Tables

The lawsuit isn’t completely unexpected, of course, given the past year or so of tension between Gross and PIMCO that has largely played out in the media.

“No matter how much wealth you’ve amassed, no one wants to feel that they were treated shabbily and unjustly,” said Mark Elzweig, head of Mark Elzweig Co., an executive-search consultancy that has worked with advisors and asset managers.

“Bonus disputes of this nature in which an employee is fired shortly before their bonus is due and then not properly paid are not uncommon on Wall Street. Traders and investment bankers often lodge them against their former employers,” Elzweig explained.

Both Elzweig and Burns believe by telling his side of the breakup, Gross could get investors and others thinking more critically about what transpired.

“Gross is such a celebrity and has such a wide following that I don’t imagine this [lawsuit] could hurt him or Janus,” said Elzweig. “He is raising issues that certainly were not out there before the suit was filed.”

In Burns’ view, the two sides may come to an agreement, so the matter isn’t playing out in the courts and in the media for a long time. “You would think there is a reasonable chance that it could be settled, if there is any merit to what [Gross] says.”

Late Thursday, Morningstar senior manager research analyst Eric Jacobson weighed in on the matter.

While Jacobson says the lawsuit does not affect the research group’s opinion of PIMCO funds or how they’re managed, “There is one element of potential interest to shareholders, however,” he said.

The lawsuit refers to PIMCO’s fees and disclosures, “with Bill Gross suggesting that PIMCO has been deliberately obfuscating the allocation of some fees in order to make it easier for the firm to raise them,” Jacobson explains. “The way PIMCO discloses fund fees is something Morningstar analysts have written about and raised publicly many times in the past.”

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