What shook the market with the sudden departure of “Bond King” William Hunt Bill Gross, from Pacific Investment Management Company (PIMCO) in September 2014 seems to be gradually unfolding now. On Thursday, Gross filed a lawsuit against PIMCO, the company he co-founded, alleging that several of his former colleagues conspired to oust him in order to boost their own careers and have larger claim in his annual bonus, which was 20% of PIMCO’s profit pool.
PIMCO’s parent, German insurer, Allianz SE’s AZSEY U.S. unit – Allianz Asset Management of America L.P. – also stands as a defendant in the lawsuit, which is seeking at least $ 200 million in damages.
According to the 37-page complaint , “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 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.”
Gross who currently manages Janus Capital Group, Inc.JNS fund – The Janus Global Unconstrained Bond Fund ¬- does not intend to retain any amount of the recovery amount in the event he wins the case. According to Gross’ lawyer any proceeds from the lawsuit would go to charity, including the Pimco Foundation.
A spokesperson for PIMCO stated that the lawsuit lacks merit and the company will respond in court in due course.
In Brief
Rumors were afloat that Gross’ exit from PIMCO was a result of mounting tensions in PIMCO, which were weighing down Gross. The lawsuit filed seems to have justified these rumors.
Gross, 71, who has always been a supporter of low fees and traditional, low-risk bond investments, was opposed to a number young executives who wanted to transform PIMCO into high-risk, high fee asset management company that would invest in riskier equities and leveraged real estate investments.
Gross disagreed with Mohamed El-Erian, former co-Chief investment officer (CIO) and Co-Chief Executive of PIMCO, as El-Erian sought to shift PIMCO from its core focus on bonds and related fixed income securities and expand into general-purpose investment management firms, offering riskier investments like stocks, commodities and hedge fund products.
The complaint highlighted El-Erian’s intentions as “varied menu at Cheesecake Factory” while Gross preferred “bonds and burgers” approach that yielded stable returns. The lawsuit stated that Gross was concerned over PIMCO’s expansion into new areas that may pose significant risks, like the collapse of Lehman Brothers.
According to the complaint, Gross offered to step down from his role in the PIMCO investment committee and focus solely on fixed income security portfolio. However, El-Erian 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,” and as a result he abruptly announced his resignation.
The complaint also stated that Ivascyn, who ran the alternative assets from PIMCO “believed that Pimco was paying Mr. Gross tens of millions of dollars that should have instead gone to Ivascyn.” Consequently he “hatched a plan to oust Mr. Gross from Pimco.” Ivascyn along with several co-conspirators threatened PIMCO that if Gross was not dismissed form the company, they would resign.
Michael Diekmann, CEO of Allianz intervened to resolve the dispute. According to the arrangement, Gross agreed to step down from several of his positions including CIO, have his annual bonus cut by over half and cease managing his flagship Total Return Fund and would instead control a portfolio, the size of which was below 10% of his then current assets under management. The complaint highlighted, “This plan stripped Mr. Gross of power position and compensation.”
However, PIMCO Chief Executive Douglas Hodge and President Jay Jacobs did not withstand to Diekmann’s agreement and pushed him to renege on the deal with Gross. Hodge sketched an entire new plan, stating that Gross’ refusal to the plan would lead to his immediate termination.
While Gross was allowed to remain at PIMCO through December 2014, he resigned on Sep 25, 2014.
Gross was on track to receive a bonus for 2014 of around $ 250 million at PIMCO. However, he alleged that he was denied his third-quarter bonus of $ 80 million, even though he left just a few days before the end of the third quarter of 2014.
The lawsuit filed in California alleges PIMCO and his parent firm for “constructive termination”, breach of contract and breach of covenant of good faith and fair dealing and demands a jury trial.
Bottom line
With the departure of Gross, PIMCO witnessed massive redemptions. The world’s once biggest bond fund “Pimco Total Return fund” this year through September, has $ 95.5 billion in assets under management, significantly down from peak $ 293 billion in April 2013. Following 28 straight months of outflows, PIMCO Total Return fund’s assets under management dropped below $ 100 billion in August 2014.
It is very evident that Bill Gross’ legal battle with PIMCO is not about money. Instead, it is a battle for repairing the dent in reputation and humiliation faced by one of the greatest money managers of all times.
Janus Capital currently carries Zacks Rank 5 (Strong Sell). A couple of better-ranked stocks in the investment management space include Monroe Capital Corporation MRCC and America First Multifamily Investors, L.P. ATAX . Both the stocks sport a Zacks Rank #2 (Buy).
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JANUS CAP GRP (JNS): Free Stock Analysis Report
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