He won't forget.

Photographer: Scott Eells/Bloomberg.

Bill Gross Is Still Mad at Pimco

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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I'm sure it's just the sort of boilerplate that is in every lawsuit, but still this might be my favorite passage in Bill Gross's absurd lawsuit against Pimco:

Defendants Does 1 through 100, inclusive, are sued herein under fictitious names. Their true names and capacities are unknown to Plaintiff. When their true names and capacities are ascertained, Plaintiff will amend this complaint by inserting their true names and capacities herein. Plaintiff is informed and believes, and on that basis alleges, that each of the fictitiously named defendants is the agent, servant, employee, representative, partner, and joint-venturer of their co-defendants, and in doing the things herein alleged was acting within the course and scope of such agency, employment, representation, partnership, and joint venture with the knowledge, permission and consent of their co-defendants, and so ratified all of their acts and conduct.

What I like here is the image that Gross "is informed and believes" that 100 people whose "true names and capacities are unknown" to him conspired against him. Again, this passage is boilerplate, and doesn't literally mean that. But the rest of the lawsuit, in which Gross is suing Pimco for "hundreds of millions of dollars" for unfairly ousting him from his job as chief investment officer in September 2014, is not really inconsistent with that image. I mean, here is the non-boilerplate introduction to the 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 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.

There are those who say that "the active voice is usually more direct and vigorous than the passive," but I think that underrates the vigor of the construction at the end there, call it the Passive Righteous. Their behavior "must now be exposed," and Bill Gross has no choice but to put himself forth as the instrument of that exposure.

That is obviously the point of the lawsuit: to expose the cabal that ousted Gross to public judgment. And why not? In his telling, the cabal spent a lot of time working to expose Gross to public ridicule. A long section of the complaint discusses the perfidy of Andrew Balls, a Pimco managing director and former journalist whom Pimco caught leaking information about the breach between Bill Gross and Mohamed El-Erian that led to El-Erian's resignation as chief executive officer of Pimco. (El-Erian is a Bloomberg View contributor.) The complaint discusses how Balls was caught -- "After a week spent checking the phone records of PIMCO land lines and cell phones turned up nothing, PIMCO's investigators then checked the records for a second, little-used cell phone issued to Balls" -- and complains that Gross wanted him fired but was overruled by other conspirators. But it also complains that the press coverage of his dispute with El-Erian was unfair: 

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. Also left out was the comparative fact that ... in the three years preceding his departure, Mr. Gross's flagship Total Return Fund produced stellar returns—returns that were almost double those of the benchmark Barclays US Aggregate Bond Index.

It is hard to see how Pimco, or Balls, or Does 1 through 100 inclusive, could be responsible for the Financial Times failing to mention that Gross had beat his benchmark for three years.  

Gross is right, though, that the coverage of El-Erian's departure tended to make Gross look bad. The story of Gross's own ouster from Pimco has of course been told before, and in that story he generally comes off as "a world-class jerk who’d lost his touch." So you can see why Gross wanted to tell his side of the story. And as a way of telling Gross's side of the story in as inflammatory way as possible, this lawsuit is ... effective? Effective-ish? An effort? Vigorous, anyway. I feel like he could have just written his side of the story and put it on Ello? Maybe leave out the Does?

His side of the story contains some juicy nuggets, basically along the lines that Bill Gross was not a difficult jerk, but rather the executives who ousted him were plotting jerks. More interesting perhaps are Gross's claims about philosophical differences in Pimco's management. In his telling:

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.

And:

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.

This leads to a pretty amazing theory for why El-Erian left. Gross offered to focus on his own Total Return Fund and "step down from heading a portion of PIMCO's Investment Committee in favor of El-Erian," and El-Erian declined and quit instead because, Gross says, he "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." 

Gross's theory of Ivascyn, on the other hand, is that he did want more responsibility, and money, for his risky investments. According to Gross, Ivascyn felt like he was being underpaid for his financial performance, and "that PIMCO was paying Mr. Gross tens of millions of dollars that should have instead gone to Ivascyn." And so:

Ivascyn began a campaign to be named the next PIMCO Chief Investment Officer, a move that Mr. Gross opposed due to Ivascyn's lack of experience outside his specific investment field. Ivascyn's response was to warn Mr. Gross and others that he "wasn't a long term player" and that if he did not immediately receive what he believed was his due he would not remain at PIMCO.

This story of a struggle between the traditional, investor-friendly, long-term, risk-averse, "bonds and burgers" Gross and his high-fee, high-risk, flighty, short-term enemies is interesting enough, and provides a counter-narrative to the usual story of a struggle between the moody, eye-contact-averse, underperforming Gross and the long-suffering executives who finally rose up to get rid of him. It makes a kind of sense as a marketing document, or at least as a philosophical statement. Sure, Gross's new fund at Janus has underperformed his old fund at Pimco since he left. But performance isn't everything. Bill Gross is not driven by a lust for power or greed, does not take unreasonable risks, does not charge excessive fees. Gross is the champion of the investor, in this story, and he was pushed out by a new wave of managers who do not have investors' best interests at heart. 

It's a theory. As a lawsuit, though, it is very silly indeed. Gross's claim is that he was pushed out of his job, and shouldn't have been pushed out. You can't really sue for that! For one thing, Gross wasn't technically fired: He quit, calling Pimco's offer of help starting a new fund, "a bone even a dog wouldn't pick." And even if you buy his theory that he was constructively fired,  Gross seems not to have had an employment contract, making him an at-will employee who could have been fired at any time for any reason. Or almost any reason: He couldn't be fired for an illegal reason, like racial discrimination, but he doesn't allege that. Instead he says that he was pushed out "to punish Plaintiff for protected conduct, including but not limited to the exercise of his First Amendment rights," which, good lord, is not how the First Amendment works. 

He also argues that he did in fact have some sort of implied employment contract guaranteeing that he couldn't be fired until 2019, which cannot possibly be true, and, separately, that he had another implied employment contract guaranteeing that he couldn't be fired until the end of 2014, which also cannot be true.  And he argues that, since he was fired shortly before the end of the third quarter of 2014, he was entitled to a prorated share of his $80 million profit-sharing payment for that quarter. (Yes, for that quarter: Gross's quarterly bonus was supposed to be $80 million.) This argument strikes me as wrong, but less ludicrously wrong than the other ones. Still wrong though.

These are all sort of beside-the-point technicalities, though. Gross doesn't even want the money:

Gross, who is worth $2 billion according to the Bloomberg Billionaires index, says he wouldn’t keep money he might recover in a lawsuit. Patricia Glaser, Gross’s lead attorney, said in an e-mail that all proceeds from the lawsuit would go to charity, including the Pimco Foundation.

This lawsuit, which is barely a lawsuit, is not about winning the lawsuit. It's about telling Gross's side of the story in a way that will get maximum attention and be maximally embarrassing for Pimco. It's about replacing Gross's reputation as an erratic, vindictive manager who had lost his touch, with a new reputation as a selfless defender of investors from his enemies' greed. I'm just not sure how effective a revenge lawsuit for hundreds of millions of dollars will be at changing that reputation.

  1. Maybe some of the Does work at the FT? I don't know. (Neither does Gross though!)

  2. This is actually pretty sympathetic to Ivascyn:

    The investment offerings under Ivascyn carried hefty, hedge-fund like fees, typically charging investors not only as much as 20% of all investment returns, but also skimming off as much as 2% of all assets under management each year, regardless of performance. This was far in excess of PIMCO's typical fee of 50 basis points (i. e., just one-half a percent).

    These steep fees, coupled with the recovery of the markets after the Great Recession of 2007, resulted in Ivascyn being responsible for the generation of hundreds of millions of dollars in fees each year for PIMCO and were a significant contribution to the company's bottom line. Ivascyn used that financial performance to secure a seat on the PIMCO Partners Compensation Committee.

    Despite the enormous sums PIMCO reaped from Ivascyn's high-fee investment vehicles, the structure of the $1.3 billion PIMCO bonus pool did not specifically allocate profit to the various business units such as Ivascyn's. As a consequence, Ivascyn saw his share of the profits pooled with other business units' profits.

    Much to Ivascyn's chagrin, this also meant that his annual bonus was drawn from the same pool as senior executives, like Mr. Gross, who had guaranteed compensation arrangements with PIMCO. As a result, Ivascyn believed that PIMCO was paying Mr. Gross tens of millions of dollars that should have instead gone to Ivascyn.

    Not mentioned here, but perhaps relevant, is that Gross's own fund was underperforming. You can see why Ivascyn would want more money and power.

  3. His argument is that his being pushed out was equivalent to being fired, i.e., a "constructive termination." But you can't normally sue for being fired, either, unless you have some reason, like racial discrimination or breach of contract.

  4. The first argument goes like this:

    At PIMCO, all managing directors are considered to be part of the company's "management board." The "management board" of PIMCO is responsible for, among other tasks, electing PIMCO executives to seats on committees such as the Executive Committee and the Investment Committee, as well as to offices such as Chief Investment Officer. Individuals elected to such posts serve a term of years before having to stand for reelection.

    This term of office creates what in effect is a guarantee of employment at PIMCO, ratified by the PIMCO managing directors who comprise the company's "management board." After election to such an office, holders of that position can expect that they would only be terminated from PIMCO for good cause.

    Gross was elected in 2014 to a five-year term expiring in 2019. This seems ... totally meaningless? It seems to me like "what in effect is a guarantee of employment" means "not at all a guarantee of employment." But who knows.

    The argument that Gross was guaranteed employment through the end of 2014 is based on an offer from Michael Diekmann, the chief executive officer of Pimco's parent company Allianz, to let Gross step down as chief investment officer but continue to manage a small "side car" fund at Pimco. Gross argues that his subsequent departure "violated the deal struck between Mr. Gross and Diekmann in September 2014 where PIMCO further guaranteed that Mr. Gross would have a position at PIMCO at a minimum through the end of 2014 and would be entitled to collect all bonuses and other compensation for that year."

  5. Section 3.1 of the Pimco profit-sharing plan, attached to the complaint, provides that:

    Upon the Termination of Employment of a Participant, unless otherwise provided in his or her employment agreement, if any, his or her participation in the Plan shall be terminated, except with respect to the Profit Sharing payable (i) with respect to the Covered Quarter preceding his or her Termination of Employment and (ii) with respect to a Termination of Employment due to death or permanent disability, with respect to the partial Covered Quarter in which such Termination of Employment due to death or permanent disability occurs. 

    Clause (i), the one applicable to Gross, seems on its face to mean that you get paid out only for a quarter that ended before you were fired. This is reinforced by clause (ii), which provides for a payout of partial quarters on termination due to death. That suggests very strongly that clause (i) provides for payout only of full, completed quarters on termination for any other reason. And this is of course industry standard: If you're fired before your bonus, you don't get your bonus. So I think that Gross's argument that he should get paid out for the partial quarter is wrong. 

    But he does have a point. "Covered Quarter" is defined as "each calendar quarter (or portion thereof) as to which the Plan is in effect" (emphasis added), so you could read that to mean that the period through Sept. 24 counts as a "Covered Quarter" with respect to him, and therefore that he should get paid for that portion of the quarter. I don't think that's right, but I can see where he's coming from.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor responsible for this story:
Zara Kessler at zkessler@bloomberg.net