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William Gross Sues Pimco Over Dismissal

The man known as the bond king, William H. Gross, is suing the company that he built into one of the largest asset managers in the world, providing his own colorful version of an ugly feud that led to his departure last year.

The lawsuit, filed on Thursday, represents a bold effort by Mr. Gross to repair the damage that was done to his reputation in the year before and after he was fired from Pimco.

News media reports have portrayed Mr. Gross's departure as a product of his erratic and domineering behavior at the firm he helped found in 1971.

Mr. Gross is seeking "in no event less than $200 million" from Pimco for breach of covenant of good faith and fair dealing, among other causes of action. But to underscore the degree to which the suit is motivated by Mr. Gross's desire to correct the public record, he has promised to donate any money he recovers to charity, his lawyer, Patricia L. Glaser, said.

Bill Gross
Tim Boyle | Bloomberg | Getty Images
Bill Gross

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Pimco did not immediately respond to calls for comment.

The lawsuit presents a picture of Pimco — an asset manager based in California that is responsible for billions of dollars in retirement savings — as a den of intrigue riven by back stabbing and competing egos.

The first sentence of the suit says that Mr. Gross was pushed out by a "cabal" of Pimco managing directors who were "driven by a lust for power, greed, and a desire to improve their own financial position."

"Their improper, dishonest, and unethical behavior must now be exposed," the opening paragraph concludes.

The suit takes aim at the man who was once in line to succeed Mr. Gross, Mohamed El-Erian, and at the man who has succeeded Mr. Gross as Pimco's group chief investment officer, Daniel J. Ivascyn. Mr. El-Erian is now the chief economic advisor at Allianz, Pimco's parent company.

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Both men, the suit says, were eager to take Pimco away from its traditional focus on bond funds and into riskier investment strategies that would earn it higher fees and lead to bigger bonuses for top executives. Mr. Gross, on the other hand, is said in the suit to have consistently advocated for keeping the firm focused on lower-fee investment products.

The suit goes into detail about Pimco's secretive bonus plan, saying that Mr. Gross was entitled to 20 percent of the firm's bonus pool – a staggering $300 million in 2013. Mr. Gross's overthrow was motivated, the suit says, by the desire of other top executives, such as Mr. Ivascyn, to take home more of the money. The suit says that Mr. Ivascyn told Mr. Gross that he "wasn't a long-term player" and would leave for more money.

With its bold claims and theatrical language, the suit could end up playing into Mr. Gross's reputation as a unpredictable and volatile character, something that was cited as part of the reason for his problems at Pimco. The tone of the document is reminiscent of some of Mr. Gross's famous letters to investors, in which he often went on at great length about his personal life, pets and philosophy.

The legal challenge may become an unhappy and potentially costly distraction for Pimco, which has recently appeared to be recovering from the damage done by Mr. Gross's departure.

PIMCO headquarters in Newport Beach, California
Scott Mlyn | CNBC
PIMCO headquarters in Newport Beach, California

While investors pulled over $100 billion from the enormous Pimco bond fund that Mr. Gross used to run, those outflows have slowed and the fund's returns have been relatively good.

Mr. Gross, by contrast, has attracted only around $1 billion to a new bond fond he created at the Janus Capital Group, the southern California company he joined immediately after leaving Pimco.

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The new Janus fund has significantly underperformed both its benchmark and the Pimco fund Mr. Gross used to lead, data from Morningstar shows. While Janus's stock rose more than 60 percent in the months after Mr. Gross joined the company, it has since given back over half of those gains.

Even before he left Pimco, Mr. Gross's results were lagging partly as a result of bad calls on the timing of when the Federal Reserve would end its huge stimulus programs and begin raising interesting rates. The uneven returns led investors to pull money from the fund.

The lawsuit locates the beginning of the problems in Mr. Gross's decision to bring Mr. El-Erian to Pimco in 2007 to groom him as a potential successor. Mr. El-Erian was at Pimco previously, but in 2007 he was running Harvard University's endowment.

When Mr. El-Erian returned, the suit says, he was eager to push Pimco beyond the bond funds that had traditionally been its strength and wanted to use "a host of high-risk derivative asset classes" he had learned about at Harvard. The suit says the returns on the funds that Mr. El-Erian ran at Pimco were "abysmal."

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According to the suit, Mr. Gross offered to step back from everything but his bond funds, but this scared Mr. El-Erian and led him to "abruptly" announce his resignation in early 2014.

At the time, Mr. El-Erian said he was stepping back to write another book and spend more time with his family.

Almost immediately after Mr. El-Erian's departure, leaks to the news media attributed the blame for his departure to Mr. Gross.

An internal Pimco investigation determined that the leaks had come from Andrew Balls, a fast-rising star at Pimco who previously worked as a journalist at The Financial Times, the suit says. When Mr. Balls was confronted, the suit says, Mr. Balls initially denied that he was responsible but then, when shown the evidence, changed his story.

According to the suit, Mr. Gross pushed for Mr. Balls to be fired, but instead Pimco executives had him sign a document suggesting that he had only given out general information about Pimco and agreed that Mr. Balls would remain at Pimco. Mr. Balls is now one of five co-chief investment officers under Mr. Ivascyn.

Mr. Gross, the suit says, was eventually forced from the firm after Mr. Ivascyn and a few others threatened to resign if Mr. Gross was not forced to leave.

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Ultimately, Mr. Gross was given an offer to leave the firm but in a way that would "conceal the news from investors, the press, and the market generally."

"Mr. Gross could not agree to participate in this deceit on investors and the public by accepting this so-called offer of his effective termination," the suit says. "As a result, he was forced out of the company he had founded and led for over 40 years."

Mr. Gross's lawsuit, filed in a state court in Orange County, asks for a jury trial, for his lawyers fees and for damages.