El-Erian Resigns

As El-Erian informed the firm in December 2013 that he was going to leave, Gross offered to step back instead. El-Erian, a contributor to Bloomberg View, stuck with his decision and on Jan. 21 announced his resignation. Soon after, Marc Seidner, a high-profile generalist fund manager and member of Pimco’s investment committee who had worked with El-Erian at Harvard University’s endowment, quit. Seidner passed up an opportunity to serve as one of three deputies to Gross, along with Daniel Ivascyn, 45, and Balls, choosing instead to join Boston-based money manager Grantham Mayo Van Otterloo & Co.

Those departures strengthened others in the firm and weakened Gross. Pimco named six deputy chief investment officers -- Ivascyn, Balls, Mark Kiesel, Virginie Maisonneuve, Scott Mather, and Mihir Worah -- and Gross promised that each would have “some empowerment that probably was lacking to some extent in the past.”

Standing Ovation

In the weeks that followed, Gross tried to close ranks. He spent more than 20 minutes before a firm-wide meeting to discuss the media scrutiny that had beset the company, a speech in which he disparaged El-Erian, according to two people. When he ended to a standing ovation from the audience, including Hodge and Ivascyn, at least one executive declined to rise. Thimons, a managing director outspoken in his objections to Gross’s leadership, disagreed with his comments and refused to stand, according to a person who was present.

El-Erian’s departure had prompted media scrutiny and reports of clashes between El-Erian and Gross. The Wall Street Journal cited one example where Gross complained that El-Erian wouldn’t let him run the firm’s entire $2 trillion in assets.

“I’m Secretariat,” Gross said, referring to the famous racehorse, according to the Journal. “Why would you bet on anyone other than Secretariat?”

To stop the reports, Gross set up interrogations of members of the investment committee, managing directors, and lower- ranking money managers. He carried around a three-ring binder of printed-out e-mails and hand-written notes to find out who was talking to the press.

‘Mr. X’

Among his suspects were Balls, a former journalist, and Thimons, the executive who had remained seated during the standing ovation and who had organized a going-away party for El-Erian. Gross sought to fire Balls, a move opposed by Pimco’s new executives. Gross gave in and agreed not to pursue the matter at that time.

“Andrew and Josh are senior and respected professionals at our firm, and we have complete confidence in their leadership and integrity,” Daniel Tarman, a Pimco spokesman, said in a statement.

Balls and Thimons didn’t return e-mails seeking comment.

Gross later told DoubleLine Capital LP’s Jeffrey Gundlach that he had been chasing a “Mr. X,” a person sympathetic to El-Erian who was trying to sabotage him by revealing internal conversations.

Angering Management

While clamping down on leaks inside the firm, Gross called Reuters in early March, telling the news organization that El- Erian had been trying to undermine him and that he was responsible for the Wall Street Journal article.

Gross apologized internally for speaking to Reuters. A month later, in an interview with Bloomberg Television, he angered his colleagues again by calling on El-Erian to explain the reason for his departure. That interview prompted Jacobs to call an emergency meeting of the executive committee without telling Gross. After the meeting, Jacobs told Gross that he’d been suspended from media appearances indefinitely, provoking an outburst by Gross, according to a person with direct knowledge of the situation.

Pimco managers worried that Gross was becoming increasingly uncontrollable in public appearances after he strolled on stage at Morningstar’s investment conference wearing sunglasses and referring to himself as the bond market’s Justin Bieber. He also made a lengthy allusion to the movie “The Manchurian Candidate,” suggesting he wished he could hypnotize journalists into writing positive things about him.

Deep Divisions

At one point, weeks after El-Erian’s departure, Gross was seen yelling at Hodge and Jacobs in a glass room just off the trading floor, in plain view of more than 60 people. Later, he told colleagues he’d staged the dressing-down publicly to intimidate others.

Amid the media scrutiny, Gross demanded public support from his colleagues for his role at Pimco. Hodge obliged in a “viewpoint” in August on the website extolling Gross’s investing prowess.

“We are unaware of any person who has created more wealth for more people in the history of fixed income investing than Bill Gross,” Hodge wrote.

The divisions within Pimco went beyond Gross’s media appearances and his management style. Gross’s view of Pimco’s future was increasingly diverging from that of management. He was unhappy with the expansion into equities and wanted to return to a simpler model.

Criticizing Cupps

Four years after a Bloomberg Markets article in which Gross said that stock-market returns would beat bonds, the firm’s equity business wasn’t meeting expectations, having gathered less than $3 billion into its four main mutual funds.

Gross argued the push wasn’t cost-efficient, that stocks and other assets were too expensive, that Pimco should retrench and didn’t need the staff it had hired to diversify.

During a strategy meeting in August, he criticized Wendy Cupps, a managing director and head of product management who was paid a bonus of about $50 million the year before, saying she was taking too much of a lead developing products without his consent. He said her products group was “stealing the firm,” according to a person who attended the meeting. The comments stunned other executives and prompted opposition.

Gross, who steered Pimco through the 2008 financial crisis unscathed, also criticized the acquisition of real estate assets, saying such assets would be difficult to sell.

Alaskan Cruise

The next day, on Aug. 20, Gross proposed to senior leaders he would step back if they agreed to his demand that Balls and Thimons, whom he referred to as “Mr. X” and “Mr.Y,” be fired. He asked for management to work on a formal proposal while he was on a two-week vacation.

In his absence, Pimco composed a power-point presentation listing Gross’s requests, among them fewer client-facing responsibilities and managing fewer accounts, according to two people familiar with the matter.

Gross had made efforts in the past to be a warmer boss. He chartered a cruise ship with his own money from San Francisco to Alaska and back in the summer of 2003, for more than a week of firm-wide bonding. The endeavor cost him about $10 million, according to one person who attended. Gross stayed up until dawn mingling with employees.

Even that team-building effort, remembered fondly by many of Pimco’s long-term employees, was marred by his expectations. When some employees with children asked if they could arrive late or leave early, Gross expressed frustration in a meeting with the managing directors, saying the employees were spoiled.

‘People Management’

“I’m not especially known for people management,” Gross said in an interview with Bloomberg News in June. “I am learning,” he said, comparing managing employees to raising children.

By September, as Gross returned from his vacation, tensions within Pimco were finally coming to a head. In a meeting with Pimco’s executive committee on Sept. 10, attended by executives including Hodge, Jacobs, Cupps, Worah and General Counsel David Flattum, Gross proposed that he would share his role with a co- chief investment officer and that they could start a search immediately.

Succession Plan

He would manage the Total Return fund with the co-CIO until Dec. 31, 2015 and then would transition his responsibilities to other managers before stepping down. He proposed that he would instead run Pimco’s Unconstrained and a few other select strategies. Gross also offered to step down from Pimco’s executive committee and the partner compensation committee that sets pay.

After Gross left the meeting, the executive committee continued talking and eventually discussed firing Gross, according to a person familiar with the contents of the meeting. The Pimco executives viewed the timeline offered by Gross as too long and lacking a clear succession plan for the remaining funds he managed.

That week, more than 100 investment professionals had gathered at Pimco for the quarterly Cyclical Forum, including Balls. Gross pulled Balls aside to urge him to resign for the good of Pimco. He also made his case to fire Balls at an executive meeting, and was told by Hodge that Gross wasn’t authorized to fire a managing director.

Seating Arrangement

After the forum, Gross devised a seating plan for a meeting of portfolio managers, relegating Balls, Ivascyn and Mather to the rows of the conference room instead of at the main table. The arrangement was perceived as a snub, according to a person familiar with the matter.

By now, key employees including Ivascyn, Jacobs and Cupps individually had told Pimco they were ready to exit.

As management debated what to do about Gross, Ivascyn emerged as a favorite to succeed him as CIO. His main mutual fund, Pimco Income Fund, had beaten 99 percent of peers in 2013.

Private funds, those not sold to retail investors, run by Ivascyn’s teams had raked in $3 billion in profit between 2010 and 2013, according to a former employee. Ivascyn got a bonus of about $70 million last year, a quarter of Gross’s.

The week of Sept. 15, Michael Diekmann, CEO of Pimco parent Allianz SE, had flown in from Munich and had breakfast with Gross at the Marriott Hotel in Newport Beach. He proposed a “sidecar” that Gross would manage under Pimco’s name in a separate structure, a proposal Gross agreed to, according to a person with knowledge of the matter. Diekmann, 59, said he would take the plan to Pimco’s management.