SEC investigates fund managed by Pimco ‘bond king’ Bill Gross

A federal investigation of Pacific Investment Management Co. is the latest crack in the armor of the $2-trillion fund giant, where a trustee recently questioned the $200-million salary, “bullying” behavior and “mediocre” recent performance of co-founder Bill Gross.

Word of the investigation follows a series of setbacks for Pimco, including the abrupt departure of Gross’ heir apparent, Mohamed El-Erian, reports of clashes between the two, and an outflow of more than $65 billion in funds from Gross’ signature Total Return Fund as disappointed investors cashed out.

Pimco said it is cooperating with an examination into whether improper accounting for bond prices contributed to the early reported success of a retail exchange-traded fund set up to mirror the investment style of the Total Return Fund, whose clients were giant institutional investors.

The Total Return Fund is the world’s largest bond mutual fund, a staple of 401(k) and other retirement plans across the nation with $221.6 billion in assets at the end of August.

The $3.6-billion Total Return Fund ETF reported investment gains of 8.7 percent from March through August 2012, its first six months of existence. That compared with a gain of 5.2 percent for the Total Return Fund it emulated, which at the time was growing rapidly and exceeded $270 billion in assets.

The Newport Beach, Calif., company, which Gross co-founded in 1971, denied it had done anything wrong.

“We take our regulatory obligations and responsibilities to our clients very seriously,” a spokesman said. “We believe our pricing procedures are entirely appropriate and in keeping with industry best practices.”

Pimco declined to comment further on the SEC investigation. A spokesman for the SEC in Washington declined to comment.

A person close to the case, speaking on condition of anonymity because of the sensitivity of the matter, told The Los Angeles Times that investigators from several SEC offices around the country have been working on the case.

The probe was first reported by the Wall Street Journal, which quoted unidentified sources as saying the SEC has been investigating for at least a year, has recently been interviewing Pimco executives, and spent more than a day questioning the 70-year-old Gross.

Reports that high-profile clashes with Gross had led to El-Erian’s departure, and that Gross had monitored El-Erian’s telephone conversations, led a longtime trustee on the board overseeing the Pimco funds to criticize Gross in an interview this March.

A midsummer Pimco regulatory filing said the trustee, William J. Popejoy, had resigned from the board, but Popejoy’s attorney said that was inaccurate and suggested that Pimco had tried to force him out.

This story was originally published September 26, 2014 at 10:44 AM.