Ex-PIMCO Money Manager Accused Firm of ETF Manipulation

A former money manager at Pacific Investment Management Co. accused the firm in a lawsuit last year of manipulating the price of its PIMCO Total Return ETF, a claim similar to the focus of a U.S. Securities and Exchange Commission probe.

Jason Williams filed a wrongful termination claim last year, accusing PIMCO managers of verbally abusing him and cutting his pay after he objected to alleged misconduct. He was fired in March 2012, three weeks after telling the firm he had spoken with agents overseeing a U.S. bailout program and was cooperating with their inquiry, according to his lawsuit, in state court in Santa Ana, California.

Williams, whose complaint included a list of alleged wrongdoing at PIMCO, withdrew the case three days after filing it, and court records don't indicate why. He left the industry and declined to comment on the suit or why he dropped it when reached by phone in Montana, where he bought a bar.

The SEC inquiry emerged last week. The agency is examining whether the PIMCO Total Return ETF, an exchange-traded fund run by Bill Gross until this month, purchased small lots of bonds at discounts, then marked them up when valuing holdings to artificially boost returns, a person familiar with the probe said Sept. 24, requesting anonymity because it's confidential.

Gross's Exit

It couldn't be determined whether there's any link between Williams's claim and the SEC's examination. John Nester, a spokesman for the agency, declined to comment. Williams said in his suit that he conveyed his suspicions to special agents for the inspector general for the Treasury Department's Troubled Asset Relief Program near the end of 2011. Troy D. Gravitt, a spokesman for that office, also declined to comment.

The inspector general's office has scrutinized programs that used government funds to help banks damaged by the financial crisis sell mortgage-backed securities into the market. Its inquiries also have looked at the industry's pricing and trading practices for such assets.

PIMCO and Gross, who left the company last week after a dispute with management over strategy amid record redemptions, haven't been accused by authorities of any wrongdoing.

Mark Porterfield, a spokesman for Newport Beach, California-based PIMCO, declined to comment on the lawsuit. Gross, 70, didn't respond to phone calls, as well as messages left with Janus Capital Group Inc., the firm he joined. PIMCO said last week that it's cooperating with the SEC.

"We believe our pricing procedures are entirely appropriate and in keeping with industry best-practices," it said at the time. It takes "regulatory obligations and responsibilities to our clients very seriously."

'Performance Reasons'

Williams said in his lawsuit that he began noticing and documenting various types of misconduct as early as mid-2008, which he reported to PIMCO's management, compliance officers and his supervisors. His complaint cited "artificial manipulation of the price" of an ETF version of the PIMCO Total Return Fund in or around March 2012, the same month he was terminated. The complaint didn't elaborate.

Among other alleged incidents, Williams said a senior manager had directed him to arbitrarily elevate a PIMCO analyst's rating on a bond so it could be placed in funds with a higher rating requirement. He also alleged market manipulation, breach of fiduciary duty to PIMCO clients and attempted insider trading.

Williams joined PIMCO in 2000 and worked as an operations associate and trading assistant before it promoted him to a money manager in the high-yield group in 2005, according to the suit. Higher-ups were satisfied with his work, proposing he mentor less-experienced peers, before firing him for "performance reasons" as a pretext, he claimed in the complaint. After leaving the firm, Williams moved to Montana and invested in the Halfway House Bar and Grill in Troy. The restaurant features live music and a 110-inch projector screen for football games, according to its website.

Funds' Performance

PIMCO is dealing with record redemptions at its main mutual fund and negative publicity stemming from the abrupt departure in January of then-Chief Executive Officer Mohamed El-Erian, which was followed by the biggest management overhaul in its history. Now led by CEO Douglas Hodge, 56, PIMCO is seeking to calm investors, saying there will be no major changes in investment strategy at the manager of the world's biggest bond fund.

The PIMCO Total Return ETF produced more than twice the return of Gross's similarly managed mutual fund, the $222 billion PIMCO Total Return Fund, in the first three months after it was started in March 2012. That helped it attract assets faster than any other actively managed ETF. The SEC's investigation is separate from a broader review of disclosure in the EFT industry, the person with knowledge of that case said.

Gross, who co-founded and served as chief investment officer of PIMCO, said last week he's joining Janus to oversee a new bond fund.

The case is Williams v. Pacific Investment Management, 30-2013-00635253-CU-WT-CJC, Superior Court of California, County of Orange (Santa Ana).

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