SEATTLE (CN) - PIMCO's "shocking payments" of more than $1.5 billion in executive bonuses for an underperforming mutual fund violate securities laws and should be clawed back, a shareholder claims in court.
PIMCO's Total Return Fund has "performed terribly" for several years, yet paid its top two executives more than half a billion dollars each, Robert Kenny claims in the Dec. 31, 2014 federal complaint.
Kenny sued Pacific Investment Management Company and PIMCO Investments for breach of fiduciary duty. He claims PIMCO violated the Investment Company Act by charging excessive fees and paying unreasonable compensation.
Kenny claims that PIMCO took "excessive compensation" from the fund, from him and from other fund shareholders "that is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm's-length negotiations."
Kenny says the fund had more than $292 billion in assets under management at its peak in 2013, but was declining in profitability.
"(A)s the increase in assets in the fund led to larger and larger amounts of compensation being paid to the defendants, the fund's performance suffered," Kenny claims. "In 2012, the fund failed to outperform its benchmark, and 60 percent of the fund's peers outperformed the fund. In 2013, the fund lost 1.92 percent and trailed 70 percent of its peers in its worst performance since 1994."
The fund's top two executives, Bill Gross and Mohamed El-Erain, both departed in 2014 but were still paid hundreds of millions of dollars in bonuses. Gross earned more than the combined take-home pay of 20 similar CEOs, the complaint states.
"Notwithstanding this poor performance, the compensation PIMCO has received for its work for the fund and fund complex has remained extraordinary and has led to shocking payments to its executives," the complaint states. "Last year alone, PIMCO paid over $1.5 billion in bonus compensation to its top executives. Bill Gross and Mohamed El-Erian, PIMCO's now-ex co-CIOs and co-CEOs, reportedly each received over half a billion dollars in bonus compensation ($290 million to Gross and $230 million to El-Erian)."
Citing PIMCO's Nov. 7, 2014 Statement of Additional Information, Kenny says the company claims that "the compensation it pays 'is designed to pay competitive compensation and reward performance, integrity and teamwork consistent with the firm's mission statement.' But no other executive officer of a peer publicly traded financial company came close to either of these bonuses on an individual level. In fact, one must aggregate the compensation of the CEOs of 20 publicly held peer finance companies to come close to the amount of money Gross alone took home last year."
Kenny claims shareholders are paying excessive fees to fund the outrageous bonuses.
"(W)here profitability is concerned, size matters," Kenny says in the 62-page lawsuit. "There are higher cost ratios inherent in running a smaller fund and, conversely, lower cost ratios in running a larger fund. The Total Return Fund was until recently the largest mutual fund in the world and, accordingly, should be one of the least expensive in the world to advise on the basis of costs divided by assets. This is not the case. The fund's fees have grown at the same rate as the underlying assets in the fund have grown and defendants have not meaningfully lowered any fees they charge the fund in the last 10 years."
Kenny claims PIMCO breached its fiduciary duty by accepting "excessive and inappropriate compensation." He seeks rescission of the distribution plan and servicing fees for the fund and restitution of excessive payments made by shareholders "for all periods not precluded by any applicable statutes of limitation."
He is represented by Michael Woerner with Keller Rohrback.
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