Inside the Showdown Atop Pimco, the World's Biggest Bond Firm

NEWPORT BEACH, Calif.—Tension increased at Pacific Investment Management Co.'s headquarters here last summer. The bond market was under pressure, losses grew and clients pulled billions of dollars from the firm. 

Bill Gross, who co-founded Pimco in 1971 and is largely responsible for building it into a behemoth overseeing almost $2 trillion in assets, struck some of his colleagues as testier than usual. He argued openly with Mohamed El-Erian, Pimco's chief executive—something employees say they rarely had seen. 

Mr. Gross—by his own admission, a demanding boss—had long showed respect for Mr. El-Erian and indicated that the younger man eventually would take over the world's biggest bond firm. But one day last June, the two men squared off in front of more than a dozen colleagues amid disagreements about Mr. Gross's conduct, according to two people who were there. 

"I have a 41-year track record of investing excellence," Mr. Gross told Mr. El-Erian, according to the two witnesses. "What do you have?" 

"I'm tired of cleaning up your s—," Mr. El-Erian responded, referring to conduct by Mr. Gross that he felt was hurting Pimco, these two people recall. 

Later, after Mr. El-Erian told Mr. Gross he needed to change the way he interacted with employees, Mr. Gross, 69 years old, agreed to make adjustments, several Pimco employees say. But last month, Pimco announced that Mr. El-Erian, 55, would leave the firm—a surprise to both employees and investors.