The elite consulting firm McKinsey & Co., that advises many of the world’s largest and most powerful institutions, is facing a federal criminal investigation of its conduct advising bankrupt companies.Investigations are underway to determine if McKinsey used its influence to manipulate over insolvent companies in violation of the rules of Chapter 11 of the United States Bankruptcy Code...
The elite consulting firm McKinsey & Co., that advises many of the world’s largest and most powerful institutions, is facing a federal criminal investigation of its conduct advising bankrupt companies.
Investigations are underway to determine if McKinsey used its influence to manipulate over insolvent companies in violation of the rules of Chapter 11 of the United States Bankruptcy Code and ascertain if billions of dollars could have possibly changed hands — by quietly steering valuable assets to itself or favoring its own clients over other creditors. Prosecutors and other Justice Department officials in New York and Washington are investigating the matter.
In the past two weeks, FBI agents have conducted interviews about McKinsey’s actions in the bankruptcies of companies such as Alpha Natural Resources – a coal producer, and SunEdison – an alternative energy company.
According to the Judges involved in the matter, McKinsey’s conduct could best be resolved by the Justice Department — with either civil actions or criminal charges. In addition to the previously unreported criminal investigation, an investigation by the Office of the U.S. Trustee, a division of the Justice Department that polices the conduct of companies in the bankruptcy system, is also underway.
The office, which can seek civil penalties and make referrals to prosecutors, is reported to be examining McKinsey’s practices. The company has been persistently receiving mounting criticism that it prioritized its own profits over clients, ethics and the law.
McKinsey refunded millions of dollars in fees after South African authorities accused it of helping associates of the country’s former President, Jacob Zuma, embezzle public treasury. The firm’s name also surfaced in a bribery case that federal prosecutors brought against a Ukrainian oligarch as it staged a presentation that cited the need to bribe officials in India.
The activities of McKinsey’s bankruptcy advising business have invited especially intense scrutiny. Such advisers have significant influence over the handling of bankrupt companies’ assets and help determine which creditors receive the best returns on defaulted debt.
Much of the criticism has come from Jay Alix, who formed an investment company – Mar-Bow Value Partners, to buy debt of bankrupt companies in order to bring complaints against the firm’s restructuring division, McKinsey RTS. He has been constantly attacking McKinsey in courts across the United States. According to allegations by Alix, McKinsey refrains from properly disclosing its connections to other parties involved in the cases and has been breaking rules meant to ensure fair dealing. However, he has met with mixed results: Few Judges have voiced concerns about the issues he has raised, and some have dismissed his complaints because, according to them, he lacked locus standi in the cases.
While the prosecutors’ specific interests in Alpha Natural Resources and SunEdison remain unclear, there are hints in the extensive public record of Alix’s complaints.
In the Alpha Natural Resources bankruptcy, McKinsey did not disclose that it owned some of the company’s debt, an arrangement that ultimately gave McKinsey a stake in the restructured company, called Contura. McKinsey owned the debt through MIO Partners, a $25 billion investment fund for current and former employees that is listed on its site as a subsidiary of the firm. Its board is occupied largely by current and former McKinsey partners. However, McKinsey has argued it had no control over the investment decisions of MIO Partners and said the stake in Alpha Natural Resources was held through a third-party fund.
Bankruptcy advisers are prohibited from holding direct or indirect stakes in the insolvent company.
Alix accused McKinsey of steering some of the best assets from Alpha Natural Resources to its consulting clients, saying those business relationships were not clear at the time the reorganization plan was approved by the court. However, on the contrary, McKinsey has reported that its disclosures complied with the law and asserted Alix’s claim to be “meritless” when he raised them. His challenge was dismissed in and the Judge said the matter would be best handled by the Justice Department.
In the SunEdison bankruptcy, Alix accused McKinsey of manipulating invoices for prior work to improperly receive payment and avoid disclosing that it was a creditor — a status that could have disqualified McKinsey from working as the energy company’s bankruptcy adviser. McKinsey refuted the allegations claiming them to be reckless and defamatory.
Alix cited an audit by an outside firm hired by SunEdison’s board. The audit indicated that McKinsey had called back millions of dollars in unpaid invoices after the energy company filed for bankruptcy in 2016. McKinsey revised and resubmitted the invoices, billing four of SunEdison’s renewable energy units, which were profitable and not part of the bankruptcy.
After Alix complained about the payments, McKinsey agreed in December to pay some SunEdison creditors $17.5 million. Although, the settlement document does not specify the creditors’ complaints, McKinsey lawyers said in court that the agreement resolved the issues raised by Alix.
McKinsey’s bankruptcy disclosures were the subject of a separate settlement in 2019. In February, McKinsey reached a $15 million agreement with the Office of the U.S. Trustee, which the office said was one of the biggest it had reached over disclosure rules. The Justice Department reserved the right to “seek even more stringent remedies” if it received new information that McKinsey had committed fraud. The February settlement revolved around Alpha Natural Resources, SunEdison and a third bankruptcy, Westmoreland Coal – also a subject of Alix’s complaints.
On October 29, 2019 a bankruptcy judge in Houston overseeing Westmoreland Coal’s restructuring granted Alix the right to demand documents from McKinsey and question its executives under oath.