McKinsey faces conflict of interest questions over retirement fund
McKinsey & Company is under scrutiny after the Wall Street Journal uncovered evidence that its retirement fund held investments that may have created a conflict of interest in six bankruptcy cases in which it played an advisory role. The revelations come just months after the founder of AlixPartners sued McKinsey under the racketeering act for allegedly misleading bankruptcy courts.
Court filings reportedly show that the retirement fund of McKinsey & Co held investments with two hedge funds – Whitebox Advisors LLC and Strategic Value Partners LLC. Through these funds McKinsey held stakes in six companies battling bankruptcy – UAL Corp; AMR Corp; Edison Mission Energy; NII Holdings; Alpha Natural Resources; and SunEdison Inc.
McKinsey was a bankruptcy advisor to each of these companies in cases which go as far back as 2002 for United Airlines parent company UAL Corp, and as recently as 2016 with SunEdison. In none of these instances did the consulting firm’s restructuring unit McKinsey RTS disclose its hedge fund investments to the relevant bankruptcy courts.
This is a chapter 11 requirement under bankruptcy regulations. All advisors are expected to be financially disinterested in the outcome for their clients. In each of the six cases, McKinsey not only did not disclose the investments in question, its officials also swore in court that the firm was a disinterested party.
The Wall Street Journal doesn’t point fingers in what is clearly a case involving complex legal questions. But the paper’s findings raise important questions for the firm, which is also embroiled in a nasty court battle with AlixPartners founder Jay Alix. If it could be proven that McKinsey knowingly withheld key information from the bankruptcy courts and provided false testimony, then the firm could face fraud charges and be convicted under the RICO act.
“McKinsey RTS’ bankruptcy disclosures meet all legal requirements and have been consistently approved by the courts,” a McKinsey spokesman said in response to the WSJ piece. The same spokesperson said that the firm’s retirement fund – worth some $5.6 billion – is managed by MIO Partners, a McKinsey unit which operates independently of the firm itself.
Yet the majority of the leadership team at MIO Partners are current McKinsey employees, and a substantial number are former executives – such as Jon Garcia, who only stepped down as MIO CEO last year and founded McKinsey’s RTS practice in 2010.
Garcia was himself named in a separate 2014 lawsuit by AlixPartners against McKinsey in which the firm accused two former employees of taking confidential information with them when they hightailed it to McKinsey in breach of their employment contracts. Both were recruited by Garcia and allegedly egged on by McKinsey Global Managing Partner Dominic Barton.
It should be stressed, however, that in a series of previous lawsuits involving disclosure allegations by AlixPartners against McKinsey, the courts have found no wrongdoing.
In the latest AlixPartners/McKinsey battle, the founder of the restructuring specialist Jay Alix is launching a personal suit against McKinsey, to prevent AlixPartners being bogged down by litigation. Buoyed by a sense of freedom, Alix – who sold most of his shares in 2006 – is accusing McKinsey of raking in more than $100 million in illegal fees as a bankruptcy advisor in cases it should have been barred from.
In the SunEdison Inc case Alix – whose firm suffered alongside FTI Consulting and Alvarez & Marsal when McKinsey entered the restructuring advisory game – accused McKinsey of operating a ‘pay-to-play’ scheme whereby it would hook up its consulting clients with bankruptcy lawyers in exchange for the lawyers recommending McKinsey to their own clients.
