McKinsey Hid Conflicts of Interest From Courts, Lawsuit Says
Posted May 9, 2018 9:12 p.m. EDT
Jay Alix, a prominent restructuring specialist, sued McKinsey & Co. on Wednesday, accusing the management-consulting firm of misleading the bankruptcy courts about conflicts of interest.
Alix, the founder of the consulting firm AlixPartners, filed suit under the federal Racketeering Influenced and Corrupt Organizations Act, saying McKinsey “knowingly and intentionally submitted false and materially misleading declarations under oath” in cases where it had been hired as a bankruptcy consultant.
The declarations allowed McKinsey “to unlawfully conceal its many significant connections to ‘interested parties’” in the bankruptcies, according to the complaint. Had the connections been known, it said, McKinsey would have been precluded from working on those cases.
The complaint also accused McKinsey of offering “pay to play” deals to various bankruptcy lawyers, in which McKinsey would offer “to refer its vast network of consulting clients” to them if in exchange they would refer their bankruptcy clients to McKinsey’s restructuring business.
In the rarefied work of bankruptcy consulting, where only a small number of consulting firms can handle the biggest clients, McKinsey’s conduct crowded AlixPartners out of a market it had served since the Chapter 11 heyday of the 1980s, according to the complaint.
A McKinsey spokesman said in a statement that the company’s disclosures met all legal requirements and called Alix’s challenge “baseless and anti-competitive litigation.”
“We will vigorously defend ourselves against these meritless claims and expose Mr. Alix’s clear pattern of anti-competitive behavior in court,” the statement said.
Bankruptcy professionals are fiduciaries, required by law to have an undivided loyalty to their clients. But Alix’s complaint offered examples of cases in which McKinsey had ties to parties whose interests appeared to be in direct conflict with each other.
Some of the cases were first reported in an article in The Wall Street Journal.
For example, the complaint cited the case of Alpha Natural Resources, a coal company based in Kingsport, Tennessee, that filed for protection from its creditors in the U.S. Bankruptcy Court in Richmond, Virginia. As the bankrupt coal company’s representative, McKinsey was duty bound to work to maximize its resources on behalf of its creditors.
But instead, the complaint said, “McKinsey was simultaneously helping United States Steel, one of Alpha Natural Resources’ largest coal customers and a McKinsey client, reduce the price that it paid Alpha Natural Resources for coal.”
Driving down the purchase price would help United States Steel, but that outcome was at odds with McKinsey’s duty to help Alpha Natural Resources. The complaint said McKinsey’s connection to United States Steel was one of dozens that were “concealed, omitted and lied about” in its court filings.
Later in the case, the complaint also said that McKinsey persuaded creditors to approve a reorganization plan that provided for the sale of most of the coal company’s assets “to entities including McKinsey’s own clients.”
Alix said in the complaint that starting in 2014, he held a series of meetings and telephone calls with Dominic Barton, McKinsey’s global managing partner, in which he challenged McKinsey’s court disclosures and told him that the “pay to play” deals were illegal.
Barton initially expressed concern and said he would follow up, according to the complaint. When the two next met, Barton “revealed that he had been upset and angry to learn that McKinsey had, in fact, been making pay-to-play offers to bankruptcy lawyers,” and spoke with outside counsel, who confirmed that such conduct was illegal.
Barton “acknowledged that it was wrong, and confirmed that it never should have happened,” the complaint said.
But Barton also asked Alix to be patient. He was up for re-election soon as McKinsey’s global managing partner, and re-election would allow him to address the legal issues from a position of greater strength.
After he was re-elected, Barton showed no sign of addressing the issues, according to the complaint. When Alix asked him about it, the McKinsey chief offered to introduce Alix to a mining company in Australia and a car company in Europe that might be interested in AlixPartners’ services.
“Alix immediately declined Barton’s offer, which he found shocking and improper,” said the complaint. “Barton’s offers were blatant attempted payoffs and bribes offered in return for dropping the issues concerning McKinsey’s acknowledged pay-to-play scheme and its illegal disclosure declarations.”
In its statement, McKinsey called Alix’s accusations “the latest attempt by Jay Alix and Alix Partners to harass and disparage McKinsey, using baseless and anti-competitive litigation, which courts have consistently rejected.” It added that “the courts and U.S. trustees have repeatedly dismissed Mr. Alix’s prior challenges.”
Alix sold much of his stake in AlixPartners in 2006 but has remained a co-chairman of the firm. He currently owns about 35 percent of it, according to his lawyer, Sean F. O’Shea of Boies Schiller Flexner. O’Shea said the firm had assigned its claims against McKinsey to Alix so that he could address the issues without bogging down the firm.
The complaint, filed in U.S. District Court for the Southern District of New York, said McKinsey’s “unlawful scheme” had allowed it to crowd AlixPartners out of the running for bankruptcy consulting business and to profit improperly at AlixPartners’ expense. It said that since 2010, when McKinsey formed its Recovery & Transformation Services subsidiary in the United States, known as McKinsey RTS, it had earned more than $101 million in bankruptcy consulting fees, and another $125 million from services provided before the bankruptcies.
The federal racketeering law awards triple damages to successful plaintiffs, and the lawsuit seeks to have McKinsey forfeit more than $300 million.