McKinsey Bankruptcy Unit Faces Criminal Probe
Giant consulting firm faces mounting legal and court challenges as it attempts to defend its bankruptcy-advisory business
Federal prosecutors are examining McKinsey’s investing unit, known as MIO Partners. PHOTO: CHARGES PLATIAU/REUTERS
By Gretchen Morgenson and Rebecca Davis O’Brien
Nov. 11, 2019 5:50 pm ET
A McKinsey & Co. unit faces mounting legal and court challenges as the giant consulting firm defends its bankruptcy-advisory business.
Federal prosecutors have launched a criminal investigation into whether McKinsey’s bankruptcy unit improperly failed to disclose investment interests in companies it was advising in bankruptcy and clients that had ties to those cases, according to people familiar with the matter.
Bankruptcy laws require advisers to troubled companies to be disinterested in the outcomes of chapter 11 cases.
As part of the probe, the people said, prosecutors are examining McKinsey’s investing unit, known as MIO Partners. MIO held undisclosed stakes in hedge funds giving it a direct financial interest in the outcome of roughly half of the chapter 11 cases the firm had worked on between 2002 and the end of 2016, according to a 2018 investigation by The Wall Street Journal. In six of the 12 chapter 11 cases in which McKinsey acted as an adviser to the debtors, the Journal found, the firm had a financial interest in the outcome. In 2015, for instance, McKinsey advised Alpha Natural Resources, a troubled coal miner, and didn’t disclose its investment in a hedge fund that received valuable Alpha assets in the bankruptcy.
McKinsey’s spokesman said Monday that in mid-2018, it received an inquiry from the U.S. attorney’s office in New York City. The firm addressed the inquiry and has received no additional requests from the office, the spokesman said.
The chapter 11 bankruptcy process requires advisers to be disinterested advocates for their clients and to disclose all relationships that might give rise to a conflict of interest so that other participants in the cases are aware of them. McKinsey has routinely disclosed far fewer potential conflicts of interest than other bankruptcy professionals over the past decade, the Journal has reported. The McKinsey spokesman said that the firm’s disclosures “have always been undertaken in good faith” and have been “entirely lawful and responsive to industry developments.” The firm strongly denies that MIO created a conflict of interest with its bankruptcy advisory business, the spokesman said.
The criminal inquiry into McKinsey, first reported in the New York Times, is taking place alongside an investigation into the firm’s practices by the U.S. Trustee Program, a unit of the Justice Department charged with protecting the integrity of the bankruptcy system.
Earlier this year, McKinsey agreed to pay $15 million to settle with the U.S. Trustee over three chapter 11 cases it worked on. At the time, the U.S. Trustee said it was continuing to investigate McKinsey and that the settlement didn’t foreclose the possibility of criminal charges down the road. The firm did not admit to wrongdoing in connection with the settlement.
The U.S. Trustee has focused on MIO, McKinsey’s $12.3 billion investment unit, and in court filings has characterized as inaccurate the firm’s sworn testimony that the unit is operated independently from the firm “as a blind trust.”
The U.S. Trustee late last year also cited the fact that Jon Garcia, founder of McKinsey’s bankruptcy advisory unit, simultaneously sat on the board of MIO Partners for many years and ratified its investment decisions. McKinsey’s disclosures about MIO lacked “timely, voluntary, and direct candor,” the U.S. Trustee contended.
McKinsey said at the time that its “disclosures in bankruptcy advising fully meet the terms of the U.S. bankruptcy code,” adding: “We have been transparent about the connections we were disclosing and the process utilized to identify those connections.” Mr. Garcia has declined to comment.
MIO Partners is under scrutiny in the 2018 bankruptcy of Westmoreland Coal, another company advised by McKinsey. The U.S. Trustee objected to McKinsey’s application to work on the Westmoreland matter, which is being heard in Judge David Jones’s Houston courtroom, saying the firm’s disclosures were insufficient and at odds with bankruptcy law. McKinsey’s spokesman said it is working constructively with the U.S. Trustee in the Westmoreland case.
McKinsey eventually withdrew its first application and submitted another with added disclosures, which the U.S. Trustee says remain “incomplete, inadequate and, in some areas, raise questions.”
—Tom Corrigan contributed to this article.
Write to Gretchen Morgenson at firstname.lastname@example.org and Rebecca Davis O’Brien at Rebecca.OBrien@wsj.com