Risk & Compliance

McKinsey Fined $15M Over Disclosure Failures

The Department of Justice says the firm showed a "lack of candor" in seeking advisory appointments in bankruptcy cases.
Matthew HellerFebruary 20, 2019

McKinsey & Co. has agreed to pay $15 million to settle allegations that it failed to adequately disclose potentially disqualifying conflicts of interest in bankruptcy cases in which it has acted as an adviser to debtors.

The settlement came as a result of a mediation between the consulting firm and the Department of Justice’s U.S. Trustee Program (USTP), which has been looking into complaints about McKinsey’s conduct in three bankruptcy cases.

“McKinsey has agreed to this settlement in order to move forward and focus on serving its clients,” a spokesperson for McKinsey said. “In reaching the agreement, McKinsey did not admit that any of its disclosures were insufficient or noncompliant, and the settlement does not in any way constitute an admission of liability or misconduct by McKinsey or any of its employees, officers, directors, or agents.”

Bankruptcy law requires all professionals working on a case to disclose business relationships so the courts and other parties can watch for conflicts of interest or movement of assets of the bankrupt companies.

“Transparency is the linchpin of the bankruptcy system and professionals employed in bankruptcy cases must be free of conflicts of interest,” USTP Director Cliff White said in a news release, adding that McKinsey “failed to satisfy its obligations under bankruptcy law and demonstrated a lack of candor with the court and USTP.”

The DoJ said the settlement is one of the highest repayments made by a bankruptcy professional for alleged non-compliance with disclosure rules. The money will be distributed to creditors and other parties in the bankruptcy cases of Alpha Natural Resources, Westmoreland Coal, and SunEdison.

“This process has provided additional clarity for the filing of future disclosures,” a spokesperson for McKinsey said. “McKinsey will be filing additional disclosures in the Westmoreland case and looks forward to working with the bankruptcy courts to continue to deliver value to debtors and stakeholders.”

The allegations of non-compliance were initially raised by Jay Alix, the founder of corporate restructuring firm AlixPartners, who has accused McKinsey of making at least $101 million in bankruptcy consulting fees by conducting a “criminal enterprise” to secure lucrative consulting appointments.

Alix said the government’s deal with McKinsey didn’t go far enough. “McKinsey has to do more to comply with the bankruptcy law,” he told The Wall Street Journal. “We intend to continue on with our actions to hold McKinsey accountable.

Since entering the bankruptcy advisory business in 2001, the firm has advised 14 companies going through the Chapter 11 process. The $15 million penalty is only about a third of the fees it has billed while advising Alpha, Westmoreland Coal, and SunEdison.

According to Alix, McKinsey improperly earned a $50 million profit by investing in Alpha’s secured debt while serving as its adviser.