Risk Update

Accounting Conflicts Allegation — Restructuring, Bankruptcy Advising, RICO Clash Continues

McKinsey Foe’s Chapter 11 Conflict-of-Interest Lawsuit Revived by Appeals Court” —

  • “A federal appeals court revived a McKinsey & Co. critic’s lawsuit alleging the consulting giant concealed conflicts of interest to obtain lucrative appointments advising bankrupt companies at the expense of rival firms.”
  • “Wednesday’s ruling by the Second Circuit Court of Appeals in New York revived a racketeering lawsuit accusing McKinsey of submitting false and misleading statements in 13 bankruptcy cases to hide financial conflicts that could have disqualified the firm from being retained.”
  • “Bankruptcy advisers legally are required to be disinterested and to disclose connections to other parties to a chapter 11 case that could give rise to a conflict of interest. In many bankruptcy cases that McKinsey worked on, the firm didn’t name any interested parties with whom it had a relationship, relying instead on broad references to unnamed clients. An investigation by The Wall Street Journal found McKinsey routinely disclosed far fewer potential conflicts than other bankruptcy advisers and that the firm’s investment unit held undisclosed financial stakes that gave it a direct interest in the outcome of several bankruptcy cases.”
  • “In 2020, McKinsey reached a settlement without admitting wrongdoing with the Justice Department’s bankruptcy division over how the firm discloses potential conflicts of interest. As part of the settlement, McKinsey agreed to walk away from $8 million in fees for work it did advising a bankrupt coal company. The firm also agreed to broaden the scope of disclosures made in future cases, including the names of confidential clients and potential conflicts involving its many affiliates.”

Second Circuit Revives Jay Alix’s RICO Claims Against McKinsey” —

  • “Had the bankruptcy engagements not been awarded to McKinsey, the judges reasoned, it was ‘entirely plausible’ that AlixPartners would have received about 24% of the work and resulting revenue, consistent with its historical market share in the niche advising space.”
  • “‘The loss to AlixPartners and the other large advising firms is plausibly alleged to flow directly from McKinsey’s fraud on the bankruptcy court,’ U.S. Circuit Judge Barrington D. Parker wrote for the court.”
  • “The ruling sent the suit back to the district court, allowing Alix to build out his allegations that McKinsey had violated the Racketeer Influenced and Corrupt Organizations Act and had employed an illegal pay-to-play scheme to secure work in large corporate bankruptcy cases.”
  • “A spokesman for McKinsey cautioned on Wednesday that the Second Circuit’s decision ‘solely addresses technical pleading standards and not whether Mr. Alix’s claims are true…To date, Mr. Alix has lost all six of his lawsuits against McKinsey, and we are confident the evidence will ultimately show that this lawsuit is similarly meritless.'”