McKinsey & Company, the elite consulting firm that advises many of the world's largest and most powerful institutions, is facing a federal criminal investigation into the conduct that advises bankruptcy firms, according to five people who are known to the case. .
Prosecutors and other officials in the New York and Washington Department of Justice try to determine whether McKinsey used his influence over insolvent companies in violation of the rules of Chapter 11 bankruptcy – where billions of dollars can change hands – by placing valuable assets under control. to themselves or favor their own customers over other creditors.
A spokesman for the Justice Department declined to comment.
Over the past two weeks, investigators have conducted interviews on McKinsey's actions in the bankruptcies of at least two companies, Alpha Natural Resources, a coal producer, and SunEdison, an alternative energy company, said one of the persons, who was questioned by FBI agents .
The judges overseeing both of these cases have already suggested that questions about McKinsey's behavior could best be resolved by the Department of Justice – either with civil action or criminal charges.
In addition to the previously unreported criminal investigation, an investigation is underway from the Office of the United States Trustee, a Department of Justice department that police the conduct of companies in the bankruptcy system.
The office, which can seek civil penalties and refer to prosecutions, has told the judges in at least three other bankruptcy cases that it investigated McKinsey's practice. The company said it had answered questions from the United States trustee.
None of the investigations will necessarily result in legal action against the company or its executives. But a criminal case would represent a blow to McKinsey's reputation.
"Would it kill McKinsey? No, because McKinsey has far more industries than bankruptcy, ”said Bruce A. Markell Professor of Bankruptcy Law at the Pritzker School of Law at Northwestern University.
Mr. Markell said an investigation could prevent the firm's bankruptcy advisory practices – if customers include PG&E, the California utility that faces huge obligations over fire damage – but probably won't affect other parts of the company.
"I think McKinsey is still at the end of this," he said. "It may not be that loud. It may be a little bent, but I think they are still on the playing field."
The criminal investigation represents a potent threat to a venerable company that has been criticized for prioritizing its own profits over clients., ethics and law. McKinsey repaid millions of dollars in fees after South African authorities accused it of helping its former president, Jacob Zuma, in plundering public coffins The company name appeared in a case of federal prosecutors brought against a Ukrainian oligarch because it gave a presentation citing the need to bribe officials in India. And court records recently revealed its role in helping opioid manufacturers sell more drugs, even though the company was not accused in that case.
But McKi's activities nsey's bankruptcy advisory business has invited special investigation. Such advisers have a significant influence on the management of the assets of the bankrupt companies, and help to determine which creditors receive the best return on non-performing debt.
Much of the criticism has come from Jay Alix, the founder of a competing firm that has attacked McKinsey in courts across the country. He formed an investment company, Mar-Bow Value Partners, to buy debt from bankruptcy firms to bring complaints against the firm's diversion division, McKinsey RTS.
Mr. Alix has told the judges he believes McKinsey does not disclose his affiliation to other parties involved in the case, and violates rules intended to ensure fair dealing. He has met with mixed results: The judges have expressed concern about the questions he has raised, but some have dismissed his complainants because they said he was lacking standing in the cases.
McKinsey has denied wrongdoing.
"Over Over the past few years, Jay Alix has led a relentless campaign based on false allegations of driving McKinsey out of the bankruptcy advisory room to exploit the firm of AlixPartners," said Mr. Pinkus. He said the courts have rejected Mr. Alix's claims in four separate bankruptcy cases, including Alpha Natural Resources and SunEdison, as well as a complaint that Alix brought last year under the Affluence and Corrupt Organizations Act.
Mr. Pinkus said the request McKinsey received from federal prosecutors in New York came shortly after Alix filed the complaint in May 2018. (That complaint was dismissed in August after the judge found that Mr. Alix could not show that he had become direct harmed.)
While prosecutors' specific interests in Alpha Natural Resources and SunEdison are still unclear, there are hints in the extensive public reference to Mr. Alix's complaints.
In the Alpha Natural Resources bankruptcy, McKinsey did not disclose that it owned any of the company's debt, a scheme that eventually gave McKinsey a stake in the restructured company, called Contura. Bankruptcy advisers are prohibited from owning direct or indirect shares in the insolvent company.
McKinsey owned the debt through MIO Partners, a $ 25 billion investment fund for current and former employees listed as a permanent subsidiary. The board is largely populated by current and former McKinsey partners. McKinsey has claimed that it had no control over MIO Partners' investment decisions, and said its holding in Alpha Natural Resources was held through a third-party fund.
Mr. Alix complained about the scheme, and Judge Kevin R. Huenneken's of the Richmond Bankruptcy Court ordered the case reopened after the Office of the United States Trustee ruled that MIO Partners was not a "blind trust", as McKinsey had claimed.
Mr. Alix also accused McKinsey of managing some of Alpha Natural Resources' best assets for consulting clients, saying business conditions were not clear at the time the reorganization plan was approved by the court.
McKinsey has stated that the disclosures are in compliance with the law, calling Mr. Alix's claims "meritless" when he raised them. His challenge was rejected in May after Judge Huennekens said that Mr. Alix was missing, and the judge said the case would be best handled by the Department of Justice.
In the SunEdison bankruptcy, Mr. Alix McKinsey accused of manipulating invoices for past work with incorrect receipt of payment and failing to disclose that it was a creditor – a status that could have disqualified McKinsey from working as an energy company. bankruptcy adviser. After Alix addressed these issues, McKinsey called the claims reckless and defamatory.
Mr. Alix cited an audit of an external firm hired by SunEdison's board. The audit indicated that McKinsey had recalled millions of dollars in unpaid invoices after the energy company filed for bankruptcy in 2016. McKinsey revised and resubmitted the invoices, billing four of SunEdison's renewable energy units, which were profitable and not a part of the bankruptcy.
"Recognize that this is not ideal," a McKinsey partner wrote in an email to a SunEdison manager, according to documents reviewed by the accountant, FTI Consulting. The partner added that it would be necessary to "push through" resistance from the project managers. McKinsey was eventually paid.
After Alix complained about the payments, in December, McKinsey accepted to pay some SunEdison creditors $ 17.5 million – more than the fees it had earned in the bankruptcy. The settlement document does not specify creditors' complaints, but in court McKinsey told attorneys that the agreement resolved the issues that Alix had raised.
Mr. Alix's challenge was rejected in June by Judge Stuart M. Bernstein of the Manhattan Bankruptcy Court, who also suggested that the Justice Department was in the best position to investigate the case.
McKinsey's bankruptcy information became the subject of a separate settlement year. In February, McKinsey reached a $ 15 million deal with the Office of the United States Trustee, which the office said was one of the largest it had ever disclosed over disclosure rules. The Justice Department reserved the right to "seek even more stringent remedies" if it received new information that McKinsey had committed fraud.
McKinsey did not admit wrongdoing under the agreement.
"We continue to respond, as we always have, to questions from the U.S. trustee, who indicated in court this week that it & # 39; has been involved in discussions with both Mar-Bow and McKinsey RTS, & # 39 ; " so DJ Carella a spokesman for McKinsey.
The February settlement centered on Alpha Natural Resources, SunEdison and a third bankruptcy, Westmoreland Coal, which is also the subject of Mr. Alix's complaints.
29. On October, a Houston bankruptcy judge overseeing Westmoreland Coal's restructuring granted Mr. Alix the right to demand McKinsey documents and question executives under oath.
A McKinsey lawyer, Faith Gay, told the court that the firm was eager to present witnesses who would testify that it complied with the law. She said Mr. Alix tried to put McKinsey out of business and had "confused" the company for competitive reasons.
The bankruptcy judge, David R. Jones, scheduled a trial for February.
"This is about the integrity of the process," Judge Jones said. The questions raised about McKinsey's behavior, he said, "went completely into the bankruptcy process."