On Second Thought, The Justice Dept. Does Think Something’s A Little Odd About McKinsey’s Professed Lack Of Potential Conflicts Of Interest

Especially with its president sitting atop its Chinese Wall.
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By Chris Potter (Flickr: 3D Judges Gavel) [CC BY 2.0], via Wikimedia Commons

By Chris Potter (Flickr: 3D Judges Gavel) [CC BY 2.0], via Wikimedia Commons

In its ongoing battle with aggrieved competitor Jay Alix, McKinsey & Co. assured us that in the nearly two decades its been bankruptcy consulting, no other creditor has ever impugned its integrity or challenged its disclosures. Which is pretty amazing, given how very large McKinsey is and how very many clients it has, and given how few potential conflicts of interest it discloses in the bankruptcy filings on which it works.

Unfortunately for McKinsey, that is now somewhat besides the point, because some others are taking issue with its rather scant disclosure practices. These new complainers are, to be sure, not unhappy creditors. They are, however, the United States Department of Justice and a federal bankruptcy judge.

According to Mary Walsh of The New York Times:

In one case, the Justice Department asked a judge in Virginia to reopen the bankruptcy of Alpha Natural Resources and force McKinsey to return about $20 million in fees because, the department said, McKinsey concealed for years that it was a secured creditor of the coal company while advising it.

Separately, a bankruptcy judge in Texas asked the Justice Department to look into allegations of similar activity by McKinsey in the current case of another coal company, Westmoreland Coal, and the closed case of GenOn Energy, a power company….

Instead of making the required disclosures, Mr. Fitzgerald said, McKinsey spent more than two years dissembling and forcing the Justice Department and other parties “to search for needles in haystacks….”

“McKinsey’s misleading representation and lack of transparency regarding Mr. Garcia’s role undermines the very purpose” of the bankruptcy disclosure rules, Mr. Fitzgerald wrote.

The role in question is not Jon Garcia’s presidency of McKinsey, but his role as a member of the board of the consultancy’s investment group, which oversaw McKinsey’s secured loans in Alpha Natural Resources at the same time McKinsey was working on a reorganization plan that gave Alpha’s best assets to its secured creditors, among them McKinsey, which we’ll admit is a strange definition of a “blind trust.” But having the guy who runs your consulting firm oversee the investment department that you say is totally walled off from the consulting side is really not that big a deal, sayeth McKinsey.

McKinsey has made repeated statements, in court and on its website, that its investment division is walled off from its consulting business. That, McKinsey has said, precludes any possibility that the investments could taint the consultants’ advice.

Since there is no risk of undue influence, McKinsey has said, it does not have to disclose its investment activities to the court when it works on a bankruptcy case.

All the same,

“We have been transparent about the connections we were disclosing and the process utilized to identify those connections,” the company said. It added, “As always, McKinsey is committed to taking any guidance the U.S. trustee deems appropriate to give.”

Sometimes it just takes a couple of years.

Justice Dept. Says McKinsey Hid Dual Roles to Profit From Bankruptcy [NYT]

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