[Marxism] McKinsey Faces a Perilous Fight in a Texas Bankruptcy Case
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Tue Dec 25 15:02:08 MST 2018
NY Times, Dec. 25, 2018
McKinsey Faces a Perilous Fight in a Texas Bankruptcy Case
By Mary Williams Walsh
At first glance, it didn’t look like a fair fight. On one side: an
enormous and powerful global consulting company. On the other: the
retired founder of a smaller turnaround firm who has become a thorn in
the side of its larger rival.
But the brawl that is erupting in the Federal Bankruptcy Court in
Houston has the potential to cause big problems for the consultancy
McKinsey & Company.
The courtroom fight hinges on whether McKinsey or its clients have
hidden interests in a bankrupt coal company that the firm has been
advising, a practice prohibited by federal laws meant to ensure that one
insider can’t effectively cut itself or its friends a great deal at the
expense of others.
The man leveling the accusations, Jay Alix, is a retired turnaround
expert who has made it his personal mission to harry McKinsey. Mr. Alix
has spent four years first needling the firm’s leadership, then
attacking it in court, accusing it of violating federal laws and
Normally a firm of McKinsey’s size would swat away a gadfly’s attacks.
But in this case, which involves the bankruptcy of Colorado’s
Westmoreland Coal, Mr. Alix has a powerful ally: the United States
Justice Department. On Dec. 14, the department said in a court filing
that McKinsey was fraught with “pervasive disclosure deficiencies” and
should be dismissed from the Westmoreland case immediately and stripped
of the fees it had earned so far.
If that were to happen, it would deal a severe blow to McKinsey’s
reputation, as well as its argument that the firm is free of conflicts
The judge overseeing the Westmoreland bankruptcy case, David R. Jones,
warned both sides in a hearing this month about the rising stakes. “The
way this has been teed up, I don’t see an out for both sides,” said
Judge Jones, the chief judge of the United States Bankruptcy Court of
the Southern District of Texas. “The harder you push all this, the more
you ensure that someone doesn’t survive.”
Westmoreland had been sprinting through a bankruptcy process that
started in October and was on track to be wrapped up in February. But
then Mr. Alix filed a 163-page objection, accusing the prestigious
consulting firm not just of hidden conflicts of interest, but of crimes
including fraud — “all sorts of heinous acts,” as Judge Jones put it.
Westmoreland asked Judge Jones to overrule Mr. Alix’s objection, but he
said he couldn’t do that.
“I don’t like someone to stand up in my court and accuse someone of
committing a crime,” he said. “There has to be an airing of this issue,
given what’s been done.”
Now, both sides are aiming for a trial late in January, where Judge
Jones would rule on what he called Mr. Alix’s “incredibly inflammatory”
Judge Jones warned that if Mr. Alix could show under oath that he had a
reasonable basis for accusing McKinsey of fraud, the dispute would
escalate in unpredictable ways.
McKinsey’s lawyer, Christine H. Chung, said in court that she did not
think Mr. Alix would be able to do that. A McKinsey spokesman declined
to comment beyond what Ms. Chung said in court.
Mr. Alix has spent more than four years building a case against
McKinsey. He says the firm makes a practice of working both sides of the
table in bankruptcy, something McKinsey denies. Mr. Alix has already
sued McKinsey under the Racketeer Influenced and Corrupt Organizations
Act in New York and is trying to reopen another bankruptcy case in
Virginia, on the argument that McKinsey committed a fraud on the court.
McKinsey says Mr. Alix is acting on a vendetta borne of McKinsey’s
ability to outcompete the restructuring firm he founded, AlixPartners.
Mr. Alix no longer works for AlixPartners, but he has a seat on the
board and a minority ownership stake.
But the Justice Department, through its Office of the United States
Trustee, also has sought to reopen the Virginia bankruptcy case, which
involves another coal company, Alpha Natural Resources. The Justice
Department is in charge of enforcing conflict-of-interest laws in
At the heart of Mr. Alix’s accusations is McKinsey’s investment
division, a $25 billion fund known as MIO Partners that invests on
behalf of McKinsey’s tens of thousands of employees, retirees and alumni
around the world. Its activities are confidential. But regulatory
filings and records of various bankruptcy proceedings make clear that
the fund has sometimes invested in the securities of the entities
McKinsey is advising.
In Puerto Rico’s bankruptcy, for example, a New York Times review of
court records found that McKinsey held both direct and indirect
investments in the territory’s bond debt while also serving as a
strategic adviser to the island’s federal oversight board. Critics
called it a hidden conflict of interest, albeit one that was not illegal.
Mr. Alix argues that, in some cases, such investments put McKinsey in
violation of the United States Bankruptcy Code’s requirement that all
professionals working on a case be disinterested.
McKinsey disputes that, saying that MIO Partners is completely separate
from the firm’s consulting business and its investments do not taint the
advice its consultants provide to clients.
Mr. Alix is calling for court-ordered access to MIO Partners’ books, to
see how the fund’s trading activities may or may not coincide with
McKinsey’s work with its clients.
McKinsey’s lawyer, Ms. Chung, said that was a nonstarter. “What we
reject is the notion that we have to just open up our file cabinets” in
response to Mr. Alix’s accusations, she said.
Mr. Alix is already having an impact. His recent court challenge
prompted McKinsey to return $1.2 million in fees to Westmoreland,
according to a court filing.
Judge Jones said that because of the grave nature of Mr. Alix’s
accusations, he had summoned Gary Pinkus, the chairman of McKinsey North
America, to his court, along with Mr. Alix, so they could decide whether
they really wanted to go through with the legal fight. If one side or
the other were to withdraw now, the judge said, the damage to
reputations and careers would still be small.
Neither side showed any willingness to back down, and Judge Jones asked
that the first two witnesses be interviewed over the holidays. Their
sworn testimony “will very much drive where I go,” said the judge.
“I just want to make sure you both understand where this can go,” Judge
Jones warned. “Once it starts, it’s kind of like a big heavy ball
rolling down the hill. Once you finally get it going, it’s hard to stop
sometimes. I apologize for the simplicity of this analogy. But once you
start, you don’t want to be standing in front of the ball.”
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