[Marxism] McKinsey Faces a Perilous Fight in a Texas Bankruptcy Case

Louis Proyect lnp3 at panix.com
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 
unethical behavior.

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 
of interest.

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” 
accusations.

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 
bankruptcy court.

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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