As the Barometer noted some months ago, McKinsey & Company, the management consulting firm, was under fire for its failure to disclose conflicts of interest in bankruptcy cases. The issue was McKinsey providing counsel and advice on distinction of estates and payment of creditors even as its retirement fund for its employees held positions in the debtors. Bankruptcy rules require disclosure of conflicts of interest, but McKinsey did not make the disclosures in the bankruptcies of Alpha Natural Resources, Westmoreland Coal, and SunEdison. McKinsey had maintained that it did not have conflicts because it was a different entity from its retirement fund.
The Justice Department’s United States Trustee Program, which oversees the U.S.Bankruptcy Court System, begged to differ and did so through a mediation process. The outcome is that McKinsey has agreed to pay $15 million distributed as follows: $5 million each to Alpha, Westmoreland, and SunEdison to be distributed to their creditors. Interestingly, the settlement also had to provide that McKinsey could not accept any repayments from the $15 million as creditors. In other words, the conflict prohibited McKinsey from accepting its own settlement money. There may be other cases that could result in settlements.
McKinsey admitted nothing but is grateful for the “clarification” it received during the process. And, as usual, it will “move forward and focus on serving its clients.” Translations: “Minimize, deflect, and tout goodness.” And this simple rule: You have to disclose conflicts between your role in bankruptcy reorgs and liquidations that involve, directly or indirectly, your company in any way, even your retirement plan.
There was an interesting characterization of the case by the Justice Department as “one of the highest repayments made by a bankruptcy professional for alleged noncompliance with disclosure rules.” There was also a warning from the Justice Department, “If this conduct is repeated in future cases, we will seek even more far-reaching remedies.”