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Judge Cites ‘Serious’ Accusations Against McKinsey in Reopening Bankruptcy Case

Category: Business,Finance

RICHMOND, Va. — A judge in Virginia reopened a more than two-year-old case on Wednesday to consider accusations that the powerful consultancy McKinsey & Company had defrauded his court while advising a bankrupt coal company.

“These are some of the most serious allegations that I have ever seen,” said the judge, Kevin R. Huennekens of the United States Bankruptcy Court for the Eastern District of Virginia, in Richmond.

The decision to reopen the bankruptcy case of Alpha Natural Resources was the latest in a series of court actions and legislative maneuvers meant to examine whether McKinsey has failed to disclose investments in the entities it helps reorganize — an arrangement that could allow the company to profit off the plan it helped put in place. The request to reopen came from a retired turnaround specialist, Jay Alix, and was supported by the Justice Department’s Office of the United States Trustee.

The federal bankruptcy code bars the professionals who work on bankruptcies from hiding their stakes, although possessing an interest in a company is not automatically disqualifying. The regulations require the disclosure of such connections between companies to ensure fair treatment of all parties.

McKinsey has denied wrongdoing. “We continue to stand by our disclosures, which have always fully complied with the law, and we are confident that Alix’s fraud claims will be exposed as completely meritless,” the company said in a statement.

McKinsey already faces similar claims of misconduct from Mr. Alix in the bankruptcy of another energy company, Westmoreland Coal, in Texas. And an examination by The New York Times revealed how the company is acting as an adviser in the bankruptcy-like restructuring of Puerto Rico while also holding some of the territory’s debt. A bipartisan group of lawmakers has proposed legislation that would strengthen the disclosure requirements in Puerto Rico’s case.

Judge Huennekens did not indicate whether he thought there was any merit to the allegations involving Alpha Natural Resources, but said they were too grave to brush off.

“We have to get to the bottom of this,” he said.

Mr. Alix, who formed a small investment company that bought some of Alpha’s unsecured debt, has expressed concerns about McKinsey’s behavior in bankruptcies for several years.

Mr. Alix alleged that there was “substantial, irrefutable evidence” that a McKinsey investment fund held an indirect stake in Alpha’s secured debt. He told the court he believed McKinsey had improperly reaped a profit of $50 million because it helped determine the way secured creditors were compensated.

McKinsey made the investment through an outside hedge fund, Whitebox Advisors, which has been a creditor in several other bankruptcies where McKinsey played a role, as well as in Puerto Rico’s case.

Judge Huennekens said he was especially troubled by Mr. Alix’s accusation that McKinsey did not tell him about its relationship with Whitebox, because McKinsey disclosed its business connections to the judge privately, rather than in open court.

A lawyer for McKinsey, Jennifer Selendy, told the judge the omission was not intentional. She said the consulting firm believed it had provided all the information that Judge Huennekens had asked for. She said Mr. Alix was seizing upon innocent omissions and using them to make “wild accusations.”

Judge Huennekens said McKinsey’s relationship with Whitebox still should have been disclosed, saying that it would have shone out at him “like a beacon.”

The Office of the United States Trustee had also asked for the Alpha case to be reopened. The office filed a statement in court in November, saying that McKinsey had failed to comply to make “transparent, timely and accurate” disclosures of potential conflicts. The statement asked Judge Huennekens to order McKinsey to pay back roughly $20 million in fees it had received.

The hearing Wednesday came a week after another bankruptcy judge, David R. Jones, told McKinsey and Mr. Alix that they should try to settle their dispute over Westmoreland Coal. If they didn’t, he said, he would also be compelled to investigate further. The United States Trustee is also urging the court to disqualify McKinsey in that case and make it forfeit the fees it has earned.


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