CORNER OFFICE The Story McKinsey Didn’t Want Written Illustrations by Laura Lannes Tied to the global consulting giant is a massive investment fund. Based on its reaction to this story, McKinsey likely doesn’t want you reading much about it. By Michelle Celarier July 08, 2019 During the reporting of this story, McKinsey’s legal counsel repeatedly sent lengthy and accusatory letters to Institutional Investor, their assertions ranging from editorial bias to irresponsible reporting. Institutional Investor stands behind this story. Fraud ran aplenty in 2008, and as frauds go New Stream Secured Capital was fairly quotidian. pay $15 million to settle with the U.S. in three cases: Alpha Natural Resources, Westmoreland Coal Co., and SunEdison. McKinsey has said that the settlement did not “constitute an admission of liability or misconduct.” Later, McKinsey forked over another $17.5 million in an unusual effort to resolve claims of unsecured creditors in SunEdison over the disclosure issues, among others. That sum was more than McKinsey made in fees in SunEdison’s bankruptcy. As Bhatia’s 401(k) lawsuit indicates, others are beginning to pull back the curtain on MIO. “It’s like turning a light on in the kitchen — a lot of roaches,” says Marianne Jennings, a professor of legal and ethical studies in business in the department of management at the W.P. Carey School of Business at Arizona State University. “Everything becomes obvious that wasn’t so obvious in the dark.” The bankruptcy cases offer a glimpse of the names, positions, and money at stake for McKinsey and MIO. Says Jennings: “I doubt McKinsey fully thought out what this meant in terms of the appearance of conflicts. This is a mess.” Electronic Trading Just Keeps Getting Better[/paste:font] MIO made other changes around that time. For example, the investment committee would no longer ratify allocations to third-party funds, according to a declaration of Casey Lipscomb, MIO’s general counsel — who also serves as the associate general counsel of McKinsey — in the Alpha Natural Resources case. And for the first time ever, Lipscomb said, MIO also hired two outside directors, who remain on the board today. One of them, Timothy Flynn, was previously the CEO and chairman of KPMG and is on the board of Walmart. Both companies have been McKinsey clients. Nine of 11 of the MIO board members are McKinsey partners or former partners. In addition to the board overlap, some MIO executives are also former McKinsey consultants. Gunnar Pritsch, MIO’s COO and head of risk management, comes out of McKinsey’s financial services group, which counts the world’s biggest banks and asset managers among its clients. McKinsey clients Barclays, BlackRock, Deutsche Bank, Goldman Sachs, Citigroup, Citadel, Credit Suisse, Wells Fargo, and UBS are also managing MIO money — and are also creditors to debtors that McKinsey has advised in bankruptcy, according to private disclosures McKinsey made to the judge in the Alpha Natural Resources case. Those disclosures were later made public. “It all looks very incestuous to me,” says Jennings, who is also the author of The Seven Signs of Ethical Collapse: How to Spot Moral Meltdowns in Companies . . . Before It’s Too Late. “There’s a fluidity running back and forth between who’s at McKinsey and who’s at MIO,” she says. “Even if you assume that they all have more integrity than anyone who walked the face of the earth, there’s still a lot of knowledge floating around and they all tie back to the management of McKinsey. I just don’t know how you can see it any other way than a conflict.” alleged corruption in South Africa to its alleged role in the opioid crisis. As media coverage of the Alix battle has gathered steam, McKinsey has gone on the offensive. This year, it hired public relations executive Michael Sitrick, a self-acknowledged spinmeister who “fixes the worst PR crises imaginable,” The New York Times wrote last year. Recently, McKinsey posted statements on its website accusing Alix of orchestrating a media campaign against it and MIO to drive McKinsey out of the bankruptcy advisory business. It says Alix’s claims are meritless, that McKinsey has been “transparent” in its bankruptcy court filings, and that its disclosures have been “lawful and made in good faith.” However, McKinsey refused II’s repeated requests to interview principals, including MIO co-CEO Tibbetts. Instead, its attorneys wrote II’s general counsel multiple times ahead of publication to complain about, among other things, this writer’s prior profile of Jay Alix. (When alerted that the existence of these letters would be noted in this article, McKinsey asked to comment on its own legal strategy, writing, in part: “As McKinsey’s counsel said in her first letter, McKinsey’s ‘concern stem[med] from the experience [the firm] had with a previous article about McKinsey written by Ms. Celarier in Institutional Investor. That lengthy article from March 18, 2019 . . . includes paragraph after paragraph of serious, but false, allegations about McKinsey and its executives. The allegations were admittedly obtained from McKinsey’s litigation adversary and yet the story includes a total of only 13 sentences of McKinsey’s rebuttal in a 95-paragraph story.’”) McKinsey, through Sitrick, offered to answer written questions with statements that could be attributed to Pinkus. In its defense, the firm points to an independent report by the Luskin law firm, which McKinsey believes has exonerated its relationship with MIO. “Mr. Luskin, who is the first and only independent expert who has reviewed the facts concerning the separation of McKinsey and MIO, concluded that ‘McKinsey’s policies, procedures, and practices ensured and continue to ensure that McKinsey’s consulting work and MIO’s investment management work were and are separate and that there is no information sharing between them,’’’ according to a statement attributed to Pinkus. The Luskin report was commissioned by the Financial Oversight and Management Board for Puerto Rico after it learned in bankruptcy proceedings that MIO was an investor in Puerto Rico bonds while McKinsey was serving as an adviser to the oversight board. The comprehensive report goes into detail about the “information barrier” McKinsey and MIO have created. It notes how MIO is separate from the consulting firm. “The MIO staff of approximately 150 is dedicated exclusively to MIO. MIO staff do not provide consulting services. MIO’s investment professionals do not share office space, infrastructure, computer systems, or email addresses with McKinsey’s consulting business,” it says. Moreover, it says that “McKinsey and MIO have multiple complementary and overlapping policies designed to avoid conflicts of interest.” Yet Luskin also says that the trading in Puerto Rico public debt is “particularly problematic, as it gives rise to the appearance of conflict.” When applying for the advisory role, McKinsey had told the board that it knew of no conflicts “or potential appearance of a conflict of interest,” the report states. McKinsey did not disclose any MIO investments and received the appointment in late 2016, according to Luskin. Some Puerto Rico bonds, however, are held by Whitebox Advisors, a longtime MIO hedge fund investment that is also a creditor in seven other bankruptcies where McKinsey was the bankruptcy adviser, according to Whitebox’s proof of claims filed in those cases. Whitebox’s investment in Puerto Rico debt was made public in June 2016 and then was mentioned by The Wall Street Journal in a June 2018 article about McKinsey. A few months later, The New York Times revealed that MIO also owned some Puerto Rico debt through its internal Compass-branded funds using managed accounts with Alternative Strategy Advisers and Aristeia Capital. The news stories triggered the oversight board’s hiring of Luskin, according to the report. Only then did McKinsey provide the full details of MIO’s investments in Puerto Rico bonds. McKinsey also moved its Puerto Rico bonds out of the Aristeia-managed account into an Aristeia hedge fund, which McKinsey says had nothing to do with the Times exposé. “The transfer of securities occurred in connection with a reduction in overall investment with Aristeia prior to the NYT article,” a McKinsey spokesman says. The Luskin investigation, which involved interviewing McKinsey and MIO executives, found “no evidence that information in MIO’s possession concerning these investments was shared with the McKinsey Puerto Rico service team or any other McKinsey consultant.” And given that Puerto Rico’s special form of bankruptcy doesn’t mandate disclosure of connections that could present conflicts, as is required under U.S. bankruptcy rules, Luskin determined that McKinsey complied with the law. But the report also found that “MIO’s direct and third-party-managed investments in Puerto Rico public debt could create the appearance of a potential conflict.” Had the oversight board known of its direct investments, the report says the board would have likely required MIO to “divest or to explain why the investments did not present a disabling conflict.” In conclusion, it recommended that McKinsey in the future take steps to ensure “full disclosure” regarding any investments in Puerto Rico public debt. McKinsey’s Pinkus says such a reading of Luskin is wrong, because “only disclosure recommendations for indirect investments exists where there is actual knowledge of such investments.” However, Luskin believes that McKinsey should learn about such investments from public filings. It argues that McKinsey should be checking filings made on MIO’s behalf with the SEC or the Department of Labor, and cross-check them with an “expanded list of interested parties.” It should also check when its asset managers file proofs of claims in the bankruptcy court. “These filings would trigger updated disclosures,” it notes. In the 14 bankruptcy cases it has been involved in since 2001, McKinsey has not disclosed hundreds of connections with MIO investments, according to public filings searches by Alix’s legal team that it disclosed in a June pleading in the Westmoreland bankruptcy case. (McKinsey did not dispute those numbers.) More connections — and potential conflicts — with MIO’s hedge funds that McKinsey has not disclosed are coming to light in two additional bankruptcy cases, Standard Register and NII Holdings, that Alix’s Mar-Bow is seeking to reopen. In a significant June 28 court filing, the U.S. Trustee said it was willing to investigate some of Mar-Bow’s claims if the NII case is reopened. MIO appears to have been an undisclosed investor in NII debt, via its investment in Whitebox, which led to an equity investment in the restructured company, according to a Mar-Bow pleading in the bankruptcy court in the Southern District of New York filed in May. A similar situation occurred in Alpha Natural Resources, giving MIO an equity stake in the new company, Contura Energy, created out of that bankruptcy, as II previously reported. McKinsey says no one on the consulting side was aware of the Whitebox investments. Earlier this year, Judge Huennekens, who oversaw the Alpha Natural Resources bankruptcy, asked McKinsey to certify that it had not profited off the portion of the settlement with the U.S. Trustee that found its way to Contura. But while saying that McKinsey itself did not benefit, the firm recently admitted in a court filing that its employees may have benefited, given the MIO fund investments. It even offered to make a contribution to charity “to the extent that even the potential that McKinsey or its employees might receive some benefit, however minimal, troubles the court.” Without naming them, McKinsey said three of the hedge fund firms MIO invests in have holdings in Contura, according to public documents. (Contura’s largest investor, Whitebox, in a statement said it “makes investment decisions for the funds and accounts it manages completely independently.”) After its settlement with the U.S. Trustee earlier this year, McKinsey embarked on the creation of a new “protocol” that would outline which potential conflicts of interest it would be willing to disclose. The proposed protocol, filed in the Houston bankruptcy court at the end of May, is an obtuse document that suggests different levels of disclosure for different types of firms. McKinsey says it would be required to “disclose the known direct connections” of MIO — which means those not made through a third-party hedge fund. And it would also have to disclose “the indirect connections” of MIO to “parties identified on the interested-parties list,” which is a list put together by the debtor. That means McKinsey itself would have no responsibility to check for conflicts with MIO’s hedge funds, which it calls “indirect” connections. Finally, McKinsey wouldn’t be required to disclose investments small enough to be considered “de minimis” — which is not specifically defined. But that’s not what the bankruptcy rule requires, say Alix’s lawyers, who call the proposal a “thicket of legal murk.” They argue that the proposed protocol “illegally allows a professional to restrict its disclosure of its investment connections” in procedures that are “inconsistent and incomprehensible.” Previous attempts by others to limit disclosure by bankruptcy advisers have failed, and it’s unclear if federal bankruptcy Judge David Jones, overseeing this case, will go along this time. “Am I going to approve it? Absolutely not,” he said in an April 16 hearing. “The standard is what the standard is. I’m assuming that the protocol will simply be a mechanism, if you will, on how compliance is hoped to be achieved.” Despite the concerns about the protocol, when the Westmoreland disclosures were filed on July 3 in accordance with it, McKinsey disclosed hundreds of MIO connections. They included 56 investments — in funds run by Whitebox, UBS, BlackRock, Oaktree Capital Management, PIMCO, and Bank of America, among others. It also disclosed numerous hedge funds that had been McKinsey clients when they were lenders to other companies that filed for bankruptcy. On June 6, Alix took the stageat a dinner hosted by the Association of Insolvency & Restructuring Advisors in Boston, where he was given an award by the professional organization. Such occasions are normally staid corporate affairs, but about 17 minutes into his speech, a man jumped on the stage, stood 10 feet from Alix, and tried to interrupt his talk. “Let him speak,” the crowd yelled at the man. “I don’t know why he’s here, but I am going to finish my speech if it’s okay with you,” Alix responded back to the audience. Alix was deep into his critique of McKinsey, detailing his various allegations against the firm. “McKinsey is so big and so connected that it scares people,” he said, according to a video of the speech II has viewed. When he finished, Alix received a standing ovation. McKinsey denies there is a “broadly held” perception that the firm has potential conflicts of interest with its internal fund of funds. But McKinsey’s actions since the controversies erupted in recent years — like adding independent directors and taking Garcia off the MIO board — indicate the firm is aware that such a perception does exist, says ethics expert Jennings. However, she doesn’t think its actions resolve the issues. “All the stuff they’re doing now is the chase and the cleanup, coupled with denial,” she says. Its efforts certainly haven’t quelled criticism. Alix’s attorneys argue that an “information barrier” isn’t foolproof. “Policies can be breached. Insider trading occurs. Water-cooler conversations result in permeable barriers. And, while people might not officially ‘participate’ in investments, they might provide formal or informal input,” they wrote in the recent pleading in the Westmoreland case. Turning over all its investments to an outside firm — as other consultancies do — or spinning out MIO to stand alone might not be an easy, or even perfect, solution. But “from a business perspective, it would make sense,” says Jennings. However, when II asked McKinsey if it had even considered such a solution, it ignored the question. That isn’t surprising to McKinsey watchers, who believe having an internal fund is integral to McKinsey’s business model — and not just because McKinsey subsidizes it. “The only reason to have it internally is to do what the rest of the world doesn’t want them to do: use their inside information,” says former consultant Matthew Stewart. Stewart’s skepticism comes from following McKinsey’s history. “Over the past 15 to 20 years, I’ve been astonished at McKinsey’s ability to push the ethical boundaries, get caught, and then turn around and insist they are prim and proper, true professionals, and put it all behind them,” he says. In 1985, when McKinsey partners thought about setting up an internal investment fund, some of them were wise enough to foresee it could create problems. While they didn’t predict the troubles the firm now faces and the questions of conflicts between lower-level employees and partners or with bankruptcy assignments and hedge fund investments, they were concerned that something “bad” might occur. As the internal history notes, “Some partners worried about what might happen if an investment went bad and made it onto the front page of The Wall Street Journal.” It didn’t stop McKinsey from going full steam ahead. “Otherwise,” it adds, “opposition was muted
Form where exactly did you get this article and information? It looks like some serious accusations, so it is not something that should be taken for granted if not previously checked well