McKinsey Should Be Barred From Coal Bankruptcy Case, Trustee Says

(Bloomberg) -- McKinsey & Co. should be denied consulting work -- and the lucrative fees it gets as a result -- in the Westmoreland Coal Co. bankruptcy, federal lawyers said in the latest attack on the firm’s restructuring business.

The consulting giant has refused to disclose potential conflicts of interest in the coal case and is acting as a creditor itself, the U.S. Trustee, an arm of the Department of Justice, told a judge in Texas. That should bar McKinsey from giving Westmoreland advice on how to restructure its debt, the lawyers said.

“McKinsey RTS must be held to the same standard as any other professional. No other professional would be allowed to do this,” wrote Hector Duran, a trial attorney with the U.S. Trustee in Houston.

In a statement, McKinsey said that a new standard for adviser disclosures is being applied in the Westmoreland bankruptcy.

“We stand behind our disclosure practices and continue to believe they are completely in line with the law,” it said. “We have consistently been responsive to guidance from the U.S. Trustee and have followed the disclosure protocol that they previously approved.”

Not the First Time

The move is the second challenge by the bankruptcy watchdog in recent weeks. Last month, the U.S. Trustee in Virginia asked a federal judge to order McKinsey to return fees in a separate coal-company bankruptcy after concluding the firm had violated U.S. bankruptcy rules requiring disclosure of potential conflicts.

In the Westmoreland case, the U.S. Trustee began looking at McKinsey’s potential conflicts after a judge ordered a probe. In response to that investigation, McKinsey denied wrongdoing and said it makes all required disclosures.

The allegations against McKinsey grew out of fight with Jay Alix, founder of a rival bankruptcy advisory firm. Alix, who retired several years ago, but remains a well-known figure in the restructuring world, sued McKinsey in federal court in New York earlier this year accusing the firm of flouting bankruptcy rules. In bankruptcy, lawyers and financial advisers are required to disclose any potential conflicts and cannot have any financial ties that could taint their restructuring advice.

McKinsey has said it complied with all appropriate bankruptcy rules, and that Alix is just trying to push a competitor out of the bankruptcy advisory business.

“We believe our disclosures have always complied with the law and are confident they will be found appropriate here as well,” McKinsey said earlier this month in response to the Westmoreland Coal investigation.

U.S. Bankruptcy Chief Judge David R. Jones has ordered McKinsey and Alix’s investment firm, Mar-Bow Value Partners, to each send a company official to a Dec. 18 status hearing in the Westmoreland case.

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