McKinsey Hid Conflicts to Draw Bankruptcy Work, Alix Says

(Bloomberg) -- Consulting giant McKinsey & Co. went so far to get ahead in the lucrative market for advising bankrupt companies that it engaged in racketeering, according to a lawsuit by Jay Alix, the founder of competitor AlixPartners LLP.

McKinsey “knowingly and intentionally submitted false and materially misleading declarations under oath in the bankruptcy proceedings” since 2001 to conceal what would have been disqualifying conflicts of interest, Alix said in the complaint, filed Wednesday in Manhattan district court.

McKinsey also had “pay to play” arrangements where it offered to refer its consulting clients to attorneys for bankruptcy work if the attorneys referred their bankruptcy clients to McKinsey for consulting work, according to the suit, which didn’t name the lawyers. McKinsey responded in an emailed statement that the lawsuit aimed at the firm’s RTS unit is an attempt to “harass and disparage McKinsey using baseless and anti-competitive litigation, which courts have consistently rejected.”

A dispute between the two advisory firms has been simmering for years, with AlixPartners sometimes pressing McKinsey to disclose more information about its clients in specific cases. The potential ramifications of such conflicts are wide-ranging, because advisers can help sway decisions on who gets assets of the bankrupt company, and whether to claw back funds so they could be shared among all creditors. Bankruptcy cases cited in the suits involved $350 billion worth of assets.

Bankruptcy Advice

“The courts and U.S. trustees have repeatedly dismissed Mr. Alix’s prior challenges, approved RTS’ disclosures, and concluded that RTS has met all of its disclosure requirements,” McKinsey said in the statement. “We will vigorously defend ourselves against these meritless claims and expose Mr. Alix’s clear pattern of anti-competitive behavior in court.”

A spokesman for AlixPartners declined to comment.

Alix has been a major player in the market for advising bankrupt companies since the 1980s. Since 2010, his firm and two other players -- Alvarez & Marsal and FTI Consulting Inc. -- have dominated the market in advising bankrupt companies with more than $1 billion in assets, controlling about 75 percent of such cases, the suit says. The market is estimated to be worth at least $100 million a year, not including pre-bankruptcy engagements, the suit says.

Alix alleges in the complaint that McKinsey’s behavior helped it compete in a market where it would have otherwise been stymied given its “roster of clients and alumni connections” that could create conflicts of interest. It estimates McKinsey has unlawfully received “at least $101 million to date” in bankruptcy consulting fees, and harmed AlixPartners by depriving it of “valuable consultancy assignments.”

Exit Plan

The suit alleges Alix had meetings, emails and phone conversations with Dominic Barton, McKinsey’s global managing partner since 2009, where Barton purportedly said that “McKinsey was intentionally concealing its clients’ identities and that it was conducting the ‘pay to play’ scheme.”

Barton allegedly asked Alix to hold off from doing anything until Barton was re-elected managing partner and could implement changes, saying McKinsey would exit the bankruptcy market, according to the suit. Instead, McKinsey accelerated its unlawful conduct, Alix said. Five other senior McKinsey employees were also named in the suit.

According to the complaint, Barton also told Alix that he had consulted with a partner at Skadden Arps Meagher & Flom LLP who had told him that the alleged "pay-to-play" scheme was illegal, and that McKinsey’s own general counsel had agreed with the assessment. A representative for Skadden didn’t immediately return a call and email for comment.

Recent cases including SunEdison Inc., Alpha Natural Resources Inc., and GenOn Energy Inc., are singled out in the complaint.

SunEdison Case

Clients allegedly concealed in McKinsey’s SunEdison work included BlackRock Inc. and affiliates of Cerberus Capital Management, both second-lien lenders, and the U.S. Attorney’s Office at the Department of Justice, according to the complaint. The suit doesn’t allege that those parties knew about the wrongdoing. In SunEdison, Longroad Energy, a firm that was a partner of a BlackRock subsidiary, bought some assets, the suit says.

A BlackRock spokesman declined to comment and Cerberus didn’t immediately return a call seeking comment.

In GenOn, McKinsey allegedly concealed that it was itself liable to the company for a $4.5 million preference claim and that while it was working for GenOn to investigate affiliate NRG Energy, the unit was actually a current or former McKinsey client. A number of GenOn’s creditors were also McKinsey’s clients, according to the complaint.

McKinsey’s alleged conduct amounts to bankruptcy fraud, mail fraud, wire fraud and obstruction of justice, according to the complaint, brought by Boies, Schiller Flexner LLP.

The case is Jay Alix vs. McKinsey & Co., 18-04141, U.S. District Court, Southern District of New York.

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