McKinsey Agrees to Pay $15 Million to End Bankruptcy Probe

(Bloomberg) -- McKinsey & Co. agreed to pay $15 million to end a probe by the U.S. Trustee into whether the global consulting giant violated disclosure rules designed to prevent conflicts of interest in corporate bankruptcies, a federal judge said in a court filing.

Under the terms, McKinsey didn’t admit wrongdoing and the U.S. Trustee agreed to drop its objections to fees charged by the company’s bankruptcy unit in three Chapter 11 cases. The U.S. Trustee is an arm of the Department of Justice that monitor’s bankruptcies to ensure compliance with federal law.

U.S. Bankruptcy Judge Marvin Isgur had been mediating a months-long dispute between McKinsey and the U.S. Trustee and Jay Alix, a retired bankruptcy adviser. The Trustee’s office and Alix accused McKinsey of hiding potential conflicts of interest that could have disqualified from the company from acting as a bankruptcy adviser in some cases.

“The settlement does not opine in any way on the adequacy of McKinsey’s prior disclosures and, as Judge Isgur noted, the proposed settlement resolves ‘good faith disputes concerning the application of Bankruptcy Rule 2014,’” the company said in an emailed statement. “McKinsey has agreed to this settlement in order to move forward and focus on serving its clients.”

Hidden Conflicts

Alix, who was not part of the deal, said he plans to continue pressing his objections to the way McKinsey reports potential conflicts of interest.

“This settlement does not bring them into compliance with all the issues we have raised,” Alix said. “We’re going to pursue our investigation and continue bringing out these hidden conflicts.”

The $15 million will be evenly divided by three companies that McKinsey advised in bankruptcy. The U.S. Trustee also agreed not to join any investigation of the other 11 bankruptcy cases in which McKinsey has served as a court-approved adviser. McKinsey’s bankruptcy unit has collected more than $140 million in fees from those 14 cases, according to court records.

The U.S. Trustee probe grew out of a fight between McKinsey and 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 last 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 complies with all appropriate bankruptcy rules, and that Alix is just trying to push a competitor out of the bankruptcy advisory business.

To contact the reporter on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net

To contact the editor responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net

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