McKinsey & Company has spent months fighting in court over how it should disclose potential conflicts of interest when it advises bankrupt companies. The powerful consulting firm has defended itself by arguing that federal disclosure rules are so vague and confusing that almost no one can agree on how to comply. But for years McKinsey has had a 57-page primer — titled “Bankruptcy 101” — that lays out how to identify possible conflicts and make proper disclosures, according to a New York Times analysis. The only problem: McKinsey hasn’t been following its own instruction manual. “It is critical that the disclosure rules and guidelines in these materials be followed,” the document says. It adds, “Failure to adequately disclose material connections may result in severe penalties and fines.” The disclosure rules are intended to protect the integrity of the bankruptcy courts, where valuable corporate assets and vast sums of cash regularly change hands, by safeguarding against secret deals. They allow regulators to make sure that the advisers retained by bankrupt companies are not improperly favoring one creditor or bidder over others. That’s precisely the situation McKinsey now finds itself in. The court battles have already cost McKinsey millions of dollars in penalties, and risk costing it millions more.
A panel of three judges approved a $15 million settlement between McKinsey & Co. and the Justice Department, resolving the government’s allegations that the consulting firm didn’t disclose conflicts of interest in bankruptcy cases it helped steer, WSJ Pro Bankruptcy reported. The settlement, struck in February with the help of a mediator, is one of the largest sums ever paid by a bankruptcy professional for alleged disclosure violations and covers three large chapter 11 cases: coal miner Alpha Natural Resources, solar-energy company SunEdison Inc. and Westmoreland Coal Co. The settlement provides $5 million for unsecured creditors in each case, though exactly how that money will be distributed has yet to be resolved. The deal follows several years of court filings from the Justice Department criticizing McKinsey’s conflicts disclosure practices. Lawyers from the U.S. Trustee Program, an arm of the Justice Department charged with protecting the integrity of the nation’s bankruptcy system, have said that McKinsey’s disclosures didn’t comply with bankruptcy law, because they failed to identity clients with connections to the cases that could pose conflicts of interest. The program’s lawyers also have said that McKinsey “wasn’t forthcoming” about links between its restructuring and investment arms.
