January 10, 2019 – Bankruptcy is a lucrative business for those doling out the advice and accusations of conflicts of interest are not uncommon. However, even by these standards the move by a judge in Virginia on January 9 to reopen a two-year-old Chapter 11 case in order to look into allegations that McKinsey & Company defrauded his court while advising a bankrupt coal company is unusual.
Judge Kevin R. Huennekens of the United States Bankruptcy Court for the Eastern District of Virginia in Richmond granted on a limited basis a motion filed on July 18, 2018 by Mar-Bow Value Partners, an unsecured creditor in the case of Alpha Natural Resources, to reopen the coal producer’s Chapter 11 cases. Alpha Natural Resources
filed for Chapter 11 protection on August 3, 2015 (case number 15- 33896).
Data compiled by Bankruptcy Data shows McKinsey filed their final fee application motion for over 19 Million USD in fees and expenses. (See attached file.)
“Mar-Bow respectfully moves the Court to reopen these Chapter 11 cases so as to allow the Court (i) to address the additional disclosure violations on the part of McKinsey that have come to light, (ii) to address credible allegations from public documents evidencing McKinsey’s fraud on the Court and (iii) to grant Mar-Bow’s request for an indicative ruling,” the motion said.
Judge Huennekens said in his order granting the motion on a limited basis: “These are some of the most serious allegations that I have ever seen… We’ve got to get to the bottom of it.”
The judge did not indicate whether he thought there was any merit to the allegations, though reopening a closed Chapter 11 case is regarded as rare. Generally, after a bankruptcy estate has been “fully administered” – ie. the debtor’s Chapter 11 plan has been confirmed, all bankruptcy claims have been resolved, and the plan is “substantially consummated” – the court is required to close the case by issuing a “final decree”. However, section 350(b) of the Bankruptcy Code and Bankruptcy Rule 5010 does allow the court, on a motion of the debtor or another party in interest, to reopen a closed bankruptcy case “to administer assets, to accord relief to the debtor, or for other cause.”
McKinsey denies any wrongdoing. “We continue to stand by our disclosures, which have always fully complied with the law, and we are confident that Alix’s [Jay Alix, the man behind Mar-Bow Value Partners] fraud claims will be exposed as completely meritless,” the company said in a statement carried by various news outlets.
However, the judge’s decision intensifies the spotlight that is already blazing on McKinsey’s bankruptcy division, which among the industry is regarded as highly secretive.
The federal bankruptcy code bars the professionals who work on bankruptcies from concealing any stakes they might have in the companies in question and requires them to disclose any such connections to ensure fair treatment of all parties.
In April 2018, the Wall Street Journal reported
that McKinsey initially disclosed an average of only five potential conflicts per case, whereas other professional-services firms divulged, on average, 171 connections. In most cases it disclosed no conflicts at all. McKinsey told the paper that its disclosures are more than appropriate. But experts question how such a well-connected consultancy could have so few potentially problematic links to declare.
The United States Trustee’s office, a government agency that monitors cases for fraud, high attorney fees and excessive executive bonuses, has previously faulted McKinsey’s disclosures and connections to other parties involved in Chapter 11 cases in which its restructuring unit, called McKinsey RTS, has participated in.
And on December 14, the Department of Justice accused in a court filing McKinsey of having “pervasive disclosure deficiencies” and should be dismissed from the bankruptcy case of another coal producer, Westmoreland Coal Company
, and stripped of the fees it had earned so far.
According to information from the Bankruptcydata database, McKinsey’s fee schedule was as follows:
Title of Professional (and Hourly Rates)
- Practice Leader: $995-$1,150
- Senior Vice President: $735-$925
- Vice President: $640-$735
- Senior Associate: $530-$615
- Associate: $425-$515
- Analyst: $300-$425
- Paraprofessional: $250-$275
According to court filings, Westmoreland paid
McKinsey RTS a retainer in the amount of $1,500,000 on August 1, 2018 in connection with prepetition services. During the ninety (90) days prior to the Petition Date, Westmoreland paid McKinsey RTS a total of $5,540,000.00 (inclusive of the Retainer and reimbursable expenses).
Westmoreland had been sailing through the bankruptcy process since its filing for Chapter 11 protection on October 9, 2018 with the US Bankruptcy Court in the Southern District of Texas (case number 18-35672) until Jay Alix, founder of AlixPartners, which competes with McKinsey in the field of bankruptcy advice, intervened. A trenchant critic and legal foe of McKinsey, Alix filed an objection on November 29, 2018 in the bankruptcy of Westmoreland, alleging dozens of instances in which McKinsey’s business relationships were in conflict with its duty to its bankrupt clients.
Alix is also the founder of Mar-Bow Value Partners, an investment firm which filed the motion to reopen the Alpha Natural Resources case. Alix had directed Mar-Bow Value Partners to buy up a stake in Alpha Natural Resources as a way to convince regulators to press the consultancy to make more disclosures.
Alix has had McKinsey in his sights for some time, accusing it in a lawsuit filed in federal court in New York in May 2018 of improperly earning at least $101mn in bankruptcy fees. Specifically, Alix alleged McKinsey concealed that, while it was advising Alpha Natural Resources on maximizing the value of its business, the firm was also helping U.S. Steel reduce what it paid Alpha for its coal. The WSJ has also reported that MIO Partners, which oversees McKinsey’s employee retirement fund and other investments, held a $110mn investment in a hedge fund that owned senior debt issued by Alpha Natural Resources.
A McKinsey statement called Alix’s lawsuit “meritless” and says the veteran of the turnaround industry is on a crusade to drive it out of the bankruptcy business.
That business is of course highly lucrative, but it can also be very messy – as McKinsey is finding out to its cost.
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