MOBSTERS, gangsters and bent cops have all been tried under America’s Racketeer Influenced and Corrupt Organisations (RICO) Act. Might consultants be next? McKinsey, a management consultancy, is being sued under the law by Jay Alix, the founder of AlixPartners, a competitor in the field of bankruptcy advice. Mr Alix alleges that McKinsey knowingly misled courts in order to land clients. The firm denies any wrongdoing.
Bankruptcy is lucrative, for those doling out the advice. According to Debtwire, a data provider, corporate bankruptcies generated $1.3bn in fees in 2016, with lawyers taking home over half, and the rest going to consultants, accountants and financiers. McKinsey is a relative newcomer: it set up its restructuring arm, which turns around companies in financial distress, in 2010. Though its share of the market is smaller than those of the top players, AlixPartners and Alvarez & Marsal, its entry has stiffened competition. Its clients have included American Airlines, Puerto Rico and a number of energy companies.
McKinsey is well-known for keeping the details of its consulting work and its clientele close to its chest. In contrast, the byword for bankruptcy work is transparency. Restructuring advisers have influence over how much creditors get paid, or which parts of the business are sold off and to whom. They might even serve as interim executives of a distressed firm. Creditors want to know that potential buyers are not taking advantage of a company already on its knees. So advisers must disclose any potential conflicts of interest to a court before they are approved to work for a firm in distress. A judge then decides if the advisory firm’s connections pose a conflict, in which case it can be barred from working on behalf of the bankrupt business.
In April 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. That such a well-connected consultancy had so few potentially problematic links to declare might strain credulity. McKinsey points out that courts routinely approved its disclosures.
But Mr Alix, who no longer holds a majority stake in his firm and is suing independently of it, alleges that McKinsey deliberately hid conflicts of interest in order to gain work unlawfully, and so deprived his company of tens of millions of dollars of business. He also accuses McKinsey of offering to refer its consulting clients to lawyers, if law firms in turn referred bankruptcy work to it. He says he discussed the allegations with McKinsey executives in 2014, but decided to take no action because they promised to exit the bankruptcy business. McKinsey says the accusations are “baseless and anti-competitive”, and an attempt to disparage the firm; it also denies having promised to exit the business.
Mr Alix has already devoted plenty of energy to challenging McKinsey. He bought up a stake in one of McKinsey’s bankruptcy clients, Alpha Natural Resources, a coal producer, so that he could convince regulators to press the consultancy for more disclosures. McKinsey went on to disclose the names of some of its clients, including banks, that were connected to the coal company.
Mr Alix has said he wants to ensure all advisory firms operate on a level playing field. But some wonder if the RICO suit, originally designed to litigate against criminal organisations, is being used to grab headlines. Nor is it clear how Mr Alix can prove his firm was deprived of work. Even if it had made more disclosures, says Stephen Lubben, a law professor at Seton Hall University, McKinsey may not have been disqualified all the time; and if it had been disqualified, AlixPartners may not have snapped up all the work. Court cases, just like bankruptcy advice, can be messy.
Click to get a 90% discount on Udemy.