Bankruptcy, Transparency and the White Knight: McKinsey (Short Logic)

Another week, another chapter in the Jay Alix and McKinsey drama. And, seriously, folks, this sh*t is fiercer than a White Walker facing off against some dragons so hold on to your seats.

On Tuesday, Law360 reported:

Restructuring consultant Jay Alix again urged a New York bankruptcy court on Tuesday to let him investigate McKinsey & Co. over alleged conflicts of interest in the SunEdison Inc. Chapter 11 case, just days after McKinsey revealed that it paid $17.5 million to SunEdison’s estate to resolve nearly identical claims.

Tuesday’s motion comes as U.S. Bankruptcy Judge Stuart M. Bernstein is considering whether to take additional action in the SunEdison case, or let the $17.5 million settlement end matters as far as McKinsey is concerned.

And on Wednesday:

Alix’s filing in the SunEdison case comes as a Texas bankruptcy court rejected his pleas to dig further into McKinsey in the case of the Westmoreland Coal Company, which emerged from bankruptcy last month and is another McKinsey client.

The conflict of interest claims Alix raised in that case forced McKinsey to disgorge $5 million in fees in a settlement with Westmoreland’s estate, but on Wednesday U.S. Bankruptcy Judge David R. Jones shot down Alix’s request for an “emergency order” that would allow him to conduct further discovery.

Indeed, Mr. Alix sought an “emergency motion” for entry of an order compelling McKinsey to disclose all of the investments of its affiliate MIO Partners Inc. Mr. Alix wrote:

The time to move forward on Mar-Bow’s objection and determine whether McKinsey is qualified to serve as a professional in this matter is long overdue. It is notable that McKinsey has never denied the MIO’s holdings in the Debtors’ estates or in interested parties. Accordingly, this emergency motion seeks prompt and highly discrete relief: an order compelling McKinsey to (a) identify all equity or debt investments held or managed by it or any of its affiliates (including MIO) in any Debtor, or in any party in interest, competitor, customer, or supplier; and (b) disclose information sufficient to allow the Court to evaluate the amount and nature of those investments.

The judge — perhaps a bit miffed that his docket had been completely overrun by motion practice relating to the Alix/McKinsey dispute…you know, rather than issues specific to the actual Westmoreland Coal Company matter — summarily dismissed the motion. In an order issued on Wednesday April 10, 2019, he wrote:

At best, the motion represents a self-created emergency with no underlying substance. At worst, the motion constitutes an improper collateral attack on the Court’s prior order at Docket No. 1427 for an illegitimate purpose. Counsel are advised that they are responsible for the words and allegations contained in pleadings on which their names appear. Candor and professionalism must never be sacrificed in the name of overzealous advocacy.

ZING!

Of course, we find this language to be a wee bit hypocritical coming from a Judge who has skewered professionals of all types — lawyers, service providers, whomever — from his perch on the Bench. As just one example, recall this classy bit from an August 4, 2016 hearing in the matter of Sherwin Alumina Company LLC (that related to the Noranda Aluminum matter too):

You are on my radar screen. The financial transaction that ought to be being discussed a first-year business student can see. I’m not the smartest guy in the world, and I see it. I have been reading pleadings. And I cannot express the degree of disappointment that I have in the professionals that have been running these cases. If this case is going to fail, if the Noranda cases are going to fail, then so be it. But that’s going to create a block of time, and I’m going to use all of my education, all of my training, all of my experience in deciding where to lay the blame for this failure. That’s not a threat; it’s a promise. And if anyone wants to test my resolve, I encourage them to do it. Anyone doubts my commitment? Noranda’s local counsel spent a lot of years with me. They know exactly how I can be. You all are a talented group of people. I find it offensive that egos have gotten in the way. If we really want to try and have a contest as to who’s got the biggest set, I promise you I will win that battle.

“That’s not a threat; it’s a promise.” Really?

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McKinsey Keeps Getting Burned (Long Newspaper Relationships)

We’ve previously covered the pending lawsuit by Jay Alix against McKinsey here. It’s next level and totally worth refreshing your recollection. You’ll recall the sequence of events: first, a Wall Street Journal article highlighted McKinsey’s failure to disclose potential conflicts in a variety of restructuring engagements and then Jay Alix immediately launched his lawsuit alleging racketeering, bribery, etc. Curious timing, as we said at the time. We wrote:

In “McKinsey Gets Thrown Under the Bus (Long Relationships with the WSJ),” we began,

Okay, this WSJ article is bananas. What are the chances that Jay Alix has a direct line in to Gerard Baker?

Given that the WSJ piece is now front in center in the “Complaint and Jury Demand” filed by Jay Alix in Alix v. McKinsey & Co. Inc., et al (page 4, paragraph 11), wethinks the chances are pretttttttty prettttttty high (we’re 100% speculating here so take this with the usual PETITION grain of salt).

Well, for McKinsey, the hits just keep on coming.

Subsequent to the above, the Wall Street Journal reported that a McKinsey retirement fund held investments that hinged on the result of some of the very bankruptcy cases that McKinsey RTS worked on. WHOOPS.

This week, Representative Andy Biggs of Arizona asked the director of the U.S. Trustee Program, a Justice Department unit, for clarity on the requirements governing how bankruptcy professionals comply with the Bankruptcy Code’s “disinterestedness” standard. Per The Wall Street Journal, Representative Biggs is “concerned that undisclosed conflicts at McKinsey & Co.’s restructuring unit may be compromising the nation’s bankruptcy system.” With all due respect to Mr. Biggs, there are greater dangers to the integrity of the bankruptcy system than the disclosure of McKinsey’s client list. Like some of the points made here (conflicts, generally). And here (independent directors). Or here (professionals’ fees). Or here (venue shenanigans and judges “playing ball”). This wouldn’t be the first time that a Congressman exhibited a negligible understanding of an issue. But we digress.

Anyway, like clockwork, Jay Alix pounced. This week, as (also) reported in The Wall Street Journal (which seems conveniently all over this drama), Mr. Alix filed papers in the U.S. Bankruptcy Court in Richmond Virginia asking the bankruptcy judge to consider reopening the bankruptcy case of Alpha Natural Resources, a case that confirmed eons ago. Per the WSJ:

The revelation that McKinsey had a financial interest in the outcome of Alpha’s bankruptcy warrants reopening the case and revisiting whether the firm failed to properly disclose potential conflicts of interest, according to Mr. Alix.

First, HAHAHAHAHA. Right, ok. We’re sure the judge will reopen the case on this basis.

Second, the article is entitled “Disclosure Advocate Seeks to Reopen Coal Miner’s Bankruptcy.” Therein, the WSJ deadpans:

Mr. Alix has been relentless in his battle with McKinsey. He is currently pursuing litigation against the firm in several courts, hiring some of the country’s top lawyers and ethics experts to help him take on the consulting giant.

Mr. Alix has denied McKinsey’s accusation that he is seeking a competitive advantage for AlixPartners, the prominent restructuring firm he retired from in 2006 but retains a minority ownership stake in.

Right. Of course he isn’t looking to take out a competitor (that once poached his employees) and/or juice his equity. Promise.

He’s a mere “disclosure advocate.”

Professional Shots Fired: Jay Alix Sues McKinsey

In “McKinsey Gets Thrown Under the Bus (Long Relationships with the WSJ),” we began,

Okay, this WSJ article is bananas. What are the chances that Jay Alix has a direct line in to Gerard Baker?

Given that the WSJ piece is now front in center in the “Complaint and Jury Demand” filed by Jay Alix in Alix v. McKinsey & Co. Inc., et al (page 4, paragraph 11), wethinks the chances are pretttttttty prettttttty high (we’re 100% speculating here so take this with the usual PETITION grain of salt). Crack open a beer, break out the popcorn, and kick back: there’s a lot to unpack here…

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