RICHMOND, Virginia – A Virginia judge reopened a more than two-year-old case on Wednesday to examine charges that powerful consulting firm McKinsey & Company defrauded its court while advising a bankrupt coal company.
“These are some of the most serious allegations I have ever seen,” said Judge Kevin R. Huennekens of the United States Bankruptcy Court for the Eastern District of Virginia in Richmond.
The move to reopen the Alpha Natural Resources bankruptcy case was the latest in a series of lawsuits and legislative maneuvers to examine whether McKinsey failed to disclose investments in the entities it helps to reorganize – an arrangement that could allow the company to profit. the plan he helped put in place. The request to reopen came from a retired recovery specialist, Jay Alix, and was supported by the United States Department of Justice’s Office of the Trustee.
The Federal Bankruptcy Code prohibits professionals working in bankruptcy from concealing their holdings, although owning an interest in a business is not automatically disqualifying. Regulations require disclosure of these links between companies to ensure fair treatment of all parties.
McKinsey has denied any wrongdoing. “We continue to abide by our disclosures, which have always been fully in accordance with the law, and we are confident that Alix’s fraud allegations will be exposed as completely unfounded,” the company said in a statement.
McKinsey is already coping similar allegations of misconduct of Mr. Alix in the bankruptcy of another energy company, Westmoreland Coal, in Texas. And a review by the New York Times revealed how the company acts as an advisor in Puerto Rico’s bankruptcy-type restructuring while holding some of the territory’s debt. A bipartisan group of lawmakers have proposed legislation that strengthen disclosure requirements in the case of Puerto Rico.
Judge Huennekens did not say whether he thought the allegations about Alpha Natural Resources were founded, but said they were too serious to dismiss.
“We have to get to the bottom of it,” he said.
Mr. Alix, who formed a small investment firm that bought some of Alpha’s unsecured debt, has been concerned about McKinsey’s behavior in bankruptcy for several years.
Mr. Alix alleged that there was “substantial and compelling evidence” that a McKinsey investment fund held an indirect interest in Alpha’s secured debt. He told the court he believed McKinsey improperly raked in a profit of $ 50 million because it helped determine how secured creditors were compensated.
McKinsey made the investment through an external hedge fund, Whitebox Advisors, which has been a creditor in several other bankruptcies where McKinsey played a role, as well as in the Puerto Rico case.
Judge Huennekens said he was particularly troubled by Mr Alix’s accusation that McKinsey had not told him about his relationship with Whitebox because McKinsey disclosed his business dealings to the judge privately, rather than in open court.
McKinsey attorney Jennifer Selendy told the judge the omission was unintentional. She said the consulting firm believed it had provided all the information requested by Judge Huennekens. She said Mr Alix was grabbing innocent omissions and using them to make “far-fetched accusations”.
Judge Huennekens said McKinsey’s relationship with Whitebox should always have been disclosed, saying it would have shone on him “like a beacon”.
The Office of the United States Trustee had also requested the reopening of the Alpha case. The office filed a statement in court in November, saying McKinsey had failed to comply with “transparent, timely and accurate” disclosure of potential conflicts. The statement called on Judge Huennekens to order McKinsey to reimburse approximately $ 20 million in fees received.
Wednesday’s hearing came a week after another bankruptcy judge, David R. Jones, told McKinsey and Mr Alix that they should try to settle their dispute over Westmoreland Coal. If they didn’t, he said, he would also be forced to investigate further. The US trustee is also urging the court to disqualify McKinsey in this case and make him lose the fees he earned.