A long-running battle between turnaround pioneer Jay Alix and global consultancy McKinsey & Co. ended Tuesday, when a bankruptcy judge sanctioned a settlement in the midst of a more than year-long trial that turned virtual during the Covid-19 pandemic.
Houston federal bankruptcy judge David Jones, who has been overseeing the Westmoreland Coal bankruptcy case, approved a settlement between McKinsey and the U.S. Trustee, a Justice Department watchdog, in which the consultancy agreed to forgo $8 million in fees it would have received for representing Westmoreland as its advisor. McKinsey agreed to withdraw its application to represent Westmoreland in bankruptcy instead of continuing with the trial that delved into its bankruptcy advisory practices, which Alix alleged were illegal.
As part of the settlement, the U.S. Trustee agreed to drop its objection that McKinsey’s disclosures did not comply with the law in the Westmoreland case. Alix was not a party to the settlement, but he claimed victory nonetheless.
“We won,” said Alix in an email following the judge’s order. Alix is the retired founder of Alix Partners, which competes for bankruptcy advisory assignments with McKinsey. For years, Alix has claimed the giant consultancy had created an uneven playing field by not following bankruptcy rules regarding disclosures of potential conflicts.
Alix had largely focused on the potential conflicts between the bankruptcy clients of McKinsey’s restructuring subsidiary and its investment arm — called MIO Partners — that invests for the firm’s partners and employees.
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“By forcing McKinsey’s withdrawal from Westmoreland through more than two years of litigation, we’ve achieved our goal — to expose McKinsey’s illegal disclosure practices,” added Alix, who called the settlement “a great victory for the American bankruptcy system.”
Since Alix started a many-pronged litigation effort in several cases, McKinsey has reached settlements totaling $40 million regarding its bankruptcy advisory work.
The Westmoreland litigation alone resulted in at least $13 million in sanctions and forfeitures, including an earlier $5 million fine.
“Thanks to our ongoing litigation to shed light on McKinsey’s illegalities, McKinsey now holds the all-time record for the five highest sanctions in bankruptcy history ($17.5 million in SunEdison; $8.0 million in Westmoreland; and $15 million for the ANR, SunEdison, and Westmoreland cases),” Alix said in the email.
“We got what we wanted,” he added. “We will keep a close eye on McKinsey in future cases.”
However, Alix’s investment firm — Mar-Bow Value Partners, which was a party to the litigation — had asked the judge to do more than just accept the settlement.
“The commitment to future compliance in the proposed settlement consists of yet another vague promise (in a long series of broken promises) that, in the future, McKinsey’s disclosures will ‘include’ ‘affiliate connections’ and “confidential client connections’,” Mar-Bow explained in an objection to the settlement filed just one day before Tuesday’s hearing. For one thing, the proposed settlement made no promises of disclosure regarding MIO, it noted.
In a court filing, McKinsey called the settlement, reached via months of mediation, a “good-faith, fair, and reasonable compromise” of the disputes between it and the U.S. Trustee. It added that “the agreement does not constitute an admission of liability, wrongdoing or misconduct by McKinsey or any of its employees, officers, directors or agents.”
Gary Pinkus, Chairman, North America at McKinsey, said that “the agreement reflects McKinsey’s willingness to adopt new guidance issued by the US Trustee subsequent to the filing of its disclosures in the Westmoreland case and its desire to move forward.”
But Pinkus couldn’t help getting in a dig at Alix and his “vexatious and self-serving litigation.” He noted that Alix “has lost all six cases against McKinsey that have been decided by the courts so far.”
Mar-Bow, preferring that the trial continue, asked that any settlement require McKinsey to disclose all of the firm’s connections to a proposed bankruptcy advisory client, including MIO disclosures, as well as a requirement for software to check for such connections, along with enforcement and monitoring.
But Judge Jones said he couldn’t go further than the settlement before him, despite his lingering concerns.
“I can’t undo all the things I’ve heard,” he said, adding that he would continue to be “bothered by things I’ve heard” and called the resolution “unsatisfying.”
During the hearing, Sean O’Shea, the attorney for Alix, said he feared the settlement only “kicked the can down the road” and that “we feel we will be at it again.”
“My client doesn’t want to be a private attorney general, scouring the country” to keep McKinsey in check, said O’Shea.
Judge Jones, too, seemed to think it might not be the end.
“It is my hope that McKinsey management is able to implement changes that make a difference. I don’t ever want to do this again,” he said.
Since many bankruptcy cases get filed in the Southern District of Texas, he warned, “If it happens again, it will come back to me…And I will finish what got started…that’s not intended to be a threat…it’s a promise.”
