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Alix-McKinsey Legal War Forges Ahead After Tossed Litigation (1)

July 9, 2020, 5:23 PMUpdated: July 9, 2020, 6:48 PM

Corporate restructuring veteran Jay Alix’s multipronged fight against rival McKinsey & Co. has narrowed after a federal court tossed his two-year effort to bring racketeering claims on the consulting giant.

Pursuing civil claims often levied at organized crime may have been one of the more difficult of Alix’s attempts to prove that McKinsey flouts federal disclosure rules in large bankruptcy cases in order to hide disqualifying conflicts of interest.

Alix, who’s retired but owns a 35% stake in corporate restructuring firm AlixPartners, likely has his best shot in his ongoing trial against McKinsey in a bankruptcy court in Texas on similar claims.

The decision in the Texas case could have a substantial effect on disclosures and distinterestedness based on how the bankruptcy court crafts a ruling and whether it gets appealed, said University of Texas law professor Jay L. Westbrook.

Alix’s latest defeat comes after several bankruptcy courts have declined to let him investigate McKinsey, ruling that he doesn’t have legal standing to do so. But his insistence on his self-funded legal crusade against McKinsey continues to shed a spotlight on the global consulting firm’s complex, multi-industry dealings.

“Winning or losing on standing we’ve always known is a risk,” Alix told Bloomberg Law. “Our plan is still full speed ahead.”

Regardless of the outcome, “the dispute brought to the forefront the bankruptcy disclosure laws, which hadn’t been an area of significant focus before,” said Bloomberg Intelligence analyst Negisa Balluku.

Procedural Bind

The U.S. District Court for the Southern District of New York found that Alix can’t sue McKinsey for violating the Racketeer Influenced and Corrupt Organizations Act because he hasn’t linked McKinsey’s alleged conduct to a personal injury.

The court closed the case July 6, ruling that Alix put himself in a procedural bind by voluntarily dismissing other state-law claims alleged in the complaint before the RICO ruling.

Despite the setback, Alix said he’s not deterred.

“Our goal here is to ensure McKinsey complies with the law,” he said.

Alix’s best chance to his accusations is in the Chapter 11 case for Westmoreland Coal Co. in Houston, where his claims have gone to trial in front of Judge David Jones of the U.S. Bankruptcy Court for the Southern District of Texas. The outcome in that case could determine “who survives and who does not,” Jones has said, noting some parties could lose their careers if lies are uncovered.

“There is a ripple effect to all of this,” Jones told both sides at the start of trial in February. “The fact this proceeding exists has caused changes in every single commercial case I’ve had.”

“I can only say that many of us will be following the case before Judge Jones with great interest,” the University of Texas’ Westbrook said.

Trial on Hold

The trial has been on hold because of the Covid-19 pandemic and related difficulties returning to the courtroom.

When it resumes, Alix’s legal team will begin producing evidence alleging that McKinsey, which is vying to be an adviser to Westmoreland, hid financial interests in the bankrupt coal company’s reorganization and business connections to stakeholders.

The Justice Department’s bankruptcy watchdog, the U.S. Trustee, has also opposed McKinsey’s application as an adviser, saying the firm’s disclosures are inadequate.

McKinsey has denied any wrongdoing and says Alix’s accusations are part of an anticompetitive agenda to push McKinsey out of the bankruptcy consulting business.

“To date, Mr. Alix has lost all six cases against McKinsey, and each of his multiple attempts to appeal those decisions,” the firm said in a statement. “We fully expect that trend to continue because the foundation for his actions are reckless and false allegations that are supported by nothing more than inflammatory rhetoric.”

McKinsey devised a new disclosure protocol while under scrutiny in the Westmoreland case, insisting it was designed to provide “even greater transparency.”

Jones, who last month said he finds a large part of what he has already heard to be “troubling,” has vowed to hear the case to the end and conclude with “the most thorough” decision he has written since being on the bench.

(Updated to include additional comments about the Westmoreland bankruptcy case.)

To contact the reporter on this story: Alex Wolf in New York at awolf@bloomberglaw.com

To contact the editor responsible for this story: Roger Yu at ryu@bloomberglaw.com; Laura D. Francis at lfrancis@bloomberglaw.com

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