Restructuring guru Jay Alix can pursue federal racketeering claims against McKinsey & Co. for allegedly concealing conflicts of interest to secure lucrative corporate bankruptcy work, the Second Circuit ruled.
The decision, issued Wednesday by a three-judge panel, reverses a district court finding that Alix failed to show that he or his former restructuring advisory firm, AlixPartners LLP, were harmed by McKinsey’s alleged anticompetitive conduct.
The U.S. District Court for the Southern District of New York “did not draw all reasonable inferences in Alix’s favor” as it should have done on a motion to dismiss the complaint, the U.S. Court of Appeals for the Second Circuit ruled.
Alix accused McKinsey of failing to adequately disclose potentially disqualifying conflicts of interest in 13 large corporate bankrupties, including coal company Alpha Natural Resources Inc. and former green energy giant SunEdison Inc.
If those allegations are true, then it’s “entirely plausible” those high-paying consulting gigs would have been awarded to other advisory firms, including AlixPartners, the court said.
The ruling gives Alix the opportunity to substantiate his claims that McKinsey and a number of the consulting giant’s executives violated the Racketeer Influenced and Corrupt Organizations Act and used a pay-to-play scheme to get hired for advisory work.
“Today’s decision solely addresses technical pleading standards and not whether Mr. Alix’s claims are true,” a McKinsey spokesperson said in a statement Wednesday. Alix has lost previous legal actions against McKinsey, “and we are confident the evidence will ultimately show that this lawsuit is similarly meritless,” the spokesperson said.
Alix said Wednesday that he’s “grateful” the court allowed him to pursue allegations that “McKinsey perpetrated a massive fraud on multiple courts in our bankruptcy system.”
“Today’s ruling is a strong affirmation of the values of openness, transparency, and full disclosure, inherent in our nation’s bankruptcy system, as we alleged in our complaint, and as flagrantly violated by McKinsey,” he said in a statement.
Alix, a retired corporate turnaround expert who still owns roughly a third of the firm bearing his name, has been a thorn in McKinsey’s side for a number of years. In several Chapter 11 cases, he has formally accused McKinsey of intentionally failing to disclose self-enriching business connections to stakeholders.
McKinsey in recent years has settled probes into its disclosures launched by the Justice Department’s bankruptcy watchdog and a trust for SunEdison creditors. But the firm has defended its compliance with the rules and accused Alix of pursuing an “abusive litigation” campaign to push McKinsey out of the restructuring business.
Alix sued McKinsey directly in 2018, alleging that he suffered direct harm from McKinsey’s manipulation of the U.S. bankruptcy system based on the likelihood that at least one of those assignments would have gone to AlixPartners. He also accused McKinsey of arranging meetings between its clients and bankruptcy lawyers as a way to obtain referrals for work in large cases.
U.S. District Judge Jesse Furman wrote in 2019 that Alix’s claims don’t meet the “proximate-cause standard” needed to pursue a civil RICO claim. The allegations are “certainly troubling,” but they don’t directly link McKinsey’s alleged conduct to an injury suffered by Alix or his former advisory firm, the judge said.
McKinsey ultimately may prevail in the suit, but that should only happen once a more “complete record” is developed that discloses “more about who did what, when, and with what reasonably likely consequences,” the Second Circuit said Wednesday.
Judge Barrington D. Parker wrote the opinion, joined by Judges Jon O. Newman and José A. Cabranes.
The case is Alix v. McKinsey & Co., Inc., 2d Cir., No. 20-2548-cv, 1/19/22.