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McKinsey, Nemesis Alix Face ‘Career Ender’ Restructuring Trial

Feb. 4, 2020, 8:47 PM

McKinsey & Co. will embark on a trial to quash a competitor’s claims that it concealed self-enriching conflicts of interest, a reputational fight that a judge said could be “the ultimate career ender” for some who are involved.

Jay Alix, the retired founder of rival restructuring firm AlixPartners, has put legal pressure on the consulting giant over its role in Westmoreland Coal Co.'s Chapter 11 case, part of his relentless campaign to disqualify McKinsey in the competitive restructuring business.

McKinsey RTS, the restructuring unit, is expected to contend in its opening arguments Wednesday in the Houston-based U.S. Bankruptcy Court for the Southern District of Texas that its disclosures are sufficient, and that Alix is a litigious rival motivated by an anticompetitive agenda.

The trial marks the peak of a winding, multi-jurisdictional feud involving a cadre of lawyers and advisers, including former bankruptcy judges who have testified for both parties. Its deliberations promise to be an examination that tests the integrity of the U.S. bankruptcy system, involving two of the most powerful players in the highly competitive business of advising distressed companies.

The trial could determine “who survives and who does not,” said Judge David R. Jones, who stated some parties could lose their careers if lies are uncovered.

Alleged Pattern of Abuse

McKinsey RTS has been dealing with bankruptcy court scrutiny since at least 2016, as Alix began buying up claims against struggling McKinsey clients to gain a creditor voice.

Using an entity called Mar-Bow Value Partners LLC, Alix has accused McKinsey of holding disqualifying interests it should’ve disclosed under Rule 2014, a provision that requires bankruptcy estate advisers to reveal all connections to other parties in a case. The billionaire restructuring icon’s self-funded mission, he has said, “will reveal how McKinsey RTS continues to abuse the bankruptcy process.”

McKinsey RTS has yet to collect roughly $8 million worth of advisory fees in Westmoreland’s Chapter 11 case. The coal producer emerged from bankruptcy last year after selling the bulk of its assets to first lien creditors. McKinsey’s retention application has been held up by Alix’s claims that it defrauded the court by failing to disclose financial interests in the case’s outcome and business connections to Westmoreland stakeholders.

Alix alleges that McKinsey has been withholding proper conflict-of-interest disclosures since it entered the high-paying turnaround advisory business in 2001.

McKinsey also conceals interests held by the firm’s subsidiary, MIO Partners, which manages employee pension assets and other investments, Alix claims. Through the $26 billion fund, McKinsey employees reap profits from the outcome of its clients’ cases, he contends.

McKinsey RTS has been approved to advise 13 large Chapter 11 cases, including United Airlines and American Airlines. It also has helped Puerto Rico devise turnaround strategies for the commonwealth’s historic debt crisis.

Mar-Bow was denied from pursuing investigations of McKinsey in five bankruptcy cases that are older than Westmoreland: coal producer Alpha Natural Resources Inc., renewable energy company SunEdison Inc., wireless services provider NII Holdings Inc., power producer Edison Mission Energy, and printing company Standard Register Co.

A federal district judge in New York also dismissed a racketeering lawsuit Alix filed that accused McKinsey of “knowingly and intentionally” deceiving bankruptcy courts to secure advisory jobs that otherwise would have gone to AlixPartners or other top-tier restructuring firms like FTI Consulting or Alvarez & Marsal.

Still, Alix says his efforts have already paid off.

McKinsey agreed to a $15 million settlement with the U.S. Trustee’s office last year after the Justice Department’s bankruptcy watchdog launched a probe into the firm’s bankruptcy disclosures. The firm also agreed to pay $17.5 million to creditors in the SunEdison case to resolve similar claims, Alix said.

As pressure mounted in Westmoreland, McKinsey developed a new disclosure protocol. The firm revised its retention application to expand the number of its connections in the case from about 125 to more than 1,000.

Anticompetitive Agenda

McKinsey has roundly denied Alix’s allegations.

Alix is pursuing an “abusive litigation” campaign to push McKinsey out of the business, the firm said.

Alix, who still holds a 35% stake in the business, has a personal vendetta and wants to protect the company he founded almost 40 years ago, according to McKinsey.

The dismissal of Alix’s RICO case and denials of Alix’s motions in other bankruptcy cases have emboldened McKinsey. The firm has pointed to judges describing Alix’s allegations as “fantasy” and saying that he isn’t a neutral party.

McKinsey will seek to show at trial that Alix and AlixPartners have conducted a yearslong “anti-McKinsey strategy” using litigation and lobbying to drum up pressure and negative press. The consulting company believes that pages from AlixPartners’ 2013 “competitive response” document will confirm its theory of a coordinated smear campaign.

The document was kept confidential under a Delaware Chancery Court order in a case brought by AlixPartners in 2014. But Jones ruled that McKinsey could subpoena portions of it.

McKinsey also will argue that its disclosures exceed bankruptcy requirements. In the Westmoreland case, the firm said it developed a new disclosure protocol, with assistance from the former president of the American College of Bankruptcy, to provide “even greater transparency.”

Its MIO fund is walled off from McKinsey’s global advisory business and doesn’t taint the firm’s neutrality as a restructuring consultant, the company has said.

High Stakes Showdown

Alix and a number of McKinsey partners are expected to testify on a range of issues, including the disputed barriers between the firm’s consulting arm and the MIO fund.

Testimony from former McKinsey managing director Dominic Barton also is likely to come up. Now serving as Canada’s ambassador to China, Barton flew to New York last month to be deposed.

Barton’s testimony could be a crucial component in the case since he disputes what was said when he and Alix met for discussions in late 2014.

Alix says Barton reassured him that he would work to fix McKinsey’s bankruptcy code compliance issues by changing restructuring group leaders or even exiting the bankruptcy advisory business.

But according to McKinsey, Barton has said he “never agreed or believed that McKinsey RTS was acting improperly.” Barton also never said he would disband the practice group, the firm said.

Judge Jones said he wants to resolve the conflict “the old fashioned way.”

The process will end with “the most thorough thing I have written since I’ve been on the bench,” he said. “This is about the integrity of the process.”

Alix has been counseled by Cadwalader Wickersham & Taft LLP, Boies Schiller & Flexner LLP, Jones Murray & Beatty LLP, Diamond McCarthy LLP, and retired Judge Steven Rhodes, who presided over Detroit’s bankruptcy proceedings.

McKinsey is represented by Debevoise & Plimpton LLP, Selendy & Gay PLLC, and Zack A. Clement PLLC. Ronald Barliant, a former bankruptcy judge in Chicago, also has served as a consultant to McKinsey.

The case is Westmoreland Coal Co., Bankr. S.D. Tex., No. 4:18-35672, Trial 2/5/20.

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

To contact the editors responsible for this story: Roger Yu at ryu@bloomberglaw.com; Seth Stern at sstern@bloomberglaw.com