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McKinsey Unit Pays $18 Million to SEC in Latest Compliance Lapse

Nov. 19, 2021, 6:25 PM

A McKinsey & Co. affiliate that manages money for the global consulting firm’s employees allegedly let partners with insider knowledge of corporate deals oversee investments in public companies, triggering an $18 million fine from the U.S. Securities and Exchange Commission.

While the SEC didn’t accuse McKinsey or its workers of insider trading, the claims are the latest in a string of compliance headaches for the firm tied to nonpublic financial data. Just this month, in an unrelated case, a former McKinsey partner was criminally charged with making more than $450,000 in illicit profits by trading ahead of an acquisition he advised on involving Goldman Sachs Group Inc.

The enforcement action announced Friday focuses on MIO Partners Inc., which the SEC says invested hundreds of millions of dollars in companies that McKinsey was advising. McKinsey partners oversaw MIO’s investment decisions and also had access to material information, including corporate financial results, pending mergers and planned bankruptcies, the regulator said.

MIO resolved the case without admitting or denying wrongdoing. The firm managed $31.5 billion in regulatory assets at the end of last year, according to an SEC filing.

MIO said in a statement that it had strengthened its compliance through steps that are “squarely in line with best practices in the industry.” The firm emphasized that the SEC didn’t identify any misuse of nonpublic information and said its board is now made of up independent directors and only retired McKinsey partners.

‘Operationally Separate’

In a statement, McKinsey said that the two companies “are operationally separate and follow strict policies to limit information sharing.”

The SEC said that McKinsey partners were also members of MIO’s investment committee, giving them insider information on securities that MIO funds were buying and selling. In one example, according to the SEC, partners with knowledge of Puerto Rico’s efforts to restructure debt in 2017 sat on the committee as MIO sold nearly $1 million in bonds from the commonwealth.

Such relationships present “a heightened risk” of misusing information, Gurbir Grewal, director of the SEC’s enforcement division, said in the statement. “It is crucial that investment advisers have robust compliance policies and procedures in place to address the risks inherent to their organizational structures.”

In the unrelated case earlier this month, federal prosecutors said McKinsey partner Puneet Dikshit bought short-term GreenSky Inc. options before Goldman Sachs’ Sept. 15 announcement that it planned to acquire the financial technology company for around $2.24 billion.

He then sold the options when shares soared on news of the deal, according to charges in Manhattan federal court. Dikshit is also facing a suit from the SEC, which alleged he reaped a 1,829% return on his $24,647 trade.

McKinsey said it had fired Dikshit for a “gross violation” of its policies. “We have zero tolerance for the appalling behavior described in the complaint and we will continue cooperating with the authorities,” the consulting firm said in a Nov. 10 statement.

Gupta Case

In another high-profile case, Rajat Gupta, McKinsey’s former global head, was convicted in 2012 of using his position as a Goldman Sachs board member to pass illegal tips to Galleon Group co-founder Raj Rajaratnam. Gupta was sentenced to 30 months in prison while Rajaratnam got 11 years in prison for his role at the center of what prosecutors called one of the largest hedge-fund insider-trading rings in U.S. history.

McKinsey also agreed to a $15 million settlement with the Justice Department in 2019 over allegations that it didn’t properly disclose information about its clients and investments connected to bankruptcy cases it worked on.

To contact the reporters on this story:
Ben Bain in Washington at bbain2@bloomberg.net;
Robert Schmidt in Washington at rschmidt5@bloomberg.net

To contact the editors responsible for this story:
Jesse Westbrook at jwestbrook1@bloomberg.net

Dan Reichl

© 2021 Bloomberg L.P. All rights reserved. Used with permission.

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