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Lawmaker Questions Watchdog’s Ability to Monitor Bankruptcy Disclosures

Lawmaker Questions Watchdog’s Ability to Monitor Bankruptcy Disclosures

The chapter 11 process, which gives troubled businesses a chance to reorganize and creditors an opportunity at repayment, is intended to be transparent, and advisers should serve as disinterested advocates for their clients. To ensure conflict of interests doesn’t taint plans for divvying up assets, bankruptcy rules require advisoers to disclose all relationships that might give rise to a conflict.
A Wall Street Journal investigation earlier this year found that in its bankruptcy advisory practice over the year, McKinsey RTS, the firm’s restructuring unit, had disclosed far fewer potential conflicts of interest when compared with other bankruptcy professionals. In many cases, McKinsey unveiled no connections to parties with interest in the matters it worked on. Sometimes, the firm said it couldn’t disclose relationships because of its longstanding policy to protest its consulting clients’ identities.
Besides, over more than a decade, the Journal found a McKinsey retirement portfolio held investments that gave it an undisclosed financial interest in the outcome of six bankruptcy cases in which the company served as an advisor.
Among the new information Mr.Biggs is seeking from the Trustee, a unit of the Justice Department, is a description of the remedies it can take against companies that “routinely violate” the disclosure rules. Mr. Biggs also asked the Trustee for a list of closed bankruptcy cases in which it had objected to McKinsey’s disclosures.
When the Trustee’s office is altered to disclosure failures, Mr. Biggs asked, does it investigate and bring the matter to the bankruptcy court’s attention? Mr. Biggs also raised questions about the adequacy of the disclosure law and the Trustee’s resources to enforce it. He asked that the Trustee responds by Oct. 30.
A spokeswoman for the Trustee said Mr. White hadn’t yet seen the letter.
In response to Mr. Biggs’s first letter, the U.S. Trustee said that for the fiscal year 2017 it had objected to 512 bankruptcy employment applications for inadequate disclosure or conflicts.
McKinsey says it is committed to transparency and to providing its services free of conflicts. “McKinsey RTS will continue to comply with the law, and follow the guidance of Bankruptcy Courts and the U.S. Trustee as we have always done,” a McKinsey spokesman said.
In late July, the U.S. Trustee asked the judge that presided over on bankruptcy in which McKinsey served as an adviser, to reopen that case to determine if conflicts of interest at the firm had tainted its work. The debtor in the case was Alpha Natural Resources, a coal mining giant that filed for bankruptcy in 2015. Judge Kevin Huennekens, who heard the case, has yet to respond to the Trustee’s request.
The Trustee’s filing in the Alpha case followed a request in June by corporate-turnaround specialist Jay Alix that Judge Hunnekens consider reopening Alpha’s chapter 11 case, citing “gravely troubling and disqualifying disclosure violations” by McKinsey. Mr. Alix is the retired founder of AlixPartners, a competitor of McKinsey’s.
McKinsey says Mr. Alix is pursuing his interests and trying to push McKinsey out of the restructuring market.
To counter Mr. Alix and the lobbying firms he has hired to help champion his cause in Washington, McKinsey has hired its lobbying firm, according to the McKinsey spokesman. “If his solo anticompetitive campaign by Alix were to succeed, debtors would have fewer professionals to choose to help navigate the challenges of a chapter 11 bankruptcy,” he added.
The Alpha case was formally closed in June, but a provision in bankruptcy law allows judges to reopen closed cases under extraordinary circumstances, including fraud intended to deceive the court.
In a speech last year, Mr. White referred to McKinsey’s problematic disclosures without naming the firm; he contended that the firm had cleaned up its procedures after receiving a reprimand from the U.S. Trustee.
–Tom Corrigan contributed to this article.
Gretchen MorgensonUpdated Oct. 1, 2018 7:24 p.m. ET

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Harvey Yan

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