Editor's Note: This post has been updated with a statement from McKinsey & Co.
Global consulting firm McKinsey & Co. entered into a $15 million multi-district settlement agreement with the Department of Justice’s U.S. Trustee Program to resolve disputes over the adequacy of McKinsey’s disclosures concerning a set of bankruptcy cases from 2001 to 2018.
According to the Department of Justice, “this is one of the highest repayments made by a bankruptcy professional for alleged non-compliance with disclosure rules.”
Under the Bankruptcy Code and Rules, the retention and payment of a professional firm by a debtor company in bankruptcy is contingent upon approval by the bankruptcy court after the firm discloses all its connections to the debtor, creditors, and other parties. These strict disclosure requirements allow the court, USTP, and parties involved in the case to identify any conflicts of interest that may taint the professional’s advice and favor one interested party over another.
The USTP alleged that McKinsey made insufficient disclosures about its clients and investments in certain entities connected with the debtors that employed McKinsey to provide financial advice on their respective bankruptcy reorganizations. Specifically, the USTP alleged in court filings that McKinsey failed to identify clients who were connected with the debtors it represented and lacked candor regarding its investments in entities that could create a conflict of interest.
“This settlement ensures that McKinsey is held accountable for its conduct,” USTP Director Cliff White said in a statement. “Transparency is the linchpin of the bankruptcy system and professionals employed in bankruptcy cases must be free of conflicts of interest.”
“McKinsey failed to satisfy its obligations under bankruptcy law and demonstrated a lack of candor with the court and USTP,” White added. “This settlement ensures that McKinsey is held to the same standards applicable to all professionals who participate in bankruptcy cases. If this conduct is repeated in future cases, we will seek even more far-reaching remedies.”
Under terms of the settlement, McKinsey agrees to pay $15 million in three bankruptcy cases to remedy inadequate disclosures of connections and to make additional disclosures. The payment will be distributed to the creditors and other parties in accordance with the reorganization plans approved by the courts or other applicable law.
The USTP agreed not to bring additional actions in these and other cases based on McKinsey’s past disclosures. If facts later show that those disclosures contained material misrepresentations or omissions that would have rendered McKinsey not disinterested or otherwise disqualified from retention, then the USTP is free to seek disqualification from employment, disgorgement of fees, and other remedies in the settled cases.
The U.S. Trustee Program is a part of the Justice Department that protects the integrity of the bankruptcy system by overseeing case administration and litigating to enforce the bankruptcy laws.
Judge Marvin Isgur of the U.S. Bankruptcy Court for the Southern District of Texas oversaw the mediation of the case.
“The settlement does not opine in any way on the adequacy of McKinsey’s prior disclosures and, as Judge Isgur noted, the proposed settlement resolves 'good faith disputes concerning the application of Bankruptcy Rule 2014.’ McKinsey has agreed to this settlement in order to move forward and focus on serving its clients.”
“In reaching the agreement, McKinsey did not admit that any of its disclosures were insufficient or noncompliant, and the settlement does not in any way constitute an admission of liability or misconduct by McKinsey or any of its employees, officers, directors or agents,” McKinsey said.