Judge Orders McKinsey to Disclose Confidential Client Roster

Alpha Natural Resources is a client of McKinsey & Co. Corporate turnaround guru Jay Alix has challenged McKinsey’s disclosures in Alpha’s bankruptcy. ENLARGE
Alpha Natural Resources is a client of McKinsey & Co. Corporate turnaround guru Jay Alix has challenged McKinsey’s disclosures in Alpha’s bankruptcy. Photo: Luke Sharrett/Bloomberg News

Corporate turnaround guru Jay Alix prevailed Tuesday in his long-running battle with consulting giant McKinsey & Co.

Mr. Alix, who made his career helping distressed companies shed debt and shore up their bottom lines, has accused McKinsey of failing to follow bankruptcy rules by keeping secret the client relationships that could create conflicts of interest in its work advising bankrupt companies. McKinsey denies wrongdoing and has accused Mr. Alix of trying to cripple a rival to the consulting business he founded several decades ago.

But an airing of the dispute Tuesday before U.S. Bankruptcy Judge Kevin Huennekens, who is overseeing the chapter 11 restructuring of McKinsey client Alpha Natural Resources Inc., ended in a victory for Mr. Alix.

Judge Huennekens is requiring McKinsey to divulge to the court by Monday key business details, including more than 100 client names the firm has previously sought to keep confidential, though he vowed to make sure the sensitive information wouldn’t fall into Mr. Alix’s hands.

“The purpose here is not to destroy McKinsey’s business model,” Judge Huennekens said at the hearing in Richmond, Va. “It’s certainly not to give a competitive advantage to a competitor.”

The judge called the dispute “unfortunate” but said his ruling should protect both McKinsey and the integrity of the bankruptcy process without disrupting or delaying Alpha’s restructuring, which is in the home stretch.

McKinsey attorney Martin Bienenstock told Judge Huennekens the firm would “do our best” to comply. After the hearing, a McKinsey spokesman said the firm was pleased the judge promised to protect its client information and it would “work to quickly provide the limited information the court required.”

The dispute, which has played out over two years in court filings and hearings, exposes the cutthroat world of corporate restructuring, where a coterie of consultants regularly vie for lucrative jobs helping businesses restructure billions of dollars in debt. Top consultants can charge $ 1,000 or more an hour, and the assignments—which include helping companies streamline operations, cut costs, slash debt and negotiate with creditors—can stretch for months or even years.

In the Alpha case, where McKinsey has charged nearly $ 16 million for nine months of work, the rivalry among consultants has become personal, court filings indicate.

“Competition among bankruptcy professionals, both in the marketplace of clients and in bankruptcy litigation, are an ordinary part of the profession,” Mr. Alix’s lawyers said in court papers. “Unfortunately, the same can be said of personal animus among professionals.”

McKinsey has said Mr. Alix wishes to force the firm out of the bankruptcy business, which has been long been dominated by just a few companies, among them AlixPartners, which Mr. Alix founded in 1981. McKinsey’s Recovery & Transformation Services unit was formed in 2010.

Through a spokeswoman, Mr. Alix declined to comment. In court papers, however, he denied he was seeking a competitive advantage for AlixPartners. He retired from the firm in 2006 but retains a minority ownership stake.

Bankruptcy rules require disclosures of potential conflicts so that judges overseeing the cases can decide whether a firm can truly serve as an unbiased advocate for its client. In large bankruptcies where companies can owe money to thousands of people and businesses, big law and consulting firms often file dozens of pages disclosing their past or present relationships with creditors, potential asset buyers, investors and others.

Mr. Alix has said he first raised the issue of McKinsey’s lack of disclosure with Global Managing Director Dominic Barton in September 2014. In October 2015, Mr. Alix hired retired bankruptcy judge Steven Rhodes, who oversaw Detroit’s bankruptcy restructuring, to review McKinsey’s disclosures. Judge Rhodes said he “quite readily” came to the conclusion that McKinsey had not fully complied with the rules in the chapter 11 cases it worked on during the past decade.

Judge Rhodes told The Wall Street Journal that he was struck by “the arrogance of the position that McKinsey was taking,” which McKinsey declined to comment on.

In early 2016, Mr. Alix formed a company called Mar-Bow Value Partners LLC, which purchased $ 1.25 million of Alpha’s debt. Judge Rhodes told The Wall Street Journal this purchase gave Mr. Alix the legal grounds to challenge McKinsey’s disclosures in Alpha’s bankruptcy.

Mr. Alix also brought his concerns to the Justice Department. The department’s bankruptcy-watchdog unit filed papers in May seeking additional disclosures from McKinsey and criticizing McKinsey as the only professional firm “claiming contractual confidentiality is a blanket shield” protecting it from disclosure requirements.

McKinsey struck a deal with the Justice Department, providing some additional disclosure of client names, but Mr. Alix said in a court filing by Mar-Bow that the added detail gave only “the appearance of compliance without actually complying.”

A spokeswoman for the Justice Department unit declined to comment, but one of its lawyers said Tuesday in court that the additional information had “greatly improved the public record.”

In court papers, Mr. Alix said McKinsey has failed to name at least 121 clients with ties to Alpha’s bankruptcy. “This level of nondisclosure, that even McKinsey admits, is unprecedented in the history of modern bankruptcy,” Judge Rhodes said in court Tuesday.

Before Tuesday’s hearing, a paid advertisement outlining how McKinsey’s alleged disclosure violations threatens “the integrity of the bankruptcy system” appeared online. The webpage was taken down shortly after The Wall Street Journal made inquiries to a Mar-Bow spokeswoman, who declined to comment.

McKinsey defended its disclosures and has questioned Mr. Alix’s timing and motive in “having anointed himself as a private attorney general to police industry compliance.” The firm said it has a “longstanding policy” to protect clients’ identities and confidential information but said it would divulge any potential conflicts that arise.

What’s more, McKinsey said, AlixPartners has itself sought to keep the names of its clients confidential and is now asking McKinsey to “do as I say, not as I do.”

AlixPartners didn’t respond to a request for comment.

“We’ve gone above and beyond,” McKinsey attorney Mr. Bienenstock said in court Tuesday. “We have done more than most professionals in this case and other cases.”

WSJ.com: US Business

About The Author