🔒 McKinsey’s troubles deepen; undisclosed conflicts & the bankruptcy system – The Wall Street Journal

JOHANNESBURG — It’s extremely difficult to change corporate culture, especially when it’s been the foundation for past wins. So when a rot is discovered, it’s usually part of a bigger problem. Warren Buffett famously said there’s never just one cockroach in the kitchen. So while McKinsey’s apology for the South African operation misdemeanour was described as hollow at best, cockroaches seem to be rearing their heads in other regional departments. The Wall Street Journal article looks at the consulting firm’s restructuring unit, and how it fits into the nation’s bankruptcy system, with questionable conflict disclosures, in information that may have been left out during the process. When it rains, it sometimes pours. – Stuart Lowman
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Lawmaker Questions U.S. Trustee Over McKinsey’s Conflict Disclosures

By Gretchen Morgenson and Tom Corrigan

A Republican member of the House Judiciary Committee asked a Justice Department unit to detail how it enforces bankruptcy rules, concerned that undisclosed conflicts at McKinsey & Co.’s restructuring unit may be compromising the nation’s bankruptcy system.

In a July 11 letter to the director of the US Trustee Program, Rep. Andy Biggs of Arizona cited a recent investigation by The Wall Street Journal that found McKinsey disclosed far fewer connections to parties involved in the chapter 11 bankruptcy cases it has worked on than other restructuring firms.

In an April Page-One article, the Journal detailed how McKinsey initially identified 59 connections to participating debtors, creditors, lawyers and accountants in those cases, compared with the more than 15,000 total connections named by 45 other bankruptcy professionals in those matters. On average, McKinsey reported five such relationships per case, compared with the other firms’ disclosures of 171 connections each.

The bankruptcy code “requires all companies to disclose connections, including conflicts of interest, in order to receive the bankruptcy court’s approval to assist an entity through the bankruptcy process,” Mr. Biggs wrote to the director of the US Trustee Program, Clifford J. White III.

A spokesman for Mr. White said he was aware of the letter but had no immediate comment. A McKinsey spokesman declined to comment on the letter. In court papers, McKinsey says it has a “long-standing policy” to protect clients’ identities and confidential information but will divulge any conflicts that arise. The firm has also said its disclosures are appropriate.

The chapter 11 bankruptcy process, which gives ailing businesses a chance to reorganise and creditors a shot at repayment, is intended to be transparent, and advisers are supposed to be disinterested advocates for their clients. To ensure conflict of interests won’t taint plans for dividing assets, bankruptcy rules require advisers to disclose all relationships that might give rise to a conflict.

Mr. Biggs asked Mr. White to explain the disparity of disclosures between McKinsey RTS, the firm’s restructuring unit, and other bankruptcy professionals, and to describe situations in which professional services would be exempt from disclosure rules.

Mr. Biggs also asked the trustee to describe steps it can take to ensure uniform compliance with bankruptcy disclosure rules.

“This information is critical for our office to execute proper oversight authority,” Mr. Biggs wrote. Mr. White was given until July 31 to respond to the letter.

The US Trustee previously criticised McKinsey’s conflicts disclosures in two bankruptcy cases, calling them “vague and amorphous,” and demanding more details on the firm’s connections, court papers show. After a series of closed-door negotiations with lawyers for the Justice Department unit, McKinsey agreed in one case to name 22 connections, mostly to big banks, but continued to identify other ties only as “confidential clients.”

In a speech last year, Mr. White referred to the problematic disclosures by the giant consulting firm without naming it; he said the firm had cleaned up its act after the reprimand from the US Trustee.

Still, a separate Journal analysis in June found a McKinsey retirement fund held investments that gave it an undisclosed financial interest in the outcome of six bankruptcy cases in which the company also served as an adviser.

“McKinsey having a financial interest in a new company’s fate as it’s being reorganised – that struck me as being problematic,” Mr. Biggs said in an interview on Tuesday. “I’m doing fact-finding right now and would like to see where that leads us and go from there.”

Write to Gretchen Morgenson at [email protected] and Tom Corrigan at [email protected]