The Story McKinsey Didn’t Want Written

Illustrations by Laura Lannes

Illustrations by Laura Lannes

Tied to the global consulting giant is a massive investment fund. Based on its reaction to this story, McKinsey likely doesn’t want you reading much about it.

During the reporting of this story, McKinsey’s legal counsel repeatedly sent lengthy and accusatory letters to Institutional Investor, their assertions ranging from editorial bias to irresponsible reporting.

Institutional Investor stands behind this story.

Fraud ran aplenty in 2008, and as frauds go New Stream Secured Capital was fairly quotidian.

As the Securities and Exchange Commission would later assert, the Connecticut-based “hedge fund fraud . . . cost investors millions of dollars when the hedge fund failed in the fall of 2008, after the defendants perpetrated a scheme to mislead investors . . . to keep the hedge fund afloat and their management fees flowing.” New Stream Capital managing partner David Bryson would be sentenced in 2015 to 33 months in prison, but, with Bernie Madoff taking the bulk of financial fraud media attention, the firm by and large avoided public scrutiny.

The same cannot be said for one of its more prominent defrauded investors: MIO Partners, a wholly owned subsidiary and unique internal hedge fund of funds of powerful global consultancy McKinsey & Co. Only the money of McKinsey employees, partners, former partners, and family is allowed in.


MIO, which stands for McKinsey Investment Office, lost more than 90 percent of its $100 million investment in the New Stream hedge fund, according to the testimony of then-MIO portfolio manager Alexander Kisilevich at Bryson’s sentencing hearing in November 2014.

Yet as New Stream was careening into bankruptcy, several of MIO’s own funds lent it money to survive, which MIO then exchanged for the assets said to be at the core of the fund’s problems: life insurance policies purchased at a discount from people willing to trade their death benefits for cash while still alive, a once-popular hedge fund strategy that turned sour as life expectancy rose.

As a result, MIO paid an additional $127.5 million to become the majority owner of those life insurance assets, now called Limited Life Assets Master Limited. And today that investment finds itself in the midst of a purported class-action lawsuit against MIO and McKinsey, filed by former McKinsey employee Tushar Bhatia, that questions whether such investments are appropriate for employee 401(k) retirement money.

“MIO has, year after year, thrown good money after bad by investing an additional $60 million in Limited Life since 2013, even as the plans’ investment has continued to dwindle in value,” attorneys for Bhatia wrote in their complaint, which argues that the 401(k) plans violate Employee Retirement Income Security Act (ERISA) rules on everything from breach of loyalty to overcharging for the plan’s maintenance. All of that was done, the lawsuit alleges, to benefit the McKinsey partners MIO was designed to profit — at the expense of lower-level employees.

McKinsey has argued in court filings that the case belongs in arbitration or, failing that, should be thrown out. “We do not believe the lawsuit has any merit,” Gary Pinkus, senior partner and chairman of North America for McKinsey, said in a statement to Institutional Investor. “The complaint does not identify a single investment option in the retirement plans whose performance is being challenged.”

Whatever the outcome, the lawsuit, filed in the Southern District of New York in February, is another window into the workings of McKinsey’s mammoth investment operation — and a new front in what is looking to become a full-scale attack on MIO, where a web of McKinsey clients, current and former partners, and hedge funds intersect in a one-of-a-kind arrangement that has become the focus of controversy.

A global powerhouse, McKinsey counts 2,000 entities, including corporations and governments, as its clients, with former partners — investors in MIO’s funds — now sitting near the top of many of those same corporate clients and in positions of government power. In addition, several of the more prominent hedge funds its partners invest in via MIO — Citadel and Cerberus Capital Management, for example — are clients of McKinsey, and their top ranks are peppered with former McKinsey executives. Other former McKinsey executives are running MIO, and current and former partners are not only investors in MIO — they dominate its board. (Their staffs, McKinsey points out, are separate.)

“It’s alarming they have a hedge fund,” says Matthew Stewart, a former consultant at a firm that was started by ex-McKinsey consultants, which he detailed in his book The Management Myth.

“They have a huge amount of inside information, which raises serious conflict issues at multiple levels,” Stewart says, adding that McKinsey’s power in the world of business and government “puts them in a kind of an oligarchic position.”

Once shrouded in secrecy, MIO first came under scrutiny because of the investments it holds in the clients of the firm’s bankruptcy consultancy work. For years, McKinsey did not disclose those investments to the court when applying to be a bankruptcy adviser — and still has disclosed very few. Under bankruptcy law, advisers are required to be “disinterested persons,” and cannot own the debtor company’s debt or equity, directly or indirectly. A specific bankruptcy rule requires disclosures of potential conflicts to avoid tainting the process.

“I’ve got to know, in real time, whether or not I’m invested in an entity that appears before me,” Judge Kevin Huennekens, who oversaw the bankruptcy of Alpha Natural Resources — where McKinsey was the debtor’s adviser — said in a January hearing on the matter this year. The judge was speaking of his own investment disclosures, but added, “That’s what [bankruptcy] Rule 2014 requires. And it’s McKinsey’s burden to be able to provide that information. That’s what we’re missing here.”

McKinsey’s argument is that Rule 2014’s disclosure mandate is open to interpretation. “No court has litigated the issue of MIO disclosures and there is no bankruptcy rule that clearly requires disclosure of MIO connections,” says a McKinsey spokesman. The firm strenuously asserts that MIO, while not independent from McKinsey, operates independently, with an “information barrier” between the two entities, to avoid conflicts.

But Huennekens in July 2016 issued a court order requiring McKinsey to disclose its MIO connections. And the U.S. Trustee, a Department of Justice watchdog over the bankruptcy process, found McKinsey “failed to satisfy its obligations under bankruptcy law” regarding disclosures, and the firm in February agreed to pay $15 million to settle with the U.S. in three cases: Alpha Natural Resources, Westmoreland Coal Co., and SunEdison. McKinsey has said that the settlement did not “constitute an admission of liability or misconduct.” Later, McKinsey forked over another $17.5 million in an unusual effort to resolve claims of unsecured creditors in SunEdison over the disclosure issues, among others. That sum was more than McKinsey made in fees in SunEdison’s bankruptcy.

As Bhatia’s 401(k) lawsuit indicates, others are beginning to pull back the curtain on MIO. “It’s like turning a light on in the kitchen — a lot of roaches,” says Marianne Jennings, a professor of legal and ethical studies in business in the department of management at the W.P. Carey School of Business at Arizona State University. “Everything becomes obvious that wasn’t so obvious in the dark.”

The bankruptcy cases offer a glimpse of the names, positions, and money at stake for McKinsey and MIO. Says Jennings: “I doubt McKinsey fully thought out what this meant in terms of the appearance of conflicts. This is a mess.”

Untangling the “mess” might be difficult.

One solution could be spinning MIO out of McKinsey and severing its ownership — which Yale professor John Langbein, an expert on pension and ERISA law, suggests as a “smart policy” for the consultant.

But that would not be easy. One problem is that MIO isn’t self-sufficient. MIO is not profitable and a “portion” of it is subsidized by its parent, according to McKinsey’s Pinkus.

In its recent ADV filing with the SEC, MIO offers a clue as to why it’s unprofitable. It says that MIO “may waive or rebate part or all of the management fee in the case of certain fund investors.”

The 401(k) lawsuit alleges that those fee waivers go to partners, not lower-level employees. “In addition to taking advantage of bankruptcy creditors and misleading the federal courts, McKinsey has also taken advantage of its employees by using its company retirement plans as a piggybank to subsidize its MIO investment unit and the secretive hedge funds that MIO manages for McKinsey partners outside of the [pension] plans for free,” Kai Richter, partner at Minneapolis law firm Nichols Kaster, wrote in a recent pleading in New York federal court. The lawsuit cites one MIO investment contract that did not charge fees to the partners, whereas pension plan participants paid fees on the same investment.

McKinsey says the lawsuit’s allegation about partners not paying management fees is “wrong.” It adds that the partners are the owners of McKinsey and MIO and “pay their expenses through their ownership interest in MIO.” Moreover, it told II that the ADV only says it “has the discretion to waive” those fees and that “current and former McKinsey partners are subject to investment management fees payable to MIO” on their after-tax investments.

But early on, MIO did not plan to charge such fees. When MIO — then called Paul Harris Management — applied to the SEC for an exemption from the 1940 Investment Company Act in 1992 to offer closed-end funds, or partnerships, to its senior employees, it said it “will not charge a fee to, or receive any other compensation from, the partnerships for its management services, nor does it intend currently to seek expense reimbursement from the partnerships.”

The consultancy has about 30,000 employees, 2,000 of them partners.

McKinsey’s subsidy of MIO has not gone unnoticed by its critics. “This subsidy demonstrates that MIO is dependent upon McKinsey and its consultants for funding and is not a truly independent investment firm or hedge fund,” attorneys for Jay Alix’s Mar-Bow Value Partners argued in a recent Delaware federal bankruptcy court pleading.

Alix, the retired turnaround pioneer and founder of rival AlixPartners, has become McKinsey’s nemesis. He has brought the McKinsey disclosure issue to the bankruptcy courts’ attention in six cases, alleges the firm is a corrupt enterprise in a Racketeer Influenced and Corrupt Organizations Act (RICO) suit, and promises more revelations to come. McKinsey, of course, vehemently denies Alix’s allegations.

None of this could have been envisioned when McKinsey’s internal investment fund was founded in 1985. According to a history of the firm published privately, McKinsey’s profit sharing and retirement plan was set up when the firm incorporated in 1956 and was already shifting some money into alternative assets like hedge funds when MIO was formed. (It was named MIO in 2003.) “This would give the firm a real edge when competition for alternative investments heated up in later years,” according to an excerpt called “The McKinsey Investment Office.”

Financial markets were taking off, and McKinsey partners watching their clients get fabulously wealthy soon became part of the vanguard of hedge fund investors. While many of its holdings are somewhat obscure investments, over the past ten years, MIO has also invested in such big names as Citadel, Bridgewater Associates, and Cerberus, according to forms filed with the SEC and the Department of Labor.

As an illustration of McKinsey’s reach, all three firms have also hired McKinsey consultants. More than a dozen have gone to work at Citadel: Citadel’s human resources COO Lennie Gullan, along with Peter Rossmann, COO of equity quantitative research and global trading, both came from McKinsey.

The Chicago hedge fund received the largest known single investment from MIO in 2017, valued at $368 million in its most recent Department of Labor Form 5500. (Partner after-tax investments are not included on that form.) Citadel was also an investor in three companies that became McKinsey bankruptcy clients: Alpha Natural Resources, SunEdison, and Westmoreland, court filings and SEC disclosures reveal.

Citadel, which declined to comment, is also a client of the global consulting firm, according to McKinsey’s disclosures.

At year-end, MIO managed some $26 billion, including leverage, according to its most recent ADV filed with the SEC. On a net basis, that comes to $12.3 billion, which McKinsey says is split roughly equally between 401(k) money and the after-tax investments of current and former partners and family. McKinsey also says the ADV does not capture all of MIO’s assets, but it declined to provide the total amount to II.

The firm says that 90 percent of MIO’s holdings are managed by outside, or third-party, funds “who exercise sole investment discretion.” McKinsey “does not receive and cannot access nonpublic information regarding these holdings,” says a spokesman.

However, 30 to 40 percent of those MIO holdings are not in commingled hedge funds but reside in separately managed accounts, according to a recent analysis of MIO by law firm Luskin, Stern & Eisler, which says that means MIO has “at a minimum, the ability to view the individual securities that account for approximately 40 to 50 percent of its assets under management.”

Regarding its managed accounts, McKinsey says that “MIO enters into a written agreement with each third-party manager . . . that authorizes the manager to make all investment decisions for the account in accordance with written investment guidelines.” MIO maintains custody of those assets.

Managed accounts can give investors more direct involvement as well. For example, an MIO pool of money known as Compass funds has managed accounts with hedge funds, which they call advisers. In a 2018 deposition in a lawsuit that Compass filed against Bank of New York Mellon Trust Co., Eric Meyer, manager of ESM Management — a small fund that received 80 percent of its original capital from McKinsey — said he had consulted with MIO chief investment officer and co-chief executive officer Todd Tibbetts before embarking on the litigation investment strategy for Compass, which has a managed account with ESM. (MIO declined to comment.)

Investors in managed accounts can also tailor their investments. MIO has a managed account with Bridgewater, where it has amped up the leverage higher than the most levered version of the flagship Pure Alpha — so that Pure Alpha 18 percent volatility becomes Pure Alpha 24 percent volatility, according to an individual knowledgeable about the account. (Both Bridgewater and MIO declined to comment.)

In another managed account for Compass, Visium Asset Management — a hedge fund that later shut down after an unrelated insider trading scandal — was invested in SunEdison common stock for MIO shortly after McKinsey received the bankruptcy advisory assignment for SunEdison in 2015, SEC disclosures by Visium reveal. It sold the stock during the next quarter, in which SunEdison filed for bankruptcy.

Alix’s Mar-Bow alleges in a May 28 pleading in the Alpha Natural Resources case that the Compass investment, which was not disclosed by McKinsey, means the consultancy was not “disinterested” and should be disqualified from the case.

Like many early hedge fund investors, MIO looks to have done exceedingly well for many years, particularly when the markets tanked. The New York Times recently reported that from 2000 to 2010 — a time frame that included two major bear markets and is considered the golden era of hedge funds — MIO’s Compass Special Situations Fund averaged an annual return above 9 percent, while the S&P 500 index averaged an annual loss of 1.6 percent.

“The investment options have performed very well over time, even net of fees,” according to Pinkus.

However, the 401(k) lawsuit claims that in recent years, returns for the special situations strategy in the 401(k) plans lagged the broader markets and other investment options, in part due to the fees it charges. The annual management fee of 1 percent in 2017 was double that of the median fee of similarly sized defined contribution plans, the lawsuit alleges.

In the five-year period ending in 2017, the net annualized performance was only 8.7 percent, after paying 6 percentage points in fees and other costs (including the high fees charged by the hedge funds themselves), compared with a 10.86 percent return in Vanguard’s Wellington fund, according to a recent pleading in the 401(k) case. The additional fees made McKinsey’s plan as much as 35 times more expensive than a typical multi-asset class investment, the lawsuit claims.

The S&P 500 gained about 14 percent annualized during the same period.

In his statement, Pinkus said McKinsey “employees were offered a range of index funds and actively managed funds with varying risks and fees,” with some of the fees as low as 1.5 basis points.

But according to allegations in the recent 401(k) lawsuit, it wasn’t until 2017 that McKinsey offered low-fee target-dated funds to its employees through MIO. Before then, the diversified offerings were MIO-branded funds, which were more expensive.

And by 2017, the heat was on.


In June 2016, Mar-Bow filed its first McKinsey motion, asking the court to compel the firm to disclose its connections in the Alpha Natural Resources case.

Under prodding by Alix, the U.S. Trustee had also demanded more disclosure and said McKinsey’s assertion that MIO was a blind trust was inaccurate.

Alix’s attorneys also told the court it had learned that an employee of McKinsey’s restructuring practice was on MIO’s board. Much later, that person was revealed to be McKinsey partner Jon Garcia, the president of McKinsey’s bankruptcy advisory unit, called McKinsey Recovery and Transformation Services. Garcia had previously been a senior partner in the firm’s hedge fund advisory business.

Garcia, it turns out, had served on the board of MIO since 2006 and was also on its investment committee, which ratified MIO’s investment decisions.

But in June 2017, Garcia left MIO’s board. In a declaration to the bankruptcy court in the Alpha Natural Resources case, Garcia explained he left because of what he called “challenges” to McKinsey’s disclosures.

MIO made other changes around that time. For example, the investment committee would no longer ratify allocations to third-party funds, according to a declaration of Casey Lipscomb, MIO’s general counsel — who also serves as the associate general counsel of McKinsey — in the Alpha Natural Resources case.

And for the first time ever, Lipscomb said, MIO also hired two outside directors, who remain on the board today. One of them, Timothy Flynn, was previously the CEO and chairman of KPMG and is on the board of Walmart. Both companies have been McKinsey clients. Nine of 11 of the MIO board members are McKinsey partners or former partners.

In addition to the board overlap, some MIO executives are also former McKinsey consultants. Gunnar Pritsch, MIO’s COO and head of risk management, comes out of McKinsey’s financial services group, which counts the world’s biggest banks and asset managers among its clients. McKinsey clients Barclays, BlackRock, Deutsche Bank, Goldman Sachs, Citigroup, Citadel, Credit Suisse, Wells Fargo, and UBS are also managing MIO money — and are also creditors to debtors that McKinsey has advised in bankruptcy, according to private disclosures McKinsey made to the judge in the Alpha Natural Resources case. Those disclosures were later made public.

“It all looks very incestuous to me,” says Jennings, who is also the author of The Seven Signs of Ethical Collapse: How to Spot Moral Meltdowns in Companies . . . Before It’s Too Late.

“There’s a fluidity running back and forth between who’s at McKinsey and who’s at MIO,” she says. “Even if you assume that they all have more integrity than anyone who walked the face of the earth, there’s still a lot of knowledge floating around and they all tie back to the management of McKinsey. I just don’t know how you can see it any other way than a conflict.”

McKinsey has arduously defended its relationship with MIO, as it has its reputation, which likely has been harmed by several recent scandals ranging from alleged corruption in South Africa to its alleged role in the opioid crisis.

As media coverage of the Alix battle has gathered steam, McKinsey has gone on the offensive. This year, it hired public relations executive Michael Sitrick, a self-acknowledged spinmeister who “fixes the worst PR crises imaginable,” The New York Times wrote last year.

Recently, McKinsey posted statements on its website accusing Alix of orchestrating a media campaign against it and MIO to drive McKinsey out of the bankruptcy advisory business. It says Alix’s claims are meritless, that McKinsey has been “transparent” in its bankruptcy court filings, and that its disclosures have been “lawful and made in good faith.”

However, McKinsey refused II’s repeated requests to interview principals, including MIO co-CEO Tibbetts.

Instead, its attorneys wrote II’s general counsel multiple times ahead of publication to complain about, among other things, this writer’s prior profile of Jay Alix. (When alerted that the existence of these letters would be noted in this article, McKinsey asked to comment on its own legal strategy, writing, in part: “As McKinsey’s counsel said in her first letter, McKinsey’s ‘concern stem[med] from the experience [the firm] had with a previous article about McKinsey written by Ms. Celarier in Institutional Investor. That lengthy article from March 18, 2019 . . . includes paragraph after paragraph of serious, but false, allegations about McKinsey and its executives. The allegations were admittedly obtained from McKinsey’s litigation adversary and yet the story includes a total of only 13 sentences of McKinsey’s rebuttal in a 95-paragraph story.’”)

McKinsey, through Sitrick, offered to answer written questions with statements that could be attributed to Pinkus.

In its defense, the firm points to an independent report by the Luskin law firm, which McKinsey believes has exonerated its relationship with MIO.

“Mr. Luskin, who is the first and only independent expert who has reviewed the facts concerning the separation of McKinsey and MIO, concluded that ‘McKinsey’s policies, procedures, and practices ensured and continue to ensure that McKinsey’s consulting work and MIO’s investment management work were and are separate and that there is no information sharing between them,’’’ according to a statement attributed to Pinkus.

The Luskin report was commissioned by the Financial Oversight and Management Board for Puerto Rico after it learned in bankruptcy proceedings that MIO was an investor in Puerto Rico bonds while McKinsey was serving as an adviser to the oversight board.

The comprehensive report goes into detail about the “information barrier” McKinsey and MIO have created. It notes how MIO is separate from the consulting firm. “The MIO staff of approximately 150 is dedicated exclusively to MIO. MIO staff do not provide consulting services. MIO’s investment professionals do not share office space, infrastructure, computer systems, or email addresses with McKinsey’s consulting business,” it says.

Moreover, it says that “McKinsey and MIO have multiple complementary and overlapping policies designed to avoid conflicts of interest.”

Yet Luskin also says that the trading in Puerto Rico public debt is “particularly problematic, as it gives rise to the appearance of conflict.”

When applying for the advisory role, McKinsey had told the board that it knew of no conflicts “or potential appearance of a conflict of interest,” the report states. McKinsey did not disclose any MIO investments and received the appointment in late 2016, according to Luskin.

Some Puerto Rico bonds, however, are held by Whitebox Advisors, a longtime MIO hedge fund investment that is also a creditor in seven other bankruptcies where McKinsey was the bankruptcy adviser, according to Whitebox’s proof of claims filed in those cases. Whitebox’s investment in Puerto Rico debt was made public in June 2016 and then was mentioned by The Wall Street Journal in a June 2018 article about McKinsey.

A few months later, The New York Times revealed that MIO also owned some Puerto Rico debt through its internal Compass-branded funds using managed accounts with Alternative Strategy Advisers and Aristeia Capital.

The news stories triggered the oversight board’s hiring of Luskin, according to the report. Only then did McKinsey provide the full details of MIO’s investments in Puerto Rico bonds. McKinsey also moved its Puerto Rico bonds out of the Aristeia-managed account into an Aristeia hedge fund, which McKinsey says had nothing to do with the Times exposé. “The transfer of securities occurred in connection with a reduction in overall investment with Aristeia prior to the NYT article,” a McKinsey spokesman says.

The Luskin investigation, which involved interviewing McKinsey and MIO executives, found “no evidence that information in MIO’s possession concerning these investments was shared with the McKinsey Puerto Rico service team or any other McKinsey consultant.”

And given that Puerto Rico’s special form of bankruptcy doesn’t mandate disclosure of connections that could present conflicts, as is required under U.S. bankruptcy rules, Luskin determined that McKinsey complied with the law.

But the report also found that “MIO’s direct and third-party-managed investments in Puerto Rico public debt could create the appearance of a potential conflict.” Had the oversight board known of its direct investments, the report says the board would have likely required MIO to “divest or to explain why the investments did not present a disabling conflict.”

In conclusion, it recommended that McKinsey in the future take steps to ensure “full disclosure” regarding any investments in Puerto Rico public debt.

McKinsey’s Pinkus says such a reading of Luskin is wrong, because “only disclosure recommendations for indirect investments exists where there is actual knowledge of such investments.”

However, Luskin believes that McKinsey should learn about such investments from public filings. It argues that McKinsey should be checking filings made on MIO’s behalf with the SEC or the Department of Labor, and cross-check them with an “expanded list of interested parties.” It should also check when its asset managers file proofs of claims in the bankruptcy court. “These filings would trigger updated disclosures,” it notes.

In the 14 bankruptcy cases it has been involved in since 2001, McKinsey has not disclosed hundreds of connections with MIO investments, according to public filings searches by Alix’s legal team that it disclosed in a June pleading in the Westmoreland bankruptcy case. (McKinsey did not dispute those numbers.)

More connections — and potential conflicts — with MIO’s hedge funds that McKinsey has not disclosed are coming to light in two additional bankruptcy cases, Standard Register and NII Holdings, that Alix’s Mar-Bow is seeking to reopen. In a significant June 28 court filing, the U.S. Trustee said it was willing to investigate some of Mar-Bow’s claims if the NII case is reopened.

MIO appears to have been an undisclosed investor in NII debt, via its investment in Whitebox, which led to an equity investment in the restructured company, according to a Mar-Bow pleading in the bankruptcy court in the Southern District of New York filed in May.

A similar situation occurred in Alpha Natural Resources, giving MIO an equity stake in the new company, Contura Energy, created out of that bankruptcy, as II previously reported. McKinsey says no one on the consulting side was aware of the Whitebox investments.

Earlier this year, Judge Huennekens, who oversaw the Alpha Natural Resources bankruptcy, asked McKinsey to certify that it had not profited off the portion of the settlement with the U.S. Trustee that found its way to Contura. But while saying that McKinsey itself did not benefit, the firm recently admitted in a court filing that its employees may have benefited, given the MIO fund investments.

It even offered to make a contribution to charity “to the extent that even the potential that McKinsey or its employees might receive some benefit, however minimal, troubles the court.” Without naming them, McKinsey said three of the hedge fund firms MIO invests in have holdings in Contura, according to public documents.

(Contura’s largest investor, Whitebox, in a statement said it “makes investment decisions for the funds and accounts it manages completely independently.”)

After its settlement with the U.S. Trustee earlier this year, McKinsey embarked on the creation of a new “protocol” that would outline which potential conflicts of interest it would be willing to disclose.

The proposed protocol, filed in the Houston bankruptcy court at the end of May, is an obtuse document that suggests different levels of disclosure for different types of firms.

McKinsey says it would be required to “disclose the known direct connections” of MIO — which means those not made through a third-party hedge fund. And it would also have to disclose “the indirect connections” of MIO to “parties identified on the interested-parties list,” which is a list put together by the debtor. That means McKinsey itself would have no responsibility to check for conflicts with MIO’s hedge funds, which it calls “indirect” connections. Finally, McKinsey wouldn’t be required to disclose investments small enough to be considered “de minimis” — which is not specifically defined.

But that’s not what the bankruptcy rule requires, say Alix’s lawyers, who call the proposal a “thicket of legal murk.” They argue that the proposed protocol “illegally allows a professional to restrict its disclosure of its investment connections” in procedures that are “inconsistent and incomprehensible.”

Previous attempts by others to limit disclosure by bankruptcy advisers have failed, and it’s unclear if federal bankruptcy Judge David Jones, overseeing this case, will go along this time. “Am I going to approve it? Absolutely not,” he said in an April 16 hearing. “The standard is what the standard is. I’m assuming that the protocol will simply be a mechanism, if you will, on how compliance is hoped to be achieved.”

Despite the concerns about the protocol, when the Westmoreland disclosures were filed on July 3 in accordance with it, McKinsey disclosed hundreds of MIO connections. They included 56 investments — in funds run by Whitebox, UBS, BlackRock, Oaktree Capital Management, PIMCO, and Bank of America, among others. It also disclosed numerous hedge funds that had been McKinsey clients when they were lenders to other companies that filed for bankruptcy.

On June 6, Alix took the stage at a dinner hosted by the Association of Insolvency & Restructuring Advisors in Boston, where he was given an award by the professional organization. Such occasions are normally staid corporate affairs, but about 17 minutes into his speech, a man jumped on the stage, stood 10 feet from Alix, and tried to interrupt his talk.

“Let him speak,” the crowd yelled at the man.

“I don’t know why he’s here, but I am going to finish my speech if it’s okay with you,” Alix responded back to the audience.

Alix was deep into his critique of McKinsey, detailing his various allegations against the firm.

“McKinsey is so big and so connected that it scares people,” he said, according to a video of the speech II has viewed. When he finished, Alix received a standing ovation.

McKinsey denies there is a “broadly held” perception that the firm has potential conflicts of interest with its internal fund of funds. But McKinsey’s actions since the controversies erupted in recent years — like adding independent directors and taking Garcia off the MIO board — indicate the firm is aware that such a perception does exist, says ethics expert Jennings.

However, she doesn’t think its actions resolve the issues. “All the stuff they’re doing now is the chase and the cleanup, coupled with denial,” she says.

Its efforts certainly haven’t quelled criticism. Alix’s attorneys argue that an “information barrier” isn’t foolproof. “Policies can be breached. Insider trading occurs. Water-cooler conversations result in permeable barriers. And, while people might not officially ‘participate’ in investments, they might provide formal or informal input,” they wrote in the recent pleading in the Westmoreland case.

Turning over all its investments to an outside firm — as other consultancies do — or spinning out MIO to stand alone might not be an easy, or even perfect, solution. But “from a business perspective, it would make sense,” says Jennings.

However, when II asked McKinsey if it had even considered such a solution, it ignored the question.

That isn’t surprising to McKinsey watchers, who believe having an internal fund is integral to McKinsey’s business model — and not just because McKinsey subsidizes it.

“The only reason to have it internally is to do what the rest of the world doesn’t want them to do: use their inside information,” says former consultant Matthew Stewart.

Stewart’s skepticism comes from following McKinsey’s history. “Over the past 15 to 20 years, I’ve been astonished at McKinsey’s ability to push the ethical boundaries, get caught, and then turn around and insist they are prim and proper, true professionals, and put it all behind them,” he says.

In 1985, when McKinsey partners thought about setting up an internal investment fund, some of them were wise enough to foresee it could create problems. While they didn’t predict the troubles the firm now faces and the questions of conflicts between lower-level employees and partners or with bankruptcy assignments and hedge fund investments, they were concerned that something “bad” might occur.

As the internal history notes, “Some partners worried about what might happen if an investment went bad and made it onto the front page of The Wall Street Journal.”

It didn’t stop McKinsey from going full steam ahead. “Otherwise,” it adds, “opposition was muted.”