Illustrations by Laura Lannes
Jay Alix thought he was doing Dominic Barton, the man then leading McKinsey & Co., a favor.
It was the summer of 2014, and Alix had recently discovered that the powerful management consulting firm had entered the bankruptcy advisory business that he — as founder of AlixPartners — had helped launch more than 30 years earlier.
The problem, Alix had come to believe, was that McKinsey was acting illegally.
“I thought if I were him and somebody were doing this in my company, I would want to know about it and I would want to stop it immediately. It's a federal offense,” he says. “Of course he'll want to do the right thing if I just tell him.”
Alix phoned Barton, then McKinsey’s global managing partner — the firm’s equivalent of CEO — and told him the two needed to meet.
An Oxford graduate who had risen through the ranks to head McKinsey, Barton, after much pleading by Alix, finally agreed to a one-on-one with the bankruptcy expert at Alix’s law firm in midtown Manhattan that September.
Barton, no doubt, had a lot on his mind. McKinsey was still reeling from the scandal that erupted when Rajat Gupta, a former managing partner, was hauled off to prison for insider trading. And in the years to come, it would continue to endure a series of scandals that encompassed everything from alleged corruption in South Africa — what The New York Times called the “biggest mistake in McKinsey’s nine-decade history” — to a Massachusetts lawsuit over its role in advising opioid producers on how to “turbocharge” sales.
But Alix’s allegations didn’t involve former partners, faraway lands, or odious advice. Instead, he claimed something potentially more serious and certainly closer to home: that McKinsey itself was engaged in repeated efforts to flout U.S. bankruptcy law.
Alix does not have the name recognition that McKinsey enjoys. A dapper man who sports a white beard and dons pocket squares, Alix is, however, considered a statesman in the relatively small world of bankruptcy professionals.
The 63-year-old is also known for an unpretentious demeanor, no doubt honed by years of living in Michigan’s Rust Belt. Though he still owns a 35 percent stake in AlixPartners, he retired at the young age of 48 to raise his two daughters following his wife’s tragic accidental death in 2000.
When Alix returned to his firm’s board in 2012, he learned there was a new rival in town: McKinsey. It was unsettling, as McKinsey had poached some of AlixPartners’ employees, who, the firm claimed in a lawsuit, had stolen its intellectual property and taken away clients — a case that settled midway through trial.
As he began investigating McKinsey’s behavior, Alix stumbled across something even more troubling. While poring over public court filings in several cases in which McKinsey had been hired as a bankruptcy adviser, he realized the firm wasn’t properly disclosing its connections — including those with its $12 billion investment arm, as well as its corporate and banking clients — as required under a federal bankruptcy rule known as Rule 2014.
When he finally arrived at the initial meeting in 2014 armed with reams of material for Barton, Alix explained in a recent bankruptcy court deposition, he patiently showed the managing partner disclosure documents in bankruptcies filed by others. He then compared them to McKinsey’s own, explaining what bankruptcy rules mandated and how McKinsey was, as he put it, “deficient.”
Barton initially seemed concerned, according to Alix’s sworn statement. “Dominic Barton took extensive notes in his notebook for two hours and he thanked me profusely for bringing it to his attention.”
Within weeks, Barton told Alix that McKinsey would exit the bankruptcy advisory business after being told by outside counsel — Skadden Arps executive partner Eric Friedman — that its actions were “probably illegal,” Alix claimed in the deposition. But, he said, Barton asked that Alix wait until his re-election as McKinsey’s top leader was assured. In the meantime, Alix watched as McKinsey took on three more bankruptcy advisory assignments without disclosing any potential conflicts by name. After 14 months, three in-person meetings, eight phone calls, and a series of emails, Alix says, McKinsey had done nothing to address his concerns.
“McKinsey did not listen to me,” he said in the deposition, which was in the bankruptcy case of Westmoreland Coal Co. “Mr. Barton told me these weren't serious laws. He told me McKinsey didn't like these laws. He also admitted they were breaking the laws — but he didn't think they were serious.”
Barton has not yet responded under oath, but his attorney, Catherine Redlich, said in a statement that “Alix’s allegation that Dominic Barton referred to the bankruptcy laws as ‘unimportant’ is false, as is his allegation that Mr. Barton agreed with Alix that McKinsey’s bankruptcy practices were unlawful.” Skadden Arps’ Friedman did not return a call for comment.
Whomever one believes, it is now clear that the 2014 confrontation was simply the opening salvo in what would become a legal war between Alix and McKinsey — a war that bankruptcy pros say is unlike anything they’ve ever witnessed. “[Alix] has weaponized bankruptcy law,” says one attorney sympathetic to McKinsey.
Kevin Sneader, who was elected to lead McKinsey following Barton’s retirement last July, recently addressed the many controversies swirling around McKinsey, including those raised by Alix in bankruptcy court. In an unprecedented CNBC interview, Sneader admitted six times that the firm had made “mistakes.”
That said, McKinsey’s attorneys have called Alix’s allegations “baseless” and dismissed his legal strategy as a vendetta by a competitor. An attorney representing McKinsey, Jennifer Selendy, told Institutional Investor that his legal campaign was the “vanity project of a narcissistic billionaire.”
Alix, who argues he’s acting as a private attorney general, says he is just trying to make sure there is a level playing field for everyone in the industry — including his firm.
Of course, AlixPartners has lost some business to McKinsey; based on an estimated 25 percent market share of the bankruptcy advisory business outlined in one of Alix’s complaints, its share of McKinsey’s bankruptcy advisory fees since 2001 would come to about $35 million. But Alix claims McKinsey is not an existential threat to AlixPartners, which gets 15 to 20 such bankruptcy assignments annually in contrast to McKinsey’s one a year over the past decade.
Looking back on his interactions with Barton, Alix now believes he was naive.
“He got legal advice about it,” Alix said of Barton in the deposition. “It kept happening. I kept warning him. And, finally, [after] I spent 14 months, I realized I have been deceived. I have been led along and I took the bait and I feel foolish about it.”
In a series of interviews with II, Alix detailed his now four-and-a-half-year-long battle with McKinsey and the many issues it has raised. He believes these aren’t simple failures of disclosures. The greater concern, he says, is what that lack of disclosure covers up.
After his final meeting with Barton, in 2015, he says, “I started looking at McKinsey in a whole other way, and the light went off. McKinsey is a company that has lost its way.”
Confronting McKinsey is not an easy task. In addition to working with most of the global companies in the Fortune 2000, the firm also has 30,000 alumni throughout the corridors of corporate and government power. Few have gone up against it.
“For a firm as large as it is, and with such extensive global business, McKinsey has been party to lawsuits a remarkably small number of times. The reason seems an obvious one: Sue McKinsey, and lose access to the firm,” author Duff McDonald wrote in his seminal book on McKinsey, The Firm: The Story of McKinsey and Its Secret Influence on American Business.
All that has changed with Jay Alix, who, as he tells it, wants to “speak truth to power” — and is doing so through a varied and aggressive legal strategy.
To begin, eight months after his last encounter with Barton, Alix created an investment company he called Mar-Bow Value Partners — a cheeky reference to revered McKinsey leader Marvin Bower, the man credited with creating the firm’s image of integrity.
Mar-Bow had one purpose: buy up distressed debt of companies that had filed for bankruptcy and hired McKinsey as an adviser. That gave Alix a legal standing on which to bring his concerns to the federal bankruptcy court’s attention, which he has done regarding five cases since 2016.
He wasn’t done. Last May, Alix turned up the heat once again: He filed a civil racketeering, or RICO, lawsuit against McKinsey and seven of its executives — including Barton — in the Southern District of New York.
In the suit, Alix accused McKinsey of running a criminal enterprise, engaging in bankruptcy fraud, mail and wire fraud, obstruction of justice, and money laundering, among other illegal acts, detailing problems in 11 bankruptcy assignments. McKinsey has asked the judge to dismiss the case.
Beyond litigation, Alix has also turned to Washington, D.C. Estimated by Bloomberg to be worth $1.2 billion, Alix last year hired lobbyists to buttonhole members of Congress and donated some $289,800 to candidates in the midterm elections, split between Democrats and Republicans. He has even hired famed constitutional attorney Laurence Tribe.
His efforts are starting to bear fruit.
In January, a federal bankruptcy judge ordered the parties in three cases Mar-Bow had targeted — Virginia coal company Alpha Natural Resources, Colorado mining company Westmoreland Coal, and SunEdison, a solar company based in Missouri — into mediation. Within weeks, McKinsey had agreed to pay $15 million to settle disputes with the Justice Department’s U.S. Trustee Program over the firm’s failure to fully disclose its connections, which Alix had brought to the U.S. Trustee’s attention. However, McKinsey and Alix — whose Mar-Bow has its own additional complaints — have not come to an agreement and have suspended mediation.
“This settlement ensures that McKinsey is held accountable for its conduct,” said U.S. Trustee Program director Cliff White 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.”
In a nod to Alix’s outstanding criticisms, the U.S. Trustee left open the possibility of additional action against McKinsey. “If this conduct is repeated in future cases, we will seek even more far-reaching remedies.”
A penalty of $15 million may be only a slap on the wrist for a firm the size of McKinsey, but the controversy has sullied the firm’s reputation. “This is embarrassing for McKinsey,” says Richard Davis, an attorney and former assistant secretary of the Treasury who has served as a trustee on big bankruptcies.
In addressing what he calls the “conflicts issue,” Sneader, McKinsey’s new leader, blames bad advice the firm was given about how to make its disclosures. “We did it with lots of advice that said if you disclose in this way, it’s appropriate and it’s okay. We stuck to that advice. If it’s now the case that no longer holds true, of course we change,” he said on CNBC.
Alix says he tried to advise Sneader on the problems with McKinsey’s disclosures, but the new managing partner never responded to his email on the matter.
“In today’s day and age, when everything is all about crisis management, they didn’t manage it. They created the crisis. It’s unmitigated hubris,” says Sean O’Shea, a partner at Cadwalader, Wickersham & Taft, who is representing Alix.
Even now, Sneader’s comments notwithstanding, McKinsey may not be planning to be fully transparent going forward.
McKinsey did not admit to wrongdoing in its settlement with the U.S. Trustee Program, the firm said in a statement emailed to II. McKinsey added that it will be filing additional disclosures in the Westmoreland case, where the court has not yet approved its application to be the bankruptcy adviser. But McKinsey attorney Selendy was noncommittal when asked if McKinsey will be disclosing all of its connections in the future. “We’ve not decided,” she said, noting that while disclosing information regarding some of McKinsey’s affiliates “may be relevant to the bankruptcy process, some of them may not be. That's what we are working on.”
Alix’s impassioned battle with McKinsey has been emotionally wearing and incredibly expensive, likely costing him more than a million dollars in legal fees. He remains unbowed.
“What I’m going to do is keep after McKinsey until they comply with the law,” Alix says. “I’m not going to sit idly by while somebody corrupts the bankruptcy system.”
In the decades since Jay Alix founded his eponymous firm, the bankruptcy business has become a profitable financial engine for Wall Street.
Alix, who is credited with inventing the term “turnaround,” was there at the beginning.
“He created the turnaround business,” says a restructuring investment banker who first met Alix in 1983 in Detroit, two years after Alix launched his firm there. “Jay was the first professional to, in an orderly way, figure out a process for helping companies improve performance and avoid liquidation and get saved,” explains the banker, who declined to go on the record because he also has a relationship with McKinsey.
The banker calls the restructuring business “blue-collar banking,” saying, “We fix really messy problems. It is not glamorous. It’s really hard work.”
Alix was well suited to the task. He grew up in a family of six siblings in the industrial town of Waterbury, Connecticut, where his father ran a Shell gas station. “I know what it means to work around and under cars on the snow-covered ground and have my hands dirty, helping people solve problems and fixing things,” Alix says. (He graduated from the Wharton School of Business at the University of Pennsylvania in finance, and received an MBA in accounting from Rutgers University.)
As he tells it, there was no grand plan, just an “accidental turn” that led him to where he is today. “I'd like to tell you that when I was young I had a big, well-developed MBA strategy and analysis and all that — but that's not the case at all.”
After graduation, he went to work in New York City for Price Waterhouse. There, he investigated fraud in bankrupt insurers and later represented a number of clients whom he says “were hanging on the edge.” The same thing happened when he joined a small accounting firm after he moved to Detroit — a move made to be near his college girlfriend.
Alix started his new firm — which has since become a global powerhouse with 2,000 employees and is now headquartered in New York City — in 1981.
His timing was fortuitous. The 1978 Bankruptcy Reform Act was just starting to create the modern restructuring industry by allowing companies to file for Chapter 11 reorganization, taking away the stigma previously associated with bankruptcy. Insider dealing and corruption had long plagued bankruptcy work, which led to a requirement that advisers disclose their connections — Rule 2014 — to make sure they did not have conflicts of interest.
The issues raised by Alix’s battle with McKinsey over its disclosures offer a reminder of the problems of the past, says Stephen Lubben, a corporate governance and business ethics professor at Seton Hall University in Newark, New Jersey. “We don’t want to slide back into that.”
Bankruptcy advisory might seem an odd fit for McKinsey, which historically operated “like an exclusive club admitting only the most prestigious clients,” according to McDonald’s book The Firm.
Alix says Barton thought bankruptcy beneath the firm. “Barton suggested that he never liked the bankruptcy business,” Alix recalled in his deposition. “He never wanted McKinsey to be in the bankruptcy business. And he told me that he thought it was a low business. He said, ‘I don't want us to work down there with those people.’”
Given all the controversy Alix has stirred up, “you can be damned sure internally there are debates now about the relative wisdom of having gone down that path,” says one individual familiar with McKinsey.
Although RTS is a small part of McKinsey, which had revenue of $10 billion last year, since 2001 the firm has nabbed 14 assignments, all but three of them after the new unit was created. Throughout that time, it has earned about $140 million in fees off those assignments, according to court filings.
But until Alix forced the issue — and later created a database through publicly available sources of McKinsey’s connections — the firm had acknowledged few connections with any named party. Instead, it disclosed connections by “category”—which the U.S. Trustee concluded doesn’t comply with the rule.
“McKinsey has not disclosed hundreds and hundreds of connections in all these cases, they've not disclosed dozens of concealed investments, they've been working on both sides of multiple billion-dollar transactions while hiding their undisclosed clients, and it appears they've done money laundering. No one is holding them accountable for all of it,” Alix says, referring to complaints detailed in his RICO suit and the various bankruptcy cases. McKinsey has denied the allegations.
McKinsey’s reluctance to make disclosures may be, in part, cultural.
Unlike banks, law firms, or even hedge funds, as a consultancy McKinsey operates with little government scrutiny or regulation and is renowned for its secrecy. When Alix first raised issues about the lack of disclosure, “McKinsey's whole defense was, ‘We tell our clients that they're confidential,’” explains John Pottow, a University of Michigan bankruptcy law professor hired by Alix to provide expert opinion to the court. “My response is, ‘That's between you and your clients. You still have to comply with the bankruptcy law if you're going to represent debtors in bankruptcy court.’”
In fact, McKinsey’s own engagement letters with clients acknowledge that such confidentiality can’t be maintained if the firm is legally required to disclose their name.
As Alix looked over McKinsey’s Rule 2014 disclosures, he saw a thick document that had the appearance of compliance. “It's got all these thick exhibits attached; it's got an affidavit sworn under the penalty of perjury that was signed by somebody. It's got all the right preambles in it. It appears to comply. It looks like the Rule 2014 form, but in fact it is not; it doesn't have the legally required core content and full disclosures, which the bankruptcy laws were designed to get,” he says. Two U.S. trustees, in the SunEdison and Alpha Natural Resources cases, reached the same conclusion.
The lack of disclosures by McKinsey went undetected for years, despite the many professionals — lawyers for both debtors and creditors, the U.S. trustees, and judges themselves — who arguably should have noticed something was amiss. “I think [McKinsey was] counting on the fact that nobody would ever read the damn thing or see it, and if somebody did pick it up it would present the ‘right appearance,’ and look like it was pretty good, but in reality it did not comply,” Alix says.
McKinsey says its disclosures were always made “in good faith.”
One connection McKinsey did not disclose dealt with its internal hedge fund, McKinsey Investment Office, known as MIO Partners, which “had a direct financial interest in the outcome of the [Alpha Natural Resources] bankruptcy via a $110 million investment,” Alix charged in his RICO complaint. That financial interest referred to McKinsey’s investment in hedge fund Whitebox Advisors, which was a secured creditor to Alpha Natural Resources — public information that was disclosed by another adviser even when McKinsey did not do so. Whitebox is also an equity investor in the company created out of the bankruptcy with Alpha Natural Resources’ assets, Contura Energy, according to its securities filings.
Under bankruptcy law, advisers to bankrupt companies are required to be “disinterested persons,” meaning they can’t own the company’s debt or equity, directly or indirectly, among other restrictions.
MIO Partners, which invests money for McKinsey partners and alumni, also invested in seven other distressed companies for which McKinsey was a bankruptcy adviser and concealed that connection, Alix documented in a March 6 pleading. It also invests directly in the distressed-company and distressed-debt investment markets through its own Compass funds, according to its filings with the Securities and Exchange Commission.
The firm’s undisclosed conflicts in its bankruptcy advisory business first came to the public’s attention in a 2018 article in The Wall Street Journal, which also found that McKinsey reported far fewer conflicts than other advisers.
The media attention has helped win Alix support. Even investors in companies where McKinsey has been involved tend to take his side. “From my vantage point, he is unearthing something that is a material issue,” says one distressed debt portfolio manager whose hedge fund has a relationship with McKinsey. This includes, according to the U.S. Trustee, McKinsey’s claims about MIO being a blind trust, which the firm argued makes disclosure unnecessary. The “blind trust” claim was “misleading,” according to the trustee in the Alpha Natural Resources case: When the firm was advising that company, McKinsey RTS president Jon Garcia was on the board of MIO, including its investment committee.
In an exposé on MIO that dropped the same day as the U.S. Trustee’s settlement, The New York Times also reported that McKinsey partners and ex-partners make up the majority of the hedge fund’s board of directors.
The firm’s seeming inability to uncover all of its potential conflicts of interest runs counter to its image as the smartest guys in the room.
“McKinsey would say things like, ‘Well, we didn't really know there was a conflict because we sent out some email and no one answered us saying there was a conflict,’” says Pottow. “That doesn't pass the laugh test. People have conflict management databases, and my God, McKinsey, you actually have a technical consulting arm, so you're supposed to know this.”
Business ethics professor Lubben looks at it another way. “From the outside, it certainly suggests that there may be an arrogance problem at McKinsey,” he says. “That might be the most polite thing you can say about it.”
When a former Goldman Sachs banker who has dealt with many of the nation’s elite was asked if McKinsey thought it didn’t have to play by the rules, he laughed before answering, “McKinsey has no peer in this regard.”
The statement McKinsey released to media outlets after settling with the U.S. Trustee is a case in point, he says.
“We remain confident that our approach to bankruptcy disclosures complied with the law and was always undertaken in good faith,” McKinsey wrote in one of two statements emailed to II. “Our disclosures evolved over the years as part of the process with the relevant bankruptcy courts.”
But “people don't pay $15 million when they haven't done something they think is possibly wrongful,” says the University of Michigan’s Pottow.
To be sure, there are skeptics of Alix’s motivation.
“He realizes he’s spending millions of dollars, but if he can knock McKinsey out of this marketplace, he’ll get it back,” says the restructuring banker, who also says Alix is as honest as he is competitive. Regardless of the legal outcome, the banker says, “if one client thinks he’s right, it will be worth it.”
Alix insists he’s not trying to force McKinsey out of the business — as long as it follows the law. And he’s not backing down. Mar-Bow is still objecting to McKinsey’s hiring in the Westmoreland case and is asking for disgorgement of fees and profits made by McKinsey in the SunEdison case, where Alix alleges the firm engaged in self-dealing and money laundering. He has also filed a preliminary objection to McKinsey’s settlement with the U.S. Trustee and recently filed a new objection in another case, the 2015 bankruptcy of Standard Register. He is also trying to take a ruling that went against him in the Alpha Natural Resources case to the U.S. Supreme Court.
Then there’s the RICO lawsuit, which asks for damages to Alix’s firm and legal expenses — which could easily come to more than $100 million, given treble damages.
Alix says he started on this path considering himself a whistleblower for the bankruptcy industry, with his initial interest into McKinsey’s behavior triggered by rumors that McKinsey was offering exclusive access to its client list to any bankruptcy lawyer who would refer Chapter 11 bankruptcy cases to McKinsey instead of having what’s called a beauty contest to pick the best adviser. Alix knew such a pay-to-play scheme would be illegal.
According to Alix in his deposition, Barton’s final offer, in October 2015, confirmed his worst fears of this type of behavior.
“He said, ‘You know, why don't you let us refer some work to you?’” Alix explained. Barton first offered Australia’s Fortescue Metals Group, the world's fourth-largest iron ore exporter, and when that didn’t move him, Barton said, “How about if we refer Volvo to you, a company in Europe; they need to be restructured.”
“I said, ‘Dom, I said I can't accept any of this. You need to comply with the law, and until you comply with the law, we're not going to do any business together on anything. That's what you promised me.’”
Barton and McKinsey deny the allegations.
“I was shocked,” Alix says. “Here, this guy is within 15 minutes giving me introductions for two of the largest companies in the world that he says he wants to refer to my firm. I thought, ‘He’s trying to buy me off . . . to bribe me. This is outrageous. This is another pay-for-play scheme.’”
These days, Alix and many others wonder how it all will end. U.S. Bankruptcy Judge David Jones, overseeing the Westmoreland case, already suggested that McKinsey’s alleged conduct “could violate Title 18” — a reference to the possibility of criminal, not just civil, charges. Notably, when the settlement with the U.S. Trustee was finally filed in court, it stated that “claims with respect to any criminal liability are not released.”
“Where's the U.S. attorney? Where's the SEC? Who is going to be big enough and bold enough to hold McKinsey accountable?” asks Alix. “Somebody bigger and more powerful than me is going to have to stop them, because they can't or won’t stop themselves.”
