Racketeering lawsuit against McKinsey revived by U.S. appeals court

3:02 pm Wednesday, January 19th, 2022

By Jonathan Stempel

NEW YORK (Reuters) -A U.S. appeals court on Wednesday revived a racketeering lawsuit accusing the consulting firm McKinsey & Co of concealing potential conflicts when seeking permission from bankruptcy courts to perform lucrative work on corporate restructurings.

The 3-0 decision by the 2nd U.S. Circuit Court of Appeals in Manhattan was a victory for retired turnaround specialist Jay Alix, who accused McKinsey of running a “criminal enterprise” by hiding its ties to lenders and its clients’ competitors.

Alix said McKinsey’s conflicts of interest should have disqualified it from 13 bankruptcies including American Airlines, food retailer Harry & David and coal producer Alpha Natural Resources, causing his former firm AlixPartners to lose assignments.

He also accused McKinsey of running a “pay-to-play” scheme in which it arranged meetings between clients and bankruptcy lawyers in exchange for referrals from those lawyers.

The appeals court said a lower court judge erred in finding that Alix did not allege a “proximate” link between McKinsey’s alleged wrongdoing and harm to AlixPartners, in which Alix reported owning a 35% equity stake.

In addition, the court said the judge gave “insufficient consideration” to whether McKinsey undermined the integrity of federal judicial proceedings, in which litigants are entitled to know that the rules are being followed.

“If McKinsey’s conduct has corrupted the process of engaging bankruptcy advisors, as Alix plausibly alleges, then the unsuccessful participants in that process are directly harmed,” Circuit Judge Barrington Parker wrote.

The court did not rule on the merits.

It returned Alix’s case to U.S. District Judge Jesse Furman in Manhattan, who had dismissed it in August 2019.

Alix has battled McKinsey in multiple courtrooms since 2016.

“Mr. Alix has lost all six of his lawsuits against McKinsey, and we are confident the evidence will ultimately show that this lawsuit is similarly meritless,” McKinsey said in a statement.

Sean O’Shea, a lawyer for Alix, in an email said the decision allows for “fuller disclosures of McKinsey’s frauds” at the trial court.

Alix has sought triple damages under the federal Racketeer Influenced and Corrupt Organizations Act, which lets people sue if they believe criminal enterprises caused them harm.

The case is Alix v McKinsey & Co et al, 2nd U.S. Circuit Court of Appeals, No. 20-2548.

(Reporting by Jonathan Stempel in New York; Editing by Leslie Adler)