Wed 01/19/2022 16:25 PM
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Relevant Document:
Opinion

This morning, the Second Circuit Court of Appeals issued an opinion vacating District Judge Jesse Furman's ruling dismissing with prejudice Jay Alix’s federal Racketeer Influenced and Corrupt Organizations, or RICO, Act and RICO conspiracy claims against various McKinsey defendants. The opinion - which remands the case for further proceedings - turns on questions of proximate causation and rejects Judge Furman’s conclusion that the connection between McKinsey’s alleged behavior and Alix’s potential harm therefrom was sufficiently attenuated to require dismissal of the case.

The lawsuit was based on an alleged scheme by McKinsey to harm bankruptcy advisory competitors by securing engagements in 13 bankruptcy cases through unlawful and improper disclosures to the applicable bankruptcy courts and by an alleged “pay-to-play” scheme of exclusive introductions between existing clients and lawyers. Jay Alix sued as assignee of claims purportedly held by AlixPartners.

The Second Circuit panel - consisting of Judge Jon O. Newman, Judge José A. Cabranes and Judge Barrington D. Parker - concluded unanimously today in an opinion written by Judge Parker that Alix’s allegations against McKinsey are adequate to allow the case to proceed. The opinion does not determine whether such allegations are in fact true, leaving such questions to future proceedings.

Of note, the opinion stresses Article III courts’ responsibility “to ensure the integrity of the Bankruptcy Court and its processes,” elaborating as follows:

“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. The fact that this case invokes our supervisory responsibilities makes our resolution of it sui generis and of little, if any, application to ‘ordinary’ RICO cases where these responsibilities are not front and center. But in light of these special considerations, we hold that Alix has plausibly alleged proximate cause.”

The opinion finds the complaint adequately pleaded RICO violations under both (i) the theory that bankruptcy disclosure requirements - if properly followed - would have led to McKinsey having been disqualified in various cases and (ii) a “pay-to-play” scheme under which McKinsey allegedly arranged meetings between its clients and bankruptcy attorneys in exchange for exclusive bankruptcy assignment referrals from those attorneys.

Specifically as to causation, the opinion concludes that to the extent McKinsey’s “fraud” has been plausibly alleged to have led to McKinsey’s engagement in cases over rival firms, “it is entirely plausible that they would have been awarded to other advising firms.” As to particular harm to AlixPartners, the opinion relies on allegations that bankruptcy advisory engagements for large cases operate in a “niche” market, and the opinion repeatedly cites allegations by Alix that AlixPartners, FTI Consulting and Alvarez & Marsal were retained in 75% of the bankruptcy cases since 2010 involving assets over $1 billion (where McKinsey was not retained) and “of those cases, AlixPartners obtained about 24% of the contracts.”

As to the “pay-to-play” allegations, causation is “different” in that “the purported injury is the lost opportunity to compete in an unrigged ‘beauty contest,’” according to the opinion, which adds that “[w]here this occurs, competitors who do not pay are ipso facto harmed.” The opinion notes that in light of allegations that “competitors had been bought off” and “in the absence of discovery and on an undeveloped record,” the court cannot say now that “intervening causes … could have severed this causal chain.”

Alix and McKinsey have been at odds across the federal judiciary over lapses in bankruptcy disclosure by McKinsey, including a long-running feud in the Westmoreland cases, which ultimately settled.

Today’s opinion notes in particular the GenOn cases and McKinsey’s alleged “extensive connections to [GenOn parent] NRG Energy,” against which the GenOn estate had potential claims. Had a McKinsey connection to NRG or other entities related to GenOn been disclosed, “it is implausible to conclude that GenOn would have retained McKinsey” and “[w]e are even more hard-pressed to conclude that the Bankruptcy Court, given these facts, could or would have found that McKinsey was ‘disinterested’ and did not ‘hold or represent an interest adverse to the estate,’” Judge Parker writes in the opinion.

The opinion also recounts at length Alix’s meetings with McKinsey’s Dominic Barton, where Barton allegedly admitted to and promised to remedy insufficient bankruptcy disclosures and then - when such remedies were not executed - offered to introduce Alix to Fortescue and Volvo Europe for possible consultancy assignments. Alix says he rejected this as “blatant attempted pay-offs and bribes,” the opinion recounts.

“The allegations in the complaint about specific cases, when combined with the unusually detailed allegations … regarding Alix’s meetings with Barton, one of which allegedly led to Barton admitting McKinsey’s role and participation in an illegal scheme and supposed agreement to take steps to end that scheme, easily raise a strong inference of fraud,” according to the opinion (emphasis added).

Whether Alix can back up his allegations is a question for summary judgment or trial, the opinion notes.

The opinion concludes: "We hold that the amended complaint plausibly alleges proximate cause with respect to all 13 bankruptcies in which McKinsey filed false statements as well as the pay-to-play scheme."

After Judge Furman’s dismissal in August 2019, the parties engaged in various procedural mechanisms that the Second Circuit found today were sufficient to establish proper appellate jurisdiction in the matter. Absent further proceedings at the Second Circuit or the Supreme Court, the case will now be remanded to Judge Furman in the district court.
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