Second Circuit Appeal Court Re-Opens McKinsey’s RICO Case

Second Circuit Appeal Court Re-Opens McKinsey’s RICO Case

On January 19, 2021, the Second U.S. Circuit Court of Appeals in Manhattan re-opened a racketeering lawsuit wherein the consulting firm McKinsey & Co. was accused of concealing potential conflicts when seeking permission from bankruptcy courts in order to perform lucrative work on corporate restructurings. (Alix v McKinsey & Co., Inc., No. 20-2548 (2d Cir. 2022)). The Court overturned the district court’s ruling of dismissal of a 2018 case filed by Jay Alix, founder of the rival restructuring firm AlixPartners.

In the original suit, the plaintiff named McKinsey’s senior managing partners, McKinsey and three of its subsidiaries as defendants. The plaintiff accused McKinsey of running a “criminal enterprise” by hiding its ties to lenders and its client’s competitors. Plaintiff stated that McKinsey’s conflicts of interest should have disqualified it from thirteen bankruptcies including American Airlines, food retailer Harry & David, and coal producer Alpha Natural Resources, which caused his firm to lose business. Plaintiff further accused McKinsey of running a “pay-to-pay” scheme, whereby the consulting firm arranged meetings between clients and the bankruptcy lawyers in exchange for referrals from those lawyers. The plaintiff, Alix had sought triple damages under the federal Racketeer Influenced and Corrupt Organizations Act. The legislation allows people to sue against enterprises that have caused harm to them.

The lower court had dismissed the plaintiff’s case as it found that the plaintiff did not demonstrate a sufficiently direct connection between the alleged fraud by McKinsey and the damage caused to the plaintiff’s firm.[1] However, the Court disagreed and said that the plaintiff had “adequately pleaded bankruptcy fraud”.

The Court reviewed the lower court’s judgment and held that the lower court erred in finding that plaintiff did not allege a “proximate” link between McKinsey’s alleged wrongdoing and the harm caused to the plaintiff’s firm, AlixPartners, wherein the plaintiff owned thirty-five percent equity stake.  Further, the Court held that the lower court judge gave “insufficient consideration” to the issue, viz. whether McKinsey undermined the integrity of the federal judicial proceedings in which litigants are entitled to be aware of the rules are being followed. Judge Barrington Parker wrote, “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 Court found that the lower court did not rule on the merits. Besides this lawsuit, in 2019, the consulting firm had to pay $15m to settle the US Department of Justice claims that it had failed to disclose conflicts of interest in b

[1] Alix v. McKinsey & Co., Inc. et al, No. 1:2018cv04141 – Document 104 (S.D.N.Y. 2019)

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