A multi-billion-dollar private investment fund affiliated with McKinsey & Co., the giant consulting company, has settled regulatory allegations that it did not have adequate policies in place to prevent the misuse of inside information gleaned from its vast corporate consulting business, according to documents filed today by the Securities and Exchange Commission.
Although the S.E.C. did not claim the fund actually misused confidential information, it cited the dual roles played by McKinsey partners who oversaw the massive fund’s investment choices even as they had access to nonpublic client information. “These partners were routinely privy to confidential information like financial results, planned bankruptcy filings, mergers and acquisitions, product pipelines and funding efforts, and material changes in senior management at those companies,” the S.E.C. said in its complaint. The investment fund’s failures began from “at least 2015” and ran through 2020, the regulator said.
The McKinsey investment fund, known as MIO Partners, agreed to pay $18 million to settle the matter, neither admitting nor denying the allegations The fund invests on behalf of current and former McKinsey employees and had assets of $14.6 billion, as of Dec. 2020.
“Allowing individuals who may possess or have access to material nonpublic information also to have oversight over investment decisions that may benefit them economically presents a heightened risk of misuse,” said Gurbir S. Grewal, director of the S.E.C.’s Division of Enforcement. “It is crucial that investment advisers have robust compliance policies and procedures in place to address the risks inherent to their organizational structures.”
In striking the settlement, MIO said in a statement, “The historical issues identified in the S.E.C. order have been resolved by MIO through strengthened policies and procedures, and the order does not identify any misuse of confidential or material non-public information by either MIO or McKinsey. MIO and McKinsey are operationally separate and follow strict policies to limit information sharing between the two organizations.”
McKinsey’s use of an in-house investment fund to handle its employees’ retirement funds is unusual. Most large companies, including major consulting firms, hire third-party firms like Fidelity and Vanguard to oversee their employees’ retirement accounts. Those firms typically offer employees a handful of big-name mutual funds to choose from, letting them make their own investment decisions. The holdings of such mutual funds are transparent.
The MIO fund’s stakes are more opaque. It invests in private investment vehicles, including hedge funds, and only identifies its holdings once a year in Department of Labor filings. MIO Partners oversees its investments with a staff and a 12-person board of former McKinsey partners and independent directors, regulatory filings show.
One example highlighted in the S.E.C. complaint involved McKinsey’s simultaneous bankruptcy advisory work for, and investments in, coal company Alpha Natural Resources, a case explored previously in The Wall Street Journal.
In November 2015, the MIO had placed money with a hedge fund that was heavily invested in the debt of Alpha Natural Resources, even as McKinsey’s bankruptcy advisory arm, RTS, was providing restructuring advice to the coal miner, the S.E.C. said. The president of RTS was on the MIO investment committee at that time, the S.E.C. noted, and by June 2016, MIO had increased its total investment in the outside hedge fund to $272 million. By that time, the outside hedge fund held $80 million of ANR’s debt.
The Chapter 11 bankruptcy process is supposed to be transparent, and advisers are required to be disinterested advocates for their clients. McKinsey had not disclosed its investment in the hedge fund that held ANR debt.
A bankruptcy adviser that has an undisclosed stake in a company is it advising is conflicted because that advisor would also have an interest in the outcome of the company’s restructuring, the United States Trustee, a unit of the Justice Department, has said.
The U.S. Trustee oversees the nation’s bankruptcy courts and has cited McKinsey’s bankruptcy work as problematic. The firm has paid $15 million to settle allegations by the US Trustee that McKinsey made insufficient disclosures about its clients and investments in entities connected with companies that hired McKinsey to provide advice on their bankruptcy reorganizations. McKinsey made no admission of liability in the matter.
McKinsey has come under sharp criticism from lawmakers and faced legal challenges over alleged conflicts of interest in other fields.
The company this year agreed to pay $573 million to settle allegations from 49 states that its work for opioid manufacturers helped “turbocharge” sales of the drugs, contributing to a deadly addiction epidemic. At the same time the firm was working for the pharmaceutical companies, McKinsey was advising the Food and Drug Administration on its prescription drug policy, according to court documents. In the settlement, McKinsey said it believed its past opioid work was “lawful” and agreed to the settlement “without finding or admission of wrongdoing or liability of any kind.”
And, as NBC News reported last week, McKinsey simultaneously works for Chinese state companies and the Pentagon. McKinsey told NBC News that it abides by U.S. laws on federal contracting and that it has extensive internal rules to prevent conflicts of interest and to protect clients’ information.