U.S. Trustee Program Reaches Settlement with McKinsey and Company to Withdraw and Waive its Fees in the Westmoreland Coal Bankruptcy Case

Settlement Addresses Disclosure Deficiencies and Possible Conflicts Relating to McKinsey’s Retention in In Re Westmoreland Coal, No. 18-35672 (Bankr. S.D. Tex.)

The Department of Justice’s U.S. Trustee Program (USTP) has entered into a settlement agreement with global consulting firm McKinsey & Company (McKinsey) requiring McKinsey to forego payment of fees in the Westmoreland Coal bankruptcy case pending in the U.S. Bankruptcy Court for the Southern District of Texas (Westmoreland Case).  The agreement, which is subject to review and approval by the bankruptcy court, resolves the USTP’s objection to the adequacy of McKinsey’s disclosures of connections and possible conflicts of interest in the Westmoreland Case.

The USTP previously reached a $15 million settlement with McKinsey in February 2019 to address past disclosure practices by McKinsey in three bankruptcy cases, including the Westmoreland Case.  The USTP had objected to McKinsey’s initial application seeking to be retained in the Westmoreland Case, and after the prior settlement McKinsey withdrew that application.  McKinsey later made new disclosures in a renewed attempt to be retained in the Westmoreland Case.  The USTP again objected, alleging that the disclosures remained deficient because McKinsey failed to disclose the connections of all of its affiliates, failed to make adequate disclosures regarding its investments in entities that could create a conflict of interest, and failed to address inconsistencies concerning its disclosure of confidential client connections. 

“In bankruptcy, professionals who are paid at the expense of the debtor company’s creditors, employees, and shareholders must be free of any actual or potential conflicts of interest,” said USTP Director Cliff White.  “Under bankruptcy law, this also entails detailed disclosures to ensure that the professionals can provide single-minded loyalty to the debtor’s stakeholders.  Should any professionals fail to meet this standard, regardless of size, complexity, or motivation, they will be held accountable.  This settlement ensures that McKinsey is held accountable for its conduct in this case.”

Settlement Terms

Under the terms of the settlement, McKinsey’s application seeking employment in the Westmoreland Case will be withdrawn.  As a result, McKinsey will not seek to recover any fees in connection with services rendered in the case that would otherwise be subject to review and approval of the court.  While the total amount of fees it is waiving is unknown, McKinsey rendered services throughout the case and likely would have sought approval for, and reimbursement of, millions of dollars in fees and expenses. 

In addition, McKinsey has for the first time agreed that it will fully disclose all affiliate connections and all confidential client connections in any bankruptcy case in which it seeks to be retained in the future, unless the bankruptcy court orders otherwise. 

The USTP has agreed to withdraw its pending objection in the Westmoreland Case and to work cooperatively, as it does with all professionals seeking to be employed in bankruptcy cases, to ensure the adequacy of McKinsey’s disclosures relating to its proposed retention in future bankruptcy cases.  The USTP continues to review McKinsey’s practices with respect to its investment affiliates.

While the settlement resolves any actions that could be brought by the USTP for McKinsey’s inadequate disclosures in the Westmoreland Case, it does not impact the rights of other third parties, including any parties or government agencies not participating in the settlement.  This settlement, as with the prior settlement, is limited to resolving McKinsey’s disclosure deficiencies and does not address or resolve, among other things, claims relating to actual or potential conflicts of interest. 

The USTP has an ongoing initiative to ensure the rigorous review of applications to employ professionals, including those who have investment arms and complex multi-affiliate organizational structures.  The USTP’s public emphasis on enforcing conflict and disclosure set forth in bankruptcy law has resulted in more complete disclosures made by these professionals in cases across the country.

The U.S. Trustee Program is the component of the Justice Department that protects the integrity of the bankruptcy system by overseeing case administration and litigating to enforce the bankruptcy laws. The Program has 21 regions and 90 field office locations. Learn more information on the Program at: https://www.justice.gov/ust.

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Implementation of Quality Assurance Standards and Practices by Selected IC-element OIG Investigations Units   ICIG CIA OIG DIA OIG NGA OIG NRO OIG NSA OIG Regular updates of investigation guidance or procedures — — — ✓ — ✓ Internal quality assurance review routinely conducted — — ✓ — — — External quality assurance review routinely conducted — ✓ — — — — Required use of documented investigative plans ✓ ✓ ✓ ✓ — ✓ Legend: ✓ = standard or practice implemented; — = standard or practice not implemented. Source: GAO analysis of IC-element OIG investigative policies and procedures. | GAO-20-699 The Council of Inspectors General on Integrity and Efficiency's (CIGIE) Quality Standards for Investigations states that organizations should facilitate due professional care by establishing written investigative policies and procedures via handbooks, manuals, or similar mechanisms that are revised regularly according to evolving laws, regulations, and executive orders. By establishing processes to regularly update their procedures, the ICIG, CIA OIG, DIA OIG, and NRO OIG could better ensure that their policies and procedures will remain consistent with evolving laws, regulations, Executive Orders, and CIGIE standards. Additionally, CIGIE's Quality Standards for Federal Offices of Inspector General requires OIGs to establish and maintain a quality assurance program. The standards further state that internal and external quality assurance reviews are the two components of an OIG's quality assurance program, which is an evaluative effort conducted by reviewers independent of the unit being reviewed to ensure that the overall work of the OIG meets appropriate standards. Developing quality assurance programs that incorporate both types of reviews, as appropriate, could help ensure that the IC-element OIGs adhere to OIG procedures and prescribed standards, regulations, and legislation, as well as identify any areas in need of improvement. Further, CIGIE Quality Standards for Investigations states that case-specific priorities must be established and objectives developed to ensure that tasks are performed efficiently and effectively. CIGIE's standards state that this may best be achieved, in part, by preparing case-specific plans and strategies. Establishing a requirement that investigators use documented investigative plans for all investigations could facilitate NRO OIG management's oversight of investigations and help ensure that investigative steps are prioritized and performed efficiently and effectively. CIA OIG, DIA OIG, and NGA OIG have training plans or approaches that are consistent with CIGIE's quality standards for investigator training. However, while ICIG, NRO OIG, and NSA OIG have basic training requirements and tools to manage training, those OIGs have not established training requirements for their investigators that are linked to the requisite knowledge, skills, and abilities, appropriate to their career progression, and part of a documented training plan. Doing so would help the ICIG, NRO OIG, and NSA OIG ensure that their investigators collectively possess a consistent set of professional proficiencies aligned with CIGIE's quality standards throughout their entire career progression. Most of the IC-element OIGs GAO reviewed consistently met congressional reporting requirements for the investigations and semiannual reports GAO reviewed. The ICIG did not fully meet one reporting requirement in seven of the eight semiannual reports that GAO reviewed. However, its most recent report, which covers April through September 2019, met this reporting requirement by including statistics on the total number and type of investigations it conducted. Further, three of the six selected IC-element OIGs—the DIA, NGA, and NRO OIGs—did not consistently document notifications to complainants in the reprisal investigation case files GAO reviewed. Taking steps to ensure that notifications to complainants in such cases occur and are documented in the case files would provide these OIGs with greater assurance that they consistently inform complainants of the status of their investigations and their rights as whistleblowers. Whistleblowers play an important role in safeguarding the federal government against waste, fraud, and abuse. The OIGs across the government oversee investigations of whistleblower complaints, which can include protecting whistleblowers from reprisal. 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Mazanec at (202) 512-5130, mazanecb@gao.gov.
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