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.”
Under the terms of the settlement, McKinsey’s application seeking employment in the Westmoreland Case will be withdrawn.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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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. Whistleblowers in the IC face unique challenges due to the sensitive and classified nature of their work. GAO was asked to review whistleblower protection programs managed by selected IC-element OIGs. This report examines (1) the number and time frames of investigations into complaints that selected IC-element OIGs received in fiscal years 2017 and 2018, and the extent to which selected IC-element OIGs have established timeliness objectives for these investigations; (2) the extent to which selected IC-element OIGs have implemented quality standards and processes for their investigation programs; (3) the extent to which selected IC-element OIGs have established training requirements for investigators; and (4) the extent to which selected IC-element OIGs have met notification and reporting requirements for investigative activities. This is a public version of a sensitive report that GAO issued in June 2020. Information that the IC elements deemed sensitive has been omitted. GAO selected the ICIG and the OIGs of five of the largest IC elements for review. GAO analyzed time frames for all closed investigations of complaints received in fiscal years 2017 and 2018; reviewed OIG policies, procedures, training requirements, and semiannual reports to Congress; conducted interviews with 39 OIG investigators; and reviewed a selection of case files for senior leaders and reprisal cases from October 1, 2016, through March 31, 2018. GAO is making 23 recommendations, including that selected IC-element OIGs establish timeliness objectives for investigations, implement or enhance quality assurance programs, establish training plans, and take steps to ensure that notifications to complainants in reprisal cases occur. The selected IC-element OIGs concurred with the recommendations and discussed steps they planned to take to implement them. For more information, contact Brenda S. Farrell at (202) 512-3604, firstname.lastname@example.org or Brian M. Mazanec at (202) 512-5130, email@example.com.[Read More…]
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- Spare Parts Contracts: Collecting Additional Information Could Help DOD Address Delays in Obtaining Cost or Pricing DataBy Sam NewsMay 26, 2021What GAO Found When the Department of Defense (DOD) awards contracts without competition, contracting officers may rely on cost or pricing data that contractors certify as accurate, current, and complete to determine if the prices are reasonable. DOD uses data other than certified cost or pricing data when certified cost or pricing data are not required. GAO found that, during fiscal years 2015 to 2019, the Defense Logistics Agency (DLA) obtained data other than certified data for 77 of the 136 sole-source spare parts contracts it awarded. As the 77 contracts were for commercial items, statute prohibits contracting officers from requiring certified cost or pricing data. DLA also waived the requirement to obtain certified cost or pricing data in two cases, citing the exceptional need for the spare parts. DLA obtained certified cost or pricing data for the remaining sole-source contracts. In March 2019, DOD issued a memorandum requiring defense agencies to report when contractors outright refuse to provide cost or pricing data, but it is not collecting data on the extent that delays in obtaining data affect the time that it takes to award contracts. DLA, Air Force, and Navy contracting officers said that while they were able to determine if prices were reasonable, delays in obtaining contractors' cost or pricing data contributed to the length of time needed to award seven of the 10 sole-source spare parts contracts GAO reviewed (see figure). Length of Time to Award 10 Sole-Source Contracts in Fiscal Year 2019 That GAO Reviewed DOD's March 2019 memorandum highlighted the need to understand, DOD-wide, the extent that contractors do not comply with contracting officer requests for data other than certified cost or pricing data. However, the focus was on outright refusals and not delays. Without a means to monitor or identify the nature and extent of delays, DOD is missing opportunities to develop approaches to effectively address these issues and potentially award contracts faster. Why GAO Did This Study DOD spends billions of dollars each year on spare parts for planes, ships, and other equipment. While DLA buys the bulk of the spare parts, the military departments also acquire them to support specific weapon systems. DOD seeks to negotiate a reasonable price for these spare parts to award contracts in a timely manner. DOD uses data other than certified cost or pricing data if it determines certified cost or pricing data are not required to determine prices are reasonable. The National Defense Authorization Act for Fiscal Year 2020 included a provision for GAO to review DOD's efforts to obtain contractor cost or pricing data. This report 1) describes how often DLA obtained cost or pricing data on sole-source contracts for spare parts; and 2) assesses the extent to which DOD tracks delays in obtaining these data and the reasons for those delays. GAO reviewed federal and DOD acquisition regulations and analyzed data for 136 DLA spare parts contracts awarded between fiscal years 2015 to 2019. For fiscal year 2019, GAO also selected 10 sole-source contracts awarded by DLA, Air Force, and the Navy, based on dollar value and other factors, to identify challenges in obtaining cost or pricing data. GAO also interviewed DOD and contractor officials.[Read More…]
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