By Tom Corrigan

September 15, 2018 - McKinsey & Co. is fighting a request to reopen the 2015 bankruptcy of coal mining company Alpha Natural Resources, denying allegations that conflicts of interest and an undisclosed investment broke the law and tainted the outcome of the multibillion-dollar chapter 11 case.

In court papers filed Wednesday with the U.S. Bankruptcy Court in Richmond, Va., lawyers for McKinsey said it had made all disclosures required by the bankruptcy court and denied that professionals at its Recovery & Transformation Services unit who advised Alpha in the bankruptcy knew anything about the undisclosed investment.

The motion to reopen Alpha’s bankruptcy, filed by a corporate affiliate of turnaround expert Jay Alix, followed a Wall Street Journal investigation earlier this year that found McKinsey has routinely disclosed far fewer potential conflicts of interest than other bankruptcy professionals. Such disclosures are required by law.

The Journal also found a McKinsey retirement fund held a $110 million investment in a hedge fund run by Whitebox Advisors LLC, which owned Alpha’s senior debt. The hedge fund was among the Alpha creditors that received the company’s best assets, giving McKinsey an indirect stake in the outcome of the bankruptcy. Advisers in bankruptcy cases are supposed to be “disinterested.”

Mr. Alix has seized on the revelations and levied a number of allegations of misconduct against McKinsey, including that it profited by some $50 million by concealing the Whitebox investment. He says McKinsey must be held to account for the alleged transgressions and says he fears the integrity of the nation’s bankruptcy system is at stake.

Mr. Alix also has sued McKinsey in federal court in New York over its disclosure practices, claiming the firm improperly earned tens of millions of dollars in bankruptcy fees, allegations McKinsey denies.

In its court papers, McKinsey said Mr. Alix has embarked on an “exhaustive anti-competition campaign” to help AlixPartners, the prominent restructuring firm Mr. Alix retired from in 2006 but in which he retains a minority ownership.

Mr. Alix’s allegations “are demonstrably false and fall woefully short of the exacting standard courts apply in deciding whether to reopen a settled bankruptcy,” a spokesman for McKinsey said in a statement Thursday.

A provision in bankruptcy law allows judges to reopen closed cases under extraordinary circumstances, including fraud intended to deceive the court. It is unclear when Judge Kevin R. Huennekens, the Richmond judge who oversaw Alpha’s chapter 11 case, will decide the matter.

Mr. Alix’s bid to reopen Alpha has garnered an endorsement from an arm of the Justice Department that polices the bankruptcy system. In July, John P. Fitzgerald III, acting U.S. trustee in the Eastern District of Virginia, filed a motion citing the undisclosed Whitebox investment as a reason to reopen the bankruptcy and to investigate McKinsey’s conduct.

“As the U.S. Trustee joinder in our motion suggests, exposing McKinsey’s fraud is crucial to maintaining the integrity of the bankruptcy court process, and we are confident that the court will agree,” said Steven Rhodes, a retired bankruptcy judge who is one of a team of legal experts Mr. Alix has hired to help him press his case against McKinsey.

McKinsey says it is fully cooperating with the U.S. trustee’s inquiry. A spokesman for Whitebox said it makes investment decisions independently and ethically.

As McKinsey’s court papers point out, Mr. Alix’s bid to reopen Alpha is at least the fifth time he has sought to litigate McKinsey’s disclosures in bankruptcy court.

While Alpha’s bankruptcy was pending, Mr. Alix pressed McKinsey to identify more connections, winning a partial victory when Judge Huennekens ordered McKinsey to name publicly many, but not all, of its clients.

Mr. Alix fought that ruling and asked the court to claw back McKinsey’s fees, though his efforts have largely proven unsuccessful. Mr. Alix hit a roadblock with Judge Huennekens and lost a series of subsequent appeals. A lawyer for Mr. Alix has vowed to take the matter all the way to the U.S. Supreme Court.