Did you know that the legendary American consulting firm McKinsey had an internal hedge fund? Apparently, many of the company's customers do not.
According to a report in the New York Times, the fund recently recruited a series of lawsuits and critical investigations by the DOJ and Congress that it did not disclose any conflicts of interest between investments of the $ 4 billion internal fund, McKinsey Investment Office, and its customers. .
McKinsey launched the fund in the mid-1990s in the midst of a brutal war for talent at companies in Wall Street. The fund was intended to encourage high-performing employees to stay with the company. But although the company defended its refusal to disclose these conflicts by claiming that there is a wall between the two companies, lawmakers, judges and others claim to be asking whether this is true, especially after it has been found that older employees in the consulting activities McKinsey are on the board of the fund.
Virginia bankruptcy court, where a judge reopened a case with a coal company after discovering the MIO, was one of the secured creditors of the bankruptcy.
After the NYT published its report, the DOJ announced that it had reached a settlement with McKinsey on cases where it announced that conflicts in bankruptcy advisory cases had been disclosed. As part of the settlement, McKinsey agreed to pay $ 15 million to creditors that it represented in these bankruptcy cases, and stated that if McKinsey would not restore disclosure practices, DOJ could demand further penalties.
Former employees of MIO confirmed to the Times that the internal hedge fund has been so mysterious for a reason that McKinsey does not want anyone to "connect the dots" between his investments and his customers. Instead of housing his money at the headquarters in NYC, McKinsey spent $ 4 billion on the English Channel Island of Guernsey.
Here are a few other highlights from the extensive NYT report:
A fund in which MIO has invested is a creditor of China & # 39; s most notable fugitive.
The McKinsey fund participated in two China-focused PAG funds. In a London listing, PAG reported that MIO had a share of more than 10 percent in one fund, worth about $ 20 million. At the end of 2015, MIO also owned more than a quarter of another PAG fund aimed at China.
In 2008 Pacific Alliance had a big bet on a real estate magnate who owned a colossal office and a luxury apartment complex next to the site of the Summer Olympic Games in Beijing that year. Court records show that it lent $ 30 million to a company controlled by the mogul, who had close ties with the Chinese secret community and was already notorious for allegedly orchestrating the demise of a Beijing vice mayor with a sex tape.
PAG says that his loan has never been repaid. The mogul has fled from China for New York. In China he is confronted with corruption and rape money, which he says is false. PAG challenged him to a court in New York in 2017, and said he owed it about $ 88 million, according to court cases.
His name is Guo Wengui, but he also passes Miles Kwok. He is China's highly-fugitive fugitive, and for years McKinsey, via PAG, was one of his creditors, a fact that was hidden by Barfield Nominees. There is no evidence that McKinsey knew his investment would find his way to Mr. Guo, with whom the company said it had no direct transactions.
The NYT even produced an infographic to illustrate the links between McKinsey & # 39; s money and the fugitive in question, which is sought on charges of rape and corruption.
A proponent of a non-profit organization that wants to pay more attention to tax havens pointed out that the use of tax havens by McKinsey for his investments contradicts the dealings with best business practices of his consulting firm.
But John Christensen, a founder of the Tax Justice Network, a UK-based group that wants to bring more transparency to tax havens, said there was an unrelenting relationship between McKinsey's mission to distribute best practices for companies and use of tax havens such as Guernsey.
"I can not think of any legitimate, really economic reason to use such a place," Mr. Christensen said. He should know: for 11 years, mr. Christensen the economic adviser of Jersey, a neighboring tax haven.
The old manager of MIO, Todd Tibbetts, is a virtual mind. The NYT's investigation yielded almost nothing to the money manager, despite his record as a reporter of several decades of market-yielding returns. Tibbetts enforces a code of silence among its managers that is so intense that it is even forbidden to attend events in industry for fear of interacting with other market participants.
McKinsey said in his statement: "We continue to comply with our disclosures, which have always fully complied with the law, and we are confident that Alix's fraud claims will be revealed as completely worthless."
Until the flurry of attention from the bankruptcies and the controversy around Puerto Rico, the existence of the McKinsey hedge fund had largely escaped public disclosure. McKinsey refused to make Todd Tibbetts, the fund's chief investment officer, or other officers available for interviews for this article.
For someone who manages such a large and successful portfolio, there is surprisingly little public information about Mr. Tibbetts. So secret is the fund under Mr. Tibbetts that his managers were discouraged from participating in events in the sector and, even when they did, by talking to participants, a former fund executive said.
McKinsey's internal fund was invested in Puerto Rico bonds, while also advising the government of Puerto Rico during the restructuring, and presented what Elizabeth Warren described as a clear conflict of interest.
In Puerto Rico, where McKinsey is advising a board that is trying to reduce the crippling debt of the island, the New York Times reported last year that the hedge fund was invested in bonds, giving it an interest in the outcome. Subsequently, a two-party group of members of the House introduced a bill to force advisers such as McKinsey to expose possible conflicts of interest.
And representative Nydia M. Velázquez, a New York democrat, and Senator Elizabeth Warren, the American Democrat who is now President, wrote McKinsey, and accused his conflicts of interest as "opaque or non-existent." McKinsey replied that there was no relationship between his work in Puerto Rico and the bond investments of the fund.
While McKinsey advised Valeant Pharmaceuticals – a company once led by a former McKinsey partner – it held an interest in the "pharmaceutical Enron" indirectly through external hedge funds, meaning that these funds acted potentially in the company while McKinsey was giving Valeant advice about which drug makers to buy.
While consultants from McKinsey advised Valeant at the end of 2014, two funds from MIO, Compass TPM and Compass Offshore TPM, acquired an indirect interest in Valeant via Visium Asset Management, a fund that would soon implode in a scandal with inside information.
Through another external hedge fund, Aristeia Capital, two other MIO funds acquired shares in Valeant in early 2015, after the company had agreed to purchase Dendreon, a bankrupt medicine maker. The McKinsey funds were listed under Dendreon's eight noteholders, entitled to a portion of $ 495 million, in cash and Valeant shares, which Valeant paid for the company.
In a statement, Aristeia said it had learned the role of McKinsey that Valeant only advised when he was approached by The Times. "Aristeia never obtained information from MIO about potential conflicts, because MIO had no investment margin with respect to these assets," said the company.
McKinsey said in his statement that the hedge fund "did not affect the investment decisions of Visium and Aristeia" are external managers. Valeant, now called Bausch Health, said that McKinsey had not advised on mergers and acquisitions since May 2016.
The flagship fund of MIO has more often than not achieved a positive return on the market. Between 2000 and 2010, the fund achieved an average return of more than 9% compared to roughly 1.6% loss for the S & P 500. And although McKinsey prefers to hide behind this separation wall between the fund and its consulting activities, experts told NYT that it is impossible to completely exclude the possibility of a conflict.
"The mistake people make is to say," Well, conflicts of interest are not that dangerous because well-meaning professionals can use them objectively, "said Daylian Cain, who teaches business ethics at the Yale School of Management. "But the research is about this: no, they can not."
Certainly not when the leader of the bankruptcy practice of the firm also has a seat on the board of the hedge fund.