The US Securities and Exchange Commission has imposed an $18m fine on an internal McKinsey fund that invests the wealth of its top consultants for allegedly having inadequate controls to prevent the firm’s partners from misusing inside information they accessed through work for clients.
The affiliate, MIO Partners, was investing hundreds of millions of dollars in companies that McKinsey was advising, the SEC said. Some of the McKinsey partners who oversaw its investments “also had access to material nonpublic information as a result of their McKinsey consulting work,” according the regulator.
The fine against MIO Partners is the latest blow to the reputation of the world’s largest management consulting firm, which has paid out more than $600m to settle claims relating to its work for US opioid manufacturers.
McKinsey had previously paid $15m to the US Department of Justice to settle claims that it failed to disclose conflicts of interest in bankruptcy cases, while MIO Partners paid $39.5m last year to settle a class-action lawsuit over the handling of its pension fund.
Earlier this month, US prosecutors charged a McKinsey partner with securities fraud, alleging that he had “exploited his access to material non-public information” to make a $450,000 profit from trading ahead of a $2.2bn acquisition by his client, Goldman Sachs. McKinsey said it has sacked the partner. Rajat Gupta, McKinsey’s former global managing partner, was sentenced to jail in 2012 for insider trading more than 10 years earlier.
The SEC fine follows revelations made by the FT in 2016 that McKinsey was operating a secretive internal investment fund that raised questions about how information gleaned from consulting was influencing investment decisions. MIO said at the time that it had a rigorous policy in place to avoid conflicts of interest.
Jay Alix, a rival US restructuring specialist, has also alleged conflicts of interest in the consultancy’s advice to companies going through insolvency, noting that its internal fund had invested in some creditors. McKinsey has denied the allegations.
The SEC’s order, released on Friday, said that McKinsey partners who oversaw MIO’s investment choices routinely had access to confidential information about their clients’ financial results, deals and funding plans.
MIO “did not have reasonably designed policies and procedures to address the dual roles for McKinsey consultants who were involved in MIO’s investment choices”, the SEC added.
In one instance, the SEC said, a McKinsey partner’s access to confidential information “created a risk” that one of the firm’s units could influence the company’s bankruptcy reorganisation plan in a way that favoured MIO.
MIO did not admit or deny the SEC’s findings, but agreed to a cease-and-desist order and a censure, as well as the $18m penalty.
A spokesperson for MIO said it was “pleased to have resolved this matter relating to the design and implementation of its historical policies and procedures”.
The SEC’s order had not identified any misuse of material non-public information by either MIO or McKinsey, it said, adding that MIO believed that steps it had taken in recent years to strengthen its policies and procedures “put us squarely in line with best practices in the industry”.
MIO’s board was now composed entirely of independent directors and retired McKinsey partners, it added.
In a separate statement, McKinsey said: “The historical issues identified in the SEC 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 organisations.”
