McKinsey pays $ 18 million to settle SEC investigation into insider trading controls
McKinsey & Co. agreed to pay $ 18 million to settle allegations that it did not sufficiently guard against the risk of insider trading involving investments in companies for which the company was also a consultant.
McKinsey partners have gained access to material non-public information in companies such as Alpha Natural Resources Inc. and SunEdison Inc. thanks to the bankruptcy work the consultancy has done for those companies, according to the Securities and Exchange Commission. . Meanwhile, another unit of McKinsey, MIO Partners Inc., which managed the partners’ retirement funds, invested in external hedge funds that were investors in those companies, the SEC said.
The SEC did not charge McKinsey or any employee with insider trading, but said the company should have had better policies to ensure partners don’t abuse confidential information. McKinsey’s MIO unit settled the SEC investigation without admitting or denying the wrongdoing.
McKinsey spokesman DJ Carella said: âThe historic issues identified in the SEC order have been addressed by the MIO through strengthened policies and procedures, and the order does not identify any misuse. confidential or non-public information by MIO or McKinsey. “
In 2019, the company paid $ 15 million to settle Justice Department allegations it failed to disclose potential conflicts required in three bankruptcy cases it advised on.
“Allowing those who may own or have access to material non-public information to also have control over investment decisions that may benefit them economically presents an increased risk of abuse,” said Gurbir Grewal, SEC Director of Enforcement. âIt is crucial that investment advisers have strong compliance policies and procedures in place to deal with the risks inherent in their organizational structures. “
The company’s conflicts of interest in its bankruptcy counseling business were the subject of a 2018 investigation by the Wall Street Journal. In seven of 14 Chapter 11 bankruptcy cases in which McKinsey acted as counsel to debtors, the Journal found the company had a financial interest in the outcome.
McKinsey’s investments were made through MIO Partners, which provided investment options to the company’s partners and employees. While most of the investment picks were outsourced to hedge funds, MIO directly invested around 10% of the funds it managed, the SEC said.
The SEC said MIO was a direct investor in municipal bonds issued by Puerto Rico as McKinsey advised the island’s Financial Oversight and Management Board, which was in charge of its bankruptcy plan.
A spokesperson for McKinsey in 2018 told the Journal that MIO Partners “operates primarily as a” fund of funds, “investing in a wide range of third-party managers who make specific investment decisions, independent of MIO and McKinsey & Co. . “
McKinsey partners who decided to invest in MIO sold around $ 1 million worth of Puerto Rican bonds in 2017, when they gained access to confidential information about the island’s financial condition, the SEC said in a settlement order.
In the example involving Alpha Natural Resources, the SEC said the McKinsey partners knew that MIO had an investment in a hedge fund that had bought the bonds of the coal producer. The SEC settlement order said the situation created “a risk that McKinsey … may influence the reorganization plan in a way that favors MIO’s investment.”
Corrections and amplifications
McKinsey spokesperson DJ Carella made a statement after the SEC announced a settlement. An earlier version of this article mistakenly attributed the statement to David Press, a spokesperson for MIO, a McKinsey affiliate. (Corrected November 19)
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