McKinsey Fined $18M Over Compliance Failures

McKinsey & Co. has agreed to pay $18 million for failing to establish appropriate boundaries between its consultants and an affiliate that makes investments for them.

The U.S. Securities and Exchange Commission said McKinsey partners had access to material nonpublic information (MNPI) about issuers of securities in the course of their consulting work for clients while they also served as members of the investments committee of the board of MIO Partners.

While the SEC didn’t accuse McKinsey or any employees of insider trading, it said that allowing individuals who had access to MNPI about issuers in which MIO funds were invested “to oversee and monitor MIO’s investment decisions presented an ongoing risk of misuse of MNPI.”

The commission also said there was a risk that McKinsey consultants might slant their advice to clients based on MNPI they had obtained as investment committee members.

McKinsey failed “to establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of its business, to prevent the misuse of material nonpublic information,” the SEC said in an administrative order.

To settle the allegations, the firm agreed to pay a penalty of $18 million. “The historical issues identified in the SEC order have been resolved by MIO through strengthened policies and procedures,” a McKinsey spokesman said.

According to the SEC, McKinsey partners who also served as MIO investment committee members were “routinely privy” to MNPI about, for example, financial results, planned bankruptcy filings, mergers and acquisitions, product pipelines and funding efforts, and material changes in senior management.

For example, partners had access to MNPI about Alpha Natural Resources through bankruptcy work McKinsey did for the company at the same time MIO’s investments through outside hedge funds included about $80 million of ANR’s bonds.

There was also, the SEC said, a risk that McKinsey’s turnaround specialists could influence ANR’s reorganization plan in a way that favored MIO’s investments.

“Allowing individuals who may possess or have access to material nonpublic information also to have oversight over investment decisions that may benefit them economically presents a heightened risk of misuse,” Gurbir Grewal, director of the SEC’s Division of Enforcement, said in a news release.

material nonpublic information, McKinsey & Co., MIO Partners, U.S. Securities and Exchange Commission