Puerto Rico Consultant McKinsey & Company’s Ownership of $20 Million of Puerto Rico Bonds Raises Conflict of Interest Concerns

In the U.S. House of Representatives, lawmakers have introduced a bipartisan bill that would require advisers and others contracted to help with the debt restructuring proceedings in Puerto Rico to abide by stronger reporting requirements. The move comes in the wake of an article in The New York Times reporting that McKinsey & Company, one of the advisers to the island’s federal oversight board, had bought millions of dollars of Puerto Rico bonds at a huge discount but did not disclose the purchases.

McKinsey, claims that it has satisfied all disclosure requirements. The company contends that it was MIO Partners, its investment division, that purchased about $20 million of Puerto Rico bonds. The consulting firm maintains that MIO Partners is separate from the consulting arm and McKinsey consultants having no control over MIO Partners or involvement in any of its investments.

Under the proposed bill, called the Puerto Rico Recovery Accuracy in Disclosures Act, consultants and others hired by the fiscal oversight board must submit verified disclosures noting any connections they might have before they can receive payment for their services. These disclosure requirements already apply to other bankruptcies, but they have not been part of the island’s bankruptcy proceedings so far. Because the U.S. territory is not a municipality, it was unable to file for Chapter 9 bankruptcy protection and instead sought relief under the 2016 Puerto Rico Oversight Management and Economic Stability Act (PROMESA).

While MIO Partners disclosed three of its hedge funds’ investments in the Puerto Rico bonds in filings submitted in federal court, the disclosures were not made under McKinsey’s name. Also, the bonds that McKinsey affiliates bought at a reduced rate were available for sale into this year at a discounted price due to a nonpayment risk. Recently, however, the federal oversight board unveiled a repayment plan for the bonds, which caused the bond’s sale price to go up. As a result, the McKinsey-owned bonds could very well make a healthy profit for the consulting firm even as it continues to advise the U.S. territory on how much it can and should pay back bondholders. The New York Times reports that as of the end of this month, McKinsey will already have made $69 million in fees for its work advising the board.

Also, another related McKinsey company, Whitebox Advisors, holds over $140 million of Puerto Rico bonds through different investment funds. Whitebox also oversees about $100 million for McKinsey retirement plans and, according to the The New York Times, one of the funds – Pandora Select – holds money for the consulting firm.

Because McKinsey is invested in the island’s municipal bonds, it can’t help but have a stake in the recovery plans it is helping the US territory with because its ownership of Puerto Rico securities also makes it a creditor. This has some people crying out “conflict of interest.” Such a conflict could lead to self-dealing, which typically involves a fiduciary acting in its best interests rather than in a client’s best interests. For example, as The New York Times notes, while the Puerto Rico government is looking to save money, McKinsey, as a bondholder, will want to make money on its purchases.

Under the proposed bill, not only would professionals hired to help with the island’s bankruptcy proceedings have to provide sworn disclosures, but also, the Office of the United States Trustee, which is the bankruptcy watchdog for the U.S. Department of Justice, would have the authority to probe into potential conflicts of interest. A federal judge would be able to stop payments of fees owed to an adviser if a conflict were discovered.

Puerto Rico Bond Fraud Lawyers
Puerto Rico, in the meantime, continues to be mired in over $74 billion in bond debt, $49 billion in pension liabilities, and a flailing economy, not to mention thousands of Puerto Rico Bond fraud and closed-end bond fraud claims brought by investors ever since the island’s debt plunged in value in 2013. Over the last five years, our Puerto Rico bond fraud lawyers at Shepherd Smith Edwards & Kantas (SSEK Law Firm) have worked with hundreds of investors on the island and the mainland in helping them to recover losses from investing in these Puerto Rico securities. Contact SSEK Law Firm today.

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