By Andrew Graham, WyoFile.com
Two fallen Wyoming coal giants are caught at the center of a a high-stakes feud between global business mavens and regulators, leaving miners and municipalities to scramble for what they’re owed.
McKinsey & Company — a multi-billion dollar “big three” business consulting titan — stands accused of failing to disclose conflicts of interest in its bankruptcy work for coal companies Alpha Natural Resources and Westmoreland Coal Company.
The founder of a rival consultancy has alleged that while one arm of the firm shepherded Alpha and Westmoreland through Chapter 11, other branches advised clients who snapped up the wounded coal companies’ assets — opening concerns of self-dealing that may have led to millions in profits for McKinsey and its customers.
On April 18, judges approved a deal between McKinsey and the Justice Department to settle the cases. McKinsey will pay $5 million in each case, along with $5 million in a third bankruptcy unrelated to Wyoming coal.
Now the workers and retirees affected by the coal collapse and ensuing bankruptcy dealings want those funds. In court filings, a union representing Westmoreland’s miners, including some 250-300 in Kemmerer, have asked that the $5 million go to the union to offset the loss of once promised healthcare and retirement benefits.
“We’re looking for any and all opportunities to recapture some of that money,” said Phil Smith, a the United Mine Workers of America’s director of government affairs, in an interview. Even if the bid is successful, $5 million would be a drop in the bucket of lost benefits.
A judge previously ruled Westmoreland could break its health and retirement benefits contracts with the union to make it easier for the company to sell the Kemmerer mine. A proposed buyer of the mine will renegotiate healthcare with the current workers but won’t pay retired miners their benefits, according to a report in the Casper Star-Tribune.
With workers often outgunned on the high seas of high finance, it appears a long shot that the union can now convert corporate malfeasance into healthcare and a secure retirement for miners.
Lawyers for Westmoreland Coal Company have asked a judge to disregard the union’s request.
Alpha Natural Resources owned two large Powder River Basin mines near Gillette before selling them following its bankruptcy. Westmoreland owns the Kemmerer Mine.
McKinsey, a global consulting giant renowned for its secrecy, size and influence opened a bankruptcy arm in 2010. As a sprawling consulting and investing empire, the companies that hire McKinsey for bankruptcy help could end up selling assets to, and making other deals with, companies the firm advises in other capacities.
Concerns about the firm’s conflicts of interest and failure to disclose those conflicts was raised by the founder of a rival bankruptcy firm who is suing McKinsey in federal court, according to reporting by the New York Times. The Wall Street Journal has separately reported on the company’s failure to disclose conflicts of interest.
Bankruptcy judges must approve a troubled company’s hiring of firms like McKinsey and must consider potential conflicts of interests as a part of the process. “These strict disclosure requirements allow the court, [the Justice Department], and parties involved in the case to identify any conflicts of interest that may taint the professional’s advice and favor one interested party over another,” said the Justice Department in a Feb. 19 statement about the McKinsey settlement.
In the case of Alpha, McKinsey’s foes argued the firm’s investment arm had profited from sales by the coal company — being advised by McKinsey’s bankruptcy arm — to the tune of $50 million, according to the New York Times. McKinsey disputes that estimate.
Campbell County became involved in that bankruptcy proceeding in an effort to secure $19 million in unpaid taxes, according to previous WyoFile reporting. The county ultimately spent nearly $1 million on bankruptcy lawyers to secure the funds, and left $4.4 million behind in order to avoid further legal entanglement.
Campbell County attorney Carol Seeger said she didn’t believe McKinsey’s actions affected their case. “I highly doubt it would impact the tax liability [Alpha] owed the county,” she said. Seeger declined to make the attorneys who represented Campbell County in the bankruptcy case available to WyoFile for interview.
The $15 million settlement McKinsey paid in the three cases is among the largest ever paid by bankruptcy professionals, according to the Justice Department. The agency did not rule out further action against the firm if more malpractice by McKinsey comes to light.
McKinsey has denied failing to disclose conflicts of interest and also downplaying connections between its bankruptcy and investment branches, according to the Wall Street Journal.
But in February, the Justice Department minced few words with the company. “Transparency is the linchpin of the bankruptcy system and professionals employed in bankruptcy cases must be free of conflicts of interest,” said the DOJ’s Cliff White. “McKinsey failed to satisfy its obligations under bankruptcy law and demonstrated a lack of candor with the court and [the Justice Department].”
Smith with the miner’s union said the company’s actions deserved scrutiny. Coal miners and retirees are losing benefits, he said, while assets are sold for profit, executives are walking away with millions in bonuses and consulting companies are raking in hefty fees.
“I don’t know all of the ins and outs of exactly what McKinsey has done,” Smith said, but, “in a lot of these recent bankruptcies, especially in the coal industry, McKinsey’s fingers have been in that pot.”
McKinsey isn’t the only consulting giant making millions from coal company failures, however.
Another consulting firm advising Westmoreland in its bankruptcy is no stranger to Wyoming. Alvarez & Marsal, a multinational corporation, has collected $3.5 million in fees already in the case and recently applied to the court to collect $3 million more, according to filings. The same company has a $1.8 million contract with the Wyoming state government to help it find ways to be more efficient.
When coal companies go bankrupt, they can owe millions to Wyoming entities.
Filings in the Westmoreland bankruptcy shows claims for more than $2.5 million by the Wyoming Department of Revenue’s mineral tax division. That claim pales in comparison to Lincoln County, which saw more than $13 million in ad valorem taxes at risk when the company entered bankruptcy.
But the county has been paid, according to Lincoln County Commission Chairman Bob King. The commissioners hired a bankruptcy attorney to look into the case, but ultimately the coal company paid its tax bill, King said.
“I have to applaud them on that side… they had integrity,” he said.
The Uinta County treasurer, Terry Brimhall, said in an email to WyoFile that her office had filed a claim for $120,129, for outstanding property taxes. All but $38,949 had been paid so far.
Uinta County also filed a separate claim for more than $1.4 million in road-use fees. Uinta County attorney Loretta Howieson said she is representing the county in the bankruptcy proceedings.
WyoFile is an independent nonprofit news organization focused on Wyoming people, places and policy.