McKinsey & Company Considers Spinoff of Its Magical Insider Trading Machine

It’s been a tough couple of months for the elite global consulting group McKinsey & Company. In December the firm settled with the Department of Justice for their role in “turbocharging” Purdue Pharma’s sales of Oxycontin to the tune of $650 million. Additionally, in December, McKinsey paid the DOJ $122 million to settle a case of bribing South African state-owned companies to obtain lucrative consulting contracts

Now on Thursday the Financial Times reported that McKinsey is considering spinning off its internal asset manager McKinsey Investment Office Partners or MIO. MIO invests on behalf of McKinsey partners, their families and alumni. Presently, MIO has assets under management of $23 billion.

With McKinsey’s tremendous access to insider, material non-public information (MNPI) from major companies and governments around the world, having an internal asset manager for partners, alumni and their families could pose multiple conflicts of interest and opportunity for malfeasance. This is especially true when you consider that in 2012, the firm’s retired managing partner Rajat Gupta was convicted and sent to prison for passing inside information to Raj Rajaratnam, the head of the infamous hedge fund Galleon Group. Mr. Gupta invested in Galleon while he was head of McKinsey from 1994 to 2003.

Additionally, in 2021 McKinsey partner Puneet Dikshit was convicted and sent to prison for trading in publicly traded securities on inside information he obtained from his advisory work with Goldman Sachs.

The Financial Times first broke the story of the existence of MIO in 2016.Until then very few, if anyone, outside of McKinsey knew it existed. As it turned out, MIO had been operating for at least 25 years producing stellar returns. For example, in 2014 MIO returned 14% for its holders while the average hedge fund return was approximately 3%. In 2016, when the Financial Times broke the story, McKinsey stated that MIO’s board, which included McKinsey’s heads of The Americas, Energy, Investment Banking and Private Equity divisions, had a “rigorous policy to avoid conflicts of interest.” They also stated that they were regulated by the U.S. Securities Exchange Commission and the U.K. Financial Conduct Authority. The Financial Times reported that, “The fund does not invest directly in publicly quoted securities but has specialized in macro strategies as well as complicated illiquid trades alongside hedge funds.”

Investing alongside hedge funds is exactly what got Mr. Gupta sent to prison. Also, with unfettered access to all kinds of MNPI you have to wonder what sort of information MIO passed along to these hedge fund managers they were “investing alongside with.”

Additionally, boasting about investing in complicated, illiquid trades, as opposed to public ones is a bit strange as it is much easier to hide malfeasance in the non-public arena. In the cases of Gupta and Dikshit, they were caught easily because they acted in publicly traded stocks. Here is an example of a “complicated and illiquid” trade.

In 2019, McKinsey agreed to a $15 million settlement with the DOJ for advising clients going through bankruptcy while neglecting to disclose that MIO had invested in these companies’ creditors. In short, they were playing on both sides! McKinsey was advising Alpha Natural Resources in their bankruptcy restructuring while at the same time MIO was buying up the loans and securities that would get the most favorable recovery, based on the restructuring plan McKinsey was drawing up! The DOJ found this issue through an alert from a prominent restructuring specialist who was harmed by McKinsey’s activities. Without this investor blowing the whistle the DOJ most probably would have never uncovered this conflict of interest.

What is very interesting is if you read the DOJ order you will see that the DOJ found what I would consider text book trading on MNPI in just this one case. Why didn’t they go further? Wouldn’t you think if the DOJ found what they found they would have thrown the book at McKinsey and proceeded with a full cavity search? Here’s excerpts from the DOJ order, you be the judge, with my own translations thrown in!

Active McKinsey partners who were members of the Investments Committee of MIO’s Board of Directors (the “Board”) (i) obtained material non-public information concerning issuers as a result of their consulting work on behalf of clients (“McKinsey Client MNPI”), and (ii) had access to material non-public information concerning the investments made by MIO funds as a result of their participation on the MIO Investments Committee (“MIO MNPI”).

My Translation - The MIO Investment Committee was McKinsey & Company with full access to MNPI

MIO provides investment options exclusively to current and former partners and employees of McKinsey. During the Relevant Period, MIO invested approximately 90% of MIO client assets indirectly, through third-party managers who exercise their own investment discretion (i.e., a so-called “fund-of-funds” strategy)

My Translation - McKinsey gives the appearance that 90% of MIO’s investments were in the hands of independent managers.

For MIO’s indirect investments via third-party managers, a little less than half were invested in separately managed accounts (“SMAs”), which were accounts within a MIO owned and operated special purpose fund. In the SMA structure, MIO contracted with a third-party manager to manage the SMAs; however, because MIO maintained in its records information reflecting all of the securities held by the SMAs, as well as all transactions executed by the SMAs, MIO had full knowledge of all securities held by the SMAs, including the number of shares of each security

My Translation - Despite the appearance of some independence from third-party managers, MIO’s called the shots and MIO for all intents and purposes equaled McKinsey.

Active McKinsey partners serving on the Investments Committee, including, through June 2017, the President of McKinsey RTS, possessed and had access to McKinsey Client MNPI by way of their various roles at McKinsey. As McKinsey consultants, Investments Committee members were routinely privy to MNPI relating to, for example, financial results, planned bankruptcy filings, mergers and acquisitions, product pipelines and funding efforts, and material changes in senior management.

Allowing active McKinsey partners, 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. MIO did not have policies and procedures reasonably designed to address the risks associated with its organizational structure.

My Translation - This is a pirate ship.

Here is what happened in the Alpha Natural Resources case as told by the DOJ order (keep in mind, similar activity happened in two other restructurings named in the DOJ order)

McKinsey Recovery & Transformation Services U.S., LLC. (“McKinsey RTS”) is McKinsey’s wholly-owned turnaround advisory and crisis management unit.

MIO Was Directly and Indirectly Invested in Issuers About Which Board Members Had Access to McKinsey Client MNPI

For example, between October 2015 and June 2017, MIO’s third-party managed funds, including certain of its SMAs, bought and sold securities of Alpha Natural Resources, Inc. (“ANR”)

In February 2016, the Investments Committee reviewed and ratified a $70 million allocation change to a third-party fund manager that was heavily invested in ANR senior secured debt. At that time, and in November 2015, when the Investments Committee had preliminarily ratified the allocation, McKinsey RTS was providing restructuring advice to ANR and the President of McKinsey RTS was on the Investments Committee. By June 2016, MIO had increased its total investment in the third-party manager’s funds to approximately $272 million and those funds, in turn, had obtained approximately $80 million of ANR’s senior secured debt.

In numerous instances, McKinsey provided consulting services to clients in which MIO funds were invested and about which MIO MNPI was potentially relevant.

For example, McKinsey RTS had been retained in August 2015 as ANR’s turnaround adviser, worked very closely with ANR management including by being embedded in part of its operations, and prepared a comprehensive business plan that formed the basis for the financial projections underpinning ANR’s Chapter 11 plan that helped to establish the value of the securities that were exchanged for ANR’s senior secured debt held by MIO. During the course of that consulting work, the President of McKinsey RTS sat on the Investments Committee and had access to MIO MNPI, including that MIO was invested with a third-party manager. The third-party manager had invested in ANR’s senior secured debt. In this context, MIO’s investments through the third-party manager in ANR’s senior secured debt overlapped with McKinsey RTS’s consulting work and, as such, there was a risk that McKinsey RTS could influence the reorganization plan in a way that favored MIO’s investments.

Before confirming ANR’s Chapter 11 plan, the Bankruptcy Court, which needed to rely on McKinsey RTS’s testimony in order to confirm the plan, ordered McKinsey RTS to disclose MIO’s connections to interested parties in the ANR bankruptcy case because of both the relationship between MIO and McKinsey RTS and the presence of McKinsey RTS’s President on the MIO Board. In a Bankruptcy Court-ordered in camera submission filed on July 6, 2016, however, McKinsey RTS did not disclose MIO’s connection to the third-party manager that was invested in ANR senior secured debt. After reviewing the in camera submission, the Bankruptcy Court confirmed the ANR Chapter 11 plan without disclosure in the bankruptcy proceedings of MIO’s interest in ANR senior secured debt via the third-party manager. Pursuant to the confirmed plan, because of their priority, the holders of ANR’s senior secured debt received 87.5% of the stock of ANR’s successor under the plan, and all other investors and creditors received a de minimis distribution.

Ta-Da!! If you were truly investigating McKinsey and MIO wouldn’t this be a flag that they may have done similar many times before…for the last 30 years!

Moving on.

Probably due to the above, in 2021 the SEC investigated MIO (Relevant Period 2015 - 2020) and found it didn’t have the rigorous policy to avoid conflicts of interest that they said they did in 2016 and concluded in 2021 that some members of MIO’s investment board “also had access to material nonpublic information as a result of their McKinsey consulting work.” The SEC fined McKinsey $18 million with McKinsey neither admitting nor denying the charges. Again, the government did not delve further into the actions of McKinsey and MIO, gave them their parking ticket and went on their way.

Now in 2025, MIO has assets of $23 billion, from $9 billion in 2016. The history of McKinsey’s MIO is dubious at best, and it seems doubtful that any regulator or law enforcement entity has ever taken a deep dive into the history of MIO’s investing activities, God knows what they would have found and now if MIO is spun off probably no one will ever will. The downside for McKinsey is they’ll probably lose control over their magic illegal money making machine.