A new law President Biden signed on Jan. 20 — Puerto Rico‘s Recovery Accuracy in Disclosures Act (PRRADA) — requires certain key professionals who worked on the island’s bankruptcy case to disclose s they have previously hidden investments or business relationships that could be considered a conflict of interest.
The May 16 deadline was set by a federal judge who also recently pushed back on efforts to limit the scope of the disclosure requirements.
McKinsey, a market leader in bankruptcy advice, is notably under scrutiny as one of the main billers in the case with more than $100 million in fees. Revelations that a McKinsey subsidiary held millions in Puerto Rico bonds provided the impetus for Congress’s push to enact PRRADA – a process McKinsey also engaged in as a lobbyist to shape some technicalities of legislation.
The events highlight McKinsey’s penchant for confidentiality and the multi-year fight against accusations that he intentionally conceals conflicts of interest from federal overseers. Congress and the people of Puerto Rico are now waiting to see if the law actually exposes troubling relationships between the island’s restructuring advisers and some of the biggest names on Wall Street.
“This is pretty simple, standard procedure that should be observed on behalf of the people of Puerto Rico like we do on the mainland,” Sen. Bob Menendez (DN.J.) told Bloomberg Law. “McKinsey as an entity lobbied generally against this proposal.”
PROMESA, the 2016 law passed by Congress to address Puerto Rico’s debt crisis, was modeled after traditional bankruptcy. But he omitted disclosures required in typical Chapter 11 cases to weed out consultants with unacceptable conflicts of interest.
Earlier this year, federal lawmakers applauded the passage of PRRADA, which was largely intended to close that loophole.
The PRRADA bill was passed unanimously by the House. But a review of PRRADA’s run in Congress shows that the bill sat for several months last year on the Senate Energy and Natural Resources Committee, chaired by Sen. Joe Manchin (DW.Va.).
Manchin, who raised concerns on the cost and burden of consultants to comply with the measures, the legislation advanced in December, after some disclosure requirements were removed.
At the time, McKinsey was paying three top law firms to lobby the law and related issues, according to federal lobbying records.
“We have been consistent in our support for PRRADA’s goal of promoting transparency in Puerto Rico’s restructuring process,” McKinsey spokesman DJ Carella said in a statement to Bloomberg Law. “We offered feedback during the review of the legislation to help clarify the bill and ensure it was sustainable and workable.
The practical effects of PRRADA have not yet been seen. The Department of Justice and Puerto Rico’s Federal Board of Oversight and Management, a group of federally appointed members to oversee the island’s restructuring, recently fought a court battle over the scope of the disclosures.
PRRADA was introduced to Congress three and a half years ago by Rep. Nydia Velazquez, (DN.Y.), after the New York Times reported as of September 2018, MIO Partners, a McKinsey investment fund, directly held $20 million of Puerto Rican municipal bonds while McKinsey advised the island on public finance restructuring.
Velazquez cited the report as she introduced the bipartisan bill later that year. Around this time, McKinsey began lobbying Congress on bankruptcy issues.
A 2019 investigation by the supervisory board’s special counsel cleared McKinsey of wrongdoing and said the company provided “no information sharing” between its consulting arm and MIO Partners. The investigator recommended that the board of directors adopt stricter measures to identify conflicts with suppliers.
McKinsey says it has never had any conflicts that have compromised its work and that its consulting business is separate from MIO Partners.
McKinsey’s misfortunes in Puerto Rico are part of a series of other accusations the company has faced in recent years that it flouts federal disclosure laws to hide conflicts of interest.
In recent years, McKinsey has accepted multimillion-dollar fines or settlements related to the adequacy of its disclosures as a bankruptcy consultant to
And in November 2021, McKinsey paid $18 million to the United States Securities and Exchange Commission to settle an investigation of potential insider trading risks arising from MIO’s investments in Puerto Rico and other bankrupt McKinsey clients.
Since 2018, when it began lobbying Congress on bankruptcy issues, McKinsey has paid more than $6 million to the three law firms lobbying Puerto Rico and monitoring the bankruptcy, according to federal records. lobbying. The start of this lobbying effort marked the first time the company has filed lobbying disclosures in 15 years.
Such efforts have drawn the suspicions of lawmakers.
“I think they wanted to kill the bill,” Rep. Andy Biggs (R-Arizona), co-sponsor of PRRADA, told Bloomberg Law. “I think the fact that we really have a bipartisan effort has really helped that.”
Any momentum PRRADA had after the unanimous House vote early last year stalled once it reached Manchin’s committee in the Senate.
“I went to see Senator Manchin several times and said, ‘Listen, this is important to the people of Puerto Rico. It is important that they are treated the same as all other American citizens in such a procedure. “, said Menendez, who introduced PRRADA to the Senate. “It should have been what my operation calls ‘obviousness’.”
In December reportManchin said he strongly supports improving disclosure requirements, but the bill passed by the House would have required hundreds of hired professionals to comb through potential ties to more than 165,000 creditors.
Manchin finally moved the bill forward late last year, after his committee reduced the requirement for professionals to only disclose their relationships to people or entities on a “significant interested party list”.
The Senate committee amendment also removed a provision that would require advisers who had already been paid to file a disclosure statement.
“I wasn’t surprised that was the layout that came out,” Biggs said. “Retroactivity will sometimes be negotiated.”
Manchin’s office declined to comment.
President Biden signed the Senate-amended version of the PRRADA earlier this year, just two days after Puerto Rico’s supervisory board won court approval to reorganize the Commonwealth’s central government and reduce its debt by $33 billion.
The breadth of PRRADA’s reach quickly became apparent when the Supervisory Board proposed an extensive list of interested parties to which its advisers should refer when verifying conflicts of interest.
Citing the technical provisions of the law, counsel argued that creditors whose claims have already been resolved, such as McKinsey’s hedge funds, should be excluded from the list.
“The supervisory board fully supports PRRADA’s goal of avoiding conflicts of interest and providing greater transparency through better disclosure,” board spokesman Matthias Rieker said in a statement. “McKinsey has provided the Oversight Board with the insights and analysis we need to make informed decisions.”
Briefs arguing in favor of limiting the list of creditors were signed by counsel for the council, Martin Bienenstock and Brian Rosen of Proskauer Rose LLP. Bienenstock and Rosen have a prior relationship with McKinsey, defending the company against allegations that it violated federal racketeering law by intentionally concealing conflicts of interest and that it failed to fully disclose potential conflicts in Alpha Natural Resources Chapter 11 case.
Bienenstock and Rosen did not respond to a request for comment.
The board’s interpretation drew backlash major law sponsors and, in court, US Regional Trustee Mary Ida Townson.
U.S. District Judge Laura Taylor Swain of the Southern District of New York, who is overseeing Puerto Rico’s bankruptcy case, agreed with Townson and ignored the board’s proposal to exclude creditors with “inactive” claims. She said the only consideration that should be used to exclude parties from the list is whether their claims are below a certain dollar threshold.
The law aims to make relevant “every professional’s relationship history with creditors, whether their claims are active or inactive,” Swain said.