The very high profile RICO case by Alix Partners, a competitor of McKinsey & Co., the prestigious consultancy, has been decided in the Southern District of New York in favor of McKinsey. Alix Partners had made headline-grabbing allegations against McKinsey of committing fraud in numerous bankruptcy cases in order to get consulting business from the bankruptcy trustees by omitting to disclose its interests in the finances of the bankrupt companies. Alix believes it would have been awarded many of these contracts McKinsey not been in the running for the work. And it would not have been in the running if it had accurately disclosed its interests in the giant chapter 11 bankruptcy reorganizations if it had accurately disclosed McKinsey’s parent company’s interests on what are known as Rule 2014 forms filed in the bankruptcy courts as part of a firm’s application for this kind or work.
Bankruptcy fraud can take many forms, usually by debtors to conceal assets from schedules which are filed, but it is generically made a type of racketeering activity. So this is a legitimate RICO case because the 2014 forms have been filed in many bankruptcy courts for years. But there were two big problems with Alix’s theory of causation: 1)the 2014 forms are part of an application which ultimately must be approved by the bankruptcy trustee, and the trustee has discretion to choose a firm, and then 2) the bankruptcy judge must ratify the trustee’s choice. So, McKinsey made a strong argument in its motion to dismiss that the bankruptcy fraud was not the “proximate cause” of Alix’s lost opportunity. Rather, the sophisticated trustees made an informed choice to go with McKinsey and not Alix, and this would have occurred even if the 2014 violations had not happened, i.e., if the conflict had been known. Alix could have strengthened its argument with affidavits from some trustees saying they would not have chosen McKinsey for the work if they had known of the firm’s conflicts. But this was not done perhaps because they trustees were not misled. We’ll never know the full story.
Proximate cause is the achilles heel of a lot of RICO cases, and in this one. It was just too much to overcome, even for seasoned litigators at the law firm of Boies Schiller, which represented Alix. The Court noted that judges “generally refuse to predict how other courts will decide issues presented to them.” So it was unwilling to say Alix could prove it would have been approved by the bankruptcy trustee and the bankruptcy courts even if McKinsey was not in the running. Presumably there were other qualified firms vying for the business as well. The discretion of the bankruptcy courts was deemed to be an “independent factor” breaking the chain of causation from the bankruptcy fraud to the alleged injury, lost profits to Alix.
Alix, like most RICO plaintiffs cited the Supreme Court’s Bridge decision from 2008, which allowed a real estate firm in Chicago to sue a competitor for lost profits allegedly suffered because of unfair bidding for the contracts. There the possibility that other bidders might have won the contracts did not break the causal chain because the bidding was “rotational,” meaning the plaintiff was bound to receive some. But here the intervening acts of the trustee and the court were deemed too important to ignore.
Additionally, the district court noted that the US Bankruptcy Trustee’s office, which oversees the trustees appointed by the courts, has already investigated the allegations against McKinsey and is seeking $5 million in damages against the firm It is unclear if any of that money will end up with Alix, but it is fair to say, Alix will not be satisfied with such an outcome. On that point, the district court’s reasoning is weak. Treble damages should be available to compensate victims of RICO violations unless they have been made whole, and Alix surely will not be. But the analysis of the proximate causation issue was sound and will be cited in future RICO cases alleging lost profits from illegal competition.