A new law signed by President Biden on Jan. 20—the Puerto Rico Recovery Accuracy in Disclosures Act (PRRADA) —requires certain key professionals who worked on the island’s bankruptcy-like case to disclose if they have any previously hidden investments or business connections that could be considered a conflict of interest.
The May 16 deadline was set by a federal judge who also recently batted down efforts to limit the scope of disclosure requirements.
McKinsey, a market leader in bankruptcy consulting, in particular faces scrutiny as one of the case’s top billers with over $100 million in fees. Revelations that a McKinsey subsidiary held millions in Puerto Rico bonds provided the impetus to Congress’ push to enact PRRADA—a process in which McKinsey also engaged as a lobbyist to shape certain technicalities in the legislation.
The events highlight McKinsey’s penchant for confidentiality and multiyear fight against accusations that it intentionally conceals conflicts of interest from federal overseers. Congress and the people of Puerto Rico now wait to see whether the law actually reveals any troubling relationships among the island’s restructuring advisers and some of Wall Street’s biggest names.
“This is a rather straightforward and standard procedure that should be observed on behalf of the people of Puerto Rico as we do on the mainland,” Sen. Bob Menendez (D-N.J.) told Bloomberg Law. “McKinsey as an entity has been lobbying in general against this proposition.”
PROMESA, the 2016 law Congress enacted to address Puerto Rico’s debt crisis, was modeled after traditional bankruptcy. But it left out disclosures required in typical Chapter 11 cases to weed out consultants with unacceptable conflicts of interest.
Federal lawmakers earlier this year cheered passage of PRRADA, which was aimed largely at closing that loophole.
The PRRADA bill passed the House unanimously. But an examination of PRRADA’s journey through Congress shows the bill sat for several months last year in the Senate Energy and Natural Resources Committee, chaired by Sen. Joe Manchin (D-W.Va.).
Manchin, who raised concerns about consultants’ cost and burden in complying with the measures, advanced the legislation in December, after some disclosure requirements were removed.
At the time, McKinsey was paying three, high-profile law firms to lobby on the law and related issues, according to federal lobbying records.
“We have been consistent in our support for the goal of PRRADA to promote transparency in Puerto Rico’s restructuring process,” McKinsey spokesman DJ Carella said in a statement to Bloomberg Law. “We offered feedback during the legislation’s consideration in an effort to help clarify the bill and ensure it was durable and feasible.”
PRRADA’s practical effects have yet to be seen. The Justice Department and the Puerto Rico Federal Oversight and Management Board—a panel of federally-appointed members overseeing the island’s restructuring—recently waged a court fight over the scope of disclosures.
PRRADA was introduced in Congress three and half years ago by Rep. Nydia Velazquez, (D-N.Y.), after the New York Times reported in September 2018 that MIO Partners, a McKinsey investment fund, directly held $20 million worth of Puerto Rican municipal bonds while McKinsey was advising the island on restructuring public finances.
Velazquez cited the reporting as she introduced the bipartisan bill later that year. Right around that time, McKinsey began lobbying Congress on bankruptcy issues.
A 2019 investigation by the oversight board’s special counsel cleared McKinsey of wrongdoing and said the firm ensured “no information sharing” between its consulting arm and MIO Partners. The investigator recommended that the board adopt stricter measures to identify vendor conflicts.
McKinsey says it has never had any conflicts that compromised its work, and that its consulting operations are separate from MIO Partners.
McKinsey’s travails in Puerto Rico fit into a pattern of other accusations the firm has faced in recent years that it flouts federal disclosure laws to hide conflicts of interest.
In recent years, McKinsey has agreed to multimillion-dollar fines or settlements related to the adequacy of its disclosures as a bankruptcy consultant for
And in November 2021, McKinsey paid the U.S. Securities and Exchange Commission $18 million to settle an investigation into potential insider trading risks stemming from MIO’s investments in Puerto Rico and McKinsey’s other bankrupt clients.
Since 2018, when it started lobbying Congress on bankruptcy matters, McKinsey has paid more than $6 million to the three law firms lobbying on Puerto Rico and bankruptcy oversight, according to federal lobbying records. The onset of that lobbying effort marked the first time the firm filed lobbying disclosures in 15 years.
Such efforts have drawn lawmakers’ suspicions.
“I think they wanted to kill the bill,” Rep. Andy Biggs (R-Ariz.), a co-sponsor of PRRADA, told Bloomberg Law. “I think the fact that we had truly a bipartisan effort really helped that out.”
Any momentum PRRADA had after the House’s unanimous vote early last year came to a halt once it reached Manchin’s committee in the Senate.
“I went to Senator Manchin several times and said ‘Look, this is important for the people of Puerto Rico. It is important that they be treated just the same as any other United States citizens in such a proceeding,’” said Menendez, who introduced PRRADA in the Senate. “This should have been what my operation calls a ‘no brainer.’”
In a December report, Manchin said he strongly supported enhancing disclosure requirements but the House-passed bill would have required hundreds of hired professionals to comb through potential connections to more than 165,000 creditors.
Manchin ultimately advanced the bill late last year, after his committee narrowed professionals’ requirement to disclose their connections only to people or entities on a ‘‘List of Material Interested Parties.”
The Senate committee’s amendment also removed a provision that would require advisers who had already been paid out to file a disclosure statement.
“I was not surprised that that was the provision that came out,” said Biggs. “Retroactivity sometimes is going to get bargained away.”
Manchin’s office declined to comment.
President Biden signed the Senate-amended version of PRRADA into law earlier this year, just two days after the Puerto Rico oversight board won court approval to reorganize the commonwealth’s central government and reduce its debt by $33 billion.
The extent of PRRADA’s reach quickly became evident when the oversight board proposed a material interested parties list that its advisers should refer to when they check for conflict of interest.
Citing the law’s technical provisions, the board argued that creditors whose claims have already been resolved, like McKinsey’s hedge funds, should be excluded from the list.
“The Oversight Board fully supports PRRADA’s purpose to avoid conflicts of interest and to provide greater transparency through enhanced disclosure,” board spokesman Matthias Rieker said in a statement. “McKinsey has been providing the Oversight Board with the analytics and analysis that we need to make informed decisions.”
The briefs arguing in favor of limiting the creditor list were signed by the board’s attorneys, Martin Bienenstock and Brian Rosen of Proskauer Rose LLP. Bienenstock and Rosen have a previous relationship with McKinsey, defending the firm 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 didn’t reply to a request for comment.
The board’s interpretation drew backlash from the law’s lead sponsors and, in court, from regional U.S. 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 shrugged off the board’s proposal to exclude creditors with “inactive” claims. She said that the only consideration that should be used to exclude parties from the list is whether their claims fall below a certain dollar threshold.
The law aims to make relevant “the history of each professional’s connections with creditors, regardless of whether their claims are active or inactive,” Swain said.