What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stockton investing. We recently released a video about a partner at the global management. Consulting firm mckinsey who got caught engaging in insider trading. Kunit dixit was charged by the sec for buying thousands of dollars of out of the money weekly call options on the company green sky.

Knowing that there was an imminent announcement of a takeover of green sky by goldman sachs, he ended up making thousands of percent returns on his investment. Insider training. Cases like this are common on wall street, even among just the ones that get caught. It seems like.

There are cases every few weeks and the perpetrators seem to almost always come from a few big firms on wall street. Recently, the sec uncovered a possible reason contributing to the entire trading activity on wall street. In a press release, they announced that one of mckinsey's subsidiary companies will pay 18 million dollars for enabling insider trading, essentially mckinsey's employee investment manager, mio was set up with mckinsey, so that partners at the firm who worked with consulting clients were also able to make investment Decisions using insider information gained in their consulting jobs, in one instance, mio put tens of millions of dollars into investments into companies that mckinsey was simultaneously helping navigate through bankruptcy court in this video we'll go deep into exactly what the mckenzie affiliate was doing. What these things led to, and some possible reasons why all this happened.

Mckinsey has been in the news a lot recently when it comes to insider trading. Just a week ago, as of the recording of this video, we made another video about a mckinsey partner called punit. Dixit dixit was working on advising goldman sachs regarding their acquisition of the fintech firm green sky. He ended up buying tens of thousands of call options.

On behalf of himself and his spouse, many of these call options were highly out of the money and only days until expiration. However, after the acquisition was announced, publicly green sky jumped about fifty percent instantly dickshit's speculative call portfolio which he entered into for about twenty five thousand dollars jumped in value to about hundred fifty thousand dollars within about five minutes, after which he sold them all. If you haven't already check out that video link in the description below but the issue of this video centers around a mckinsey subsidiary, called mackenzie investment office or mio mio is an investment manager that provides investment management services only to mckenzie partners, both past and present. It invests partially as a fund of funds; in other words, it invests mckinsey partners, money indirectly into other investment funds.

However, about half of these third-party funds that mio invests in are so-called separately managed accounts. As a result, mio had exact knowledge of exactly what securities and for what amounts the funds were invested in mio, also directly buys and sell securities to manage about 10 percent of the partner's money. The bottom line is that the managers of mio have detailed knowledge or control over the specific holdings of most of their aum mio manages a grand total of about 30 billion dollars. The conflict of interest comes in when considering who's in charge of mio mio's team of portfolio managers, reports directly to mio's board of directors.

The board of directors historically consisted primarily of active partners at mckinsey because of this they had access to substantial, non-public information that was relevant to investment decisions. Mckinsey is routinely involved in bankruptcy, plannings and filings mergers and acquisitions, financial reporting etc for their clients. Many of these clients are publicly traded as active partners at mckinsey in various roles. Many of the investments committee members at mio had access to this non-public information.

Normally, the correct and ethical way to handle a situation when investment managers have access to non-public information about a company is to not be invested at all in the securities of that company. However, mio flouted this principle and invested both indirectly and directly hundreds of millions of dollars in the securities of companies that they had insider information on one of the most shocking examples of mio leaking insider information into their investment decisions revolves around a company called alpha natural Resources in 2016 mio calls one of their third party managers to increase their position in alpha natural resources seniors a year in debt to 80 million dollars. Meanwhile, one of the members of mio's investments committee was providing advice to alpha natural resources regarding a restructuring of their debt. That means that mio was directly involved in negotiations that would ultimately determine the value of alpha natural resources.

Existing debt securities, which mio was heavily invested in as a result of this insider information trading mio, had the opportunity to make significant unfair profits by buying these debt securities from other less informed market participants. This same pattern of investing in securities, which they had insider information on, happened to several other companies too. Another way in which mckenzie benefited from insider information involved in actually influencing events related to the companies that they were already invested in. In several cases, mckinsey provided consulting services to clients, which mio was simultaneously invested in, for example, take the previous case with alpha natural resources.

Mckinsey was alpha. Natural resources turnaround advisor going back to 2015. for that role. Mckinsey worked closely with alpha natural resources, upper level management and operations.

A final deliverable for their work was a comprehensive business plan that underpinned their chapter 11 bankruptcy plan. This plan ultimately determined the value of the securities that were exchanged for alpha natural resources, senior secured debt. As you recall, mio held tens of millions of dollars of this senior secured debt in bankruptcy. Court mckinsey provided testimonies to support alpha natural resources, turnaround plan.

The court ordered mckenzie to disclose any connections or interests between mckinsey and alpha natural resources. However, in a court-ordered in-camera submission mackenzie did not disclose the fact that mio had invested millions of dollars in alpha natural resources, senior secured debt through the third party fund. After this, the court confirmed the chapter 11 bankruptcy plan and turn around in the final results of the bankruptcy mckinsey profited handsomely. The senior secured debt was converted into 87.5 percent of the new stock of alpha natural resources.

This same stock shot up in value from about 17, a share to almost 80 a share within weeks. Obviously, this presented a very attractive investment positioning for mckenzie in the sec press release. They claimed that mio's policies and procedures were not set up to prevent the misuse of insider information. There were no written policies within mio to address the fact that mckinsey consultants had material non-public information about clients and were, at the same time making investment decisions for mio until 2020.

They had no mechanism to determine if members in their own investments committee had insider information that was relevant to mio's investments. Nor did they have any procedure to recuse members who possess such information. The sec says that mckinsey through mio violated multiple sections of the investment advisors act of 1940. They settled with mio to pay 18 million to the sec in the form of a civil penalty.

This case is especially shocking because it shows that there may have been systemic insider trading going on in one of wall. Street's biggest players, mio managed more than 30 billion dollars, which puts it on the same level as the biggest hedge funds out there. They clearly knew or should have known, that some of their upper level management was simultaneously influencing consulting clients and involved in making investment decisions. This is blatant insider trading on an incredible scale.

Perhaps the most disappointing part is that the penalty is so tame. While it is good that the sec is monitoring and going after these financial violations, an 18 million penalty seems like nothing compared to the massive scale of mckinsey. If mio manages 30 billion dollars of current and former partner capital - and they make say a 10 return on it, then that would mean that the 18 million penalty accounts for less than two trading days worth of investment returns. If mckenzie were an average american earning 60 000 a year, that would be like someone who is guilty of securities fraud getting fined about 400.

The whole point of having laws and penalties as a society is to make the penalties severe enough to deter people from violating the laws that society collectively agrees, that everyone should abide by when companies like mckenzie or the big investment banks on wall street are only fined. A few days worth of profits and obviously not threatened with jail time. It's no wonder that we get so many of these scandals don't expect to stop hearing about new ones anytime soon, alright, guys that wraps it up for this video. Do you think mckenzie knowingly set up their investment subsidiary to profit from insider information, or do you think it was just negligence or naivety? Do you think they should have been subject to a bigger penalty? Let us know in the comments section below in the meantime, if you enjoyed this content, make sure to smash the like button and subscribe.

So you don't miss future videos as always. Thank you so much for watching and we'll see in the next one wall. Street millennial signing out.