Back in February, 2009, Morgan Stanley self-reported FCPA violations in the firm’s China real estate investment operations. Garth Peterson, the ex-Morgan Stanley Real Estate Investing managing director has pleaded guilty for his role in evading he firm’s internal controls for the purposes of personal gain.
Peterson agreed to a settlement of the SEC’s charges in which he will be permanently barred from the securities industry, pay more than $250,000 in disgorgement, and relinquish his ill-gotten real estate (currently valued at approximately $3.4 million). The U.S. Department of Justice has filed a related criminal case against Peterson.
“Peterson crossed the line not once, but twice. He secretly bribed a government official to illegally win business for his employer and enriched himself in violation of his fiduciary duty to Morgan Stanley’s clients.”
– Robert Khuzami, Director of the SEC’s Division of Enforcement
Both the DOJ and the SEC acknowledged Morgan Stanley’s internal controls and compliance procedures. Morgan Stanley regularly updated the policies to reflect regulatory developments and specific risks to the firm. Mr. Peterson received FCPA training seven times and was reminded to comply on 35 occasions. In one instance the firm specifically told him that certain employees of China-based counterparty, Yongye, were government officials for FCPA purposes. Periodically Morgan Stanley required Mr. Peterson to certify compliance.
What saved Morgan Stanley from prosecution? The DOJ concluded that Morgan Stanley’s internal policies and procedures “provided reasonable assurances that its employees were not bribing government officials.” Once the firm discovered the problem, it took decisive action, shutting down the office and disciplining Mr. Peterson. The firm self-reported and cooperated with the government investigation.
Peterson worked for Morgan Stanley in Hong Kong and Shanghai from mid-2002 to December 2008. The firm fired him when they found out he conspired to dodge Morgan Stanley’s controls to transfer an interest in a property interest from the firm to himself and a Chinese official.
His scam was to sell the property interest to Shanghai Yongye Enterprise Group, a China state-controlled company, at a discount. However, Peterson intervened and the interest was sold to a shell company controlled by Peterson, the Chinese official and a Canadian lawyer. During their ownership, they accepted distributions from the asset and realized appreciated.
According to allegations from the SEC, Peterson also arranged to pay himself and the official at least $1.8 million in finders fees which they represented to Morgan Stanley as fees required to be paid to third parties. In exchange for offers and payments from Peterson, the official is alleged to have helped Peterson and Morgan Stanley obtain business from which they personally benefited.
The DOJ’s assistant attorney General Breuern said in its statement: “Mr. Peterson admitted today that he actively sought to evade Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official. As a managing director for Morgan Stanley, he had an obligation to adhere to the company’s internal controls; instead, he lied and cheated his way to personal profit. Because of his corrupt conduct, he now faces the prospect of prison time.” Following his sentencing, scheduled on July 17, Peterson could be imprisoned for a maximum of five years in prison and a maximum fine of $250,000 or twice his gross gain from the offense.
Morgan Stanley itself condemned Peterson’s actions as an “intentional circumvention” of its controls and a “deliberate and egregious violation of our values and policies.” The bank said: “Morgan Stanley is pleased that this matter is resolved. We cooperated fully with the government and we are very satisfied with this outcome.”