Tag: Morgan Stanley

Real Estate Executive Guilty of FCPA Violations

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.”

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Failure to Adequately Oversee Service Providers

Citing what it called “wholly inadequate” oversight of a faraway subadviser, the Securities and Exchange Commission fined and ordered repayment of advisory fees by Morgan Stanley Investment Management. According to the settlement, Morgan Stanley will repay its client, the Malaysia Fund, $1.8 million for fees it paid from 1996-2007 for “research, intelligence, and advice” that  AMMB Consultant Sendirian Berhad of Malaysia, was to provide as subadviser.

AMMB served as a sub-adviser to the Fund from inception until it was terminated at the end of 2007. The Research and Advisory Agreement specified that AMMB would register with the SEC as an investment adviser under the Investment Advisers Act and furnish Morgan Stanley “such investment advice, research and assistance, as [Morgan Stanley] shall from time to time reasonably request.” AMMB did not exercise investment discretion or authority over any of the assets in the Fund. Morgan Stanley took responsibility for monitoring AMMB’s performance of services. The Fund would pay AMMB an escalating fee based on the fund’s assets. During the relevant time period, the Fund paid AMMB advisory fees totaling $1,845,000. As the fund administrator, Morgan Stanley facilitated the Fund’s payment of AMMB’s advisory fees.

Section 15(c) of the Investment Company Act requires an investment adviser of a registered investment company to furnish such information as may reasonably be necessary for such company’s directors to evaluate the terms of any contract whereby a person undertakes regularly to serve or act as investment adviser of the company.

It was an OCIE exam in 2008 that first questioned the arrangement between AMMB and Morgan Stanley. AMMB did not provide any of the services it and Morgan Stanley represented to the Fund’s Board. Instead, AMMB provided two monthly reports that Morgan Stanley neither requested nor used in its management of the Fund. The first was a two-page list of the market capitalization of the Kuala Lumpur Composite Index. The second was a two-page comparison of the monthly performance of the Fund against other Malaysian equity trusts. For twelve years, the fund’s Board relied on Morgan Stanley’s representations and submissions of information regarding AMMB’s services when it unanimously approved the continuation of AMMB’s advisory contracts. The SEC stated that even though Morgan Stanley took responsibility for monitoring AMMB’s services, its oversight and involvement with AMMB during the relevant time period were wholly inadequate.

The settlement calls on the RIA to devise written procedures, reimburse the fund and pay a fine of $1.5 million.

If you are charging a fund for services provided by a third, then there is an obligation to make sure the third party is providing those services.  The SEC stated a violation of Section 206(2) of the Investment Advisers Act that prohibits an investment adviser from engaging “in any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client”. It also imposes on investment advisers a fiduciary duty to act in “utmost good faith,” to fully and fairly disclose all material facts, and to use reasonable care to avoid misleading clients. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191, 194 (1963). Morgan Stanley willfully violated Section 206(2) of the Investment Advisers Act by representing and providing information to the Fund’s Board that AMMB was providing advisory services for the benefit of the Fund, which it was not.

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Morgan Stanley Self-Reports FCPA Violation

morganstanley_logoIn a February 9, 2009, 8-K Filing with the SEC, Morgan Stanley self-reported a violation of the Foreign Corrupt Practices Act:

II. In an unrelated matter, Morgan Stanley announced today that it has recently uncovered actions initiated by an employee based in China in an overseas real estate subsidiary that appear to have violated the Foreign Corrupt Practices Act. Morgan Stanley terminated the employee, reported the activity to appropriate authorities and is continuing to investigate the matter.