On Wednesday, April 25, 2012, DOJ announced that Garth Peterson, a former managing director for Morgan Stanley’s real estate business in China, pled guilty in federal court in Brooklyn, New York for participating in a conspiracy to evade the internal accounting controls which the company was required to maintain under the FCPA. Because Morgan Stanley had a system of internal controls designed to assure that its employees were not bribing government officials, the Government did not prosecute the company. The SEC also announced that it brought and settled a case against Mr. Peterson.
The Government alleged that Morgan Stanley ensured accountability for its assets by maintaining a system of internal controls. That system was also designed to prevent employees from offering, promising or paying anything of value to foreign government officials by prohibiting bribery and addressing corruption risks associated with the giving of gifts, business entertainment, travel, lodging, meals, charitable contributions and employment. In order to keep up with regulatory developments and specific risks, the policies were updated regularly. Morgan Stanley also provided frequent training for its employees on these issues (including over 54 training programs between 2002 and 2008 for personnel based in Asia). Mr. Peterson was trained on the FCPA seven times and received reminders regarding the policy 35 times.
Despite the wealth of training, the Government contends that Mr. Peterson conspired with others to transfer a multi-million dollar ownership interest in a Shanghai building to himself and a Chinese public official. Specifically, Mr. Peterson encouraged Morgan Stanley to sell an interest in the building at a discount to Shanghai Yongye Enterprise (Group) Co. Ltd., a state owned and controlled entity. Mr. Peterson knew the interest would then be conveyed to a shell company, which he controlled along with a Chinese public official and a Canadian attorney. The Government contends that the conspirators realized an immediate profit of more than $2.5 million (and covered up their conduct by continuing to falsely represent that Yongye owned the shell company.
Mr. Peterson pled guilty to one count of conspiring to evade Morgan Stanley's internal controls. Assistant Attorney General Lanny Breuer stated that "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," adding that, "[a]s 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." He is scheduled to be sentenced on July 17, 2012 and faces a maximum sentence of five years in prison.
In announcing the case against Mr. Peterson, DOJ stated that it was not bringing any enforcement action against Morgan Stanley related to this conduct (noting that "Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials").
The civil charges brought by the SEC make similar allegations regarding the sale of the Shanghai building and also alleges that Mr. Peterson arranged to have at least $1.8 million paid to himself and the Chinese official as finder's fees which were owed to third parties. Mr. Peterson consented to the entry of an injunction against future violations, permanent industry bars and an order requiring him to disgorge over $250,000 and to relinquish the interest (valued at $3.4 million) in the property.