Garth Peterson, the former head of Morgan Stanley’s Shanghai office, settled FCPA charges with the DOJ and the SEC. Mr. Peterson, a U.S. citizen, pleaded guilty to one count of conspiracy to evade the company’s internal accounting control. U.S. v. Peterson, (E.D.N.Y.). Mr. Peterson also settled with the SEC, whose complaint alleged violations of the bribery and books and records and internal control provisions. He agreed to the entry of an injunction and to pay disgorgement of $250,000. In addition, Mr. Peterson will relinquish his interest in Shanghai real estate valued at about $3.4 million and consented to be permanently barred from the securities industry. SEC v. Peterson (E.D.N.Y. Filed April 25, 2012).
Mr. Peterson’s violations stem from his dealings with the former Chairman of Yongye Enterprise (Group) Co., a Chinese state owned entity involved in real estate. Mr. Peterson began working for Morgan Stanley in 2002 and became the head of the Shanghai office of the firm’s wholly-owned global real estate business in 2006. His primary responsibility was to evaluate, negotiate, acquire, manage and sell real estate investments.
From 2004 through 2008 Morgan Stanley partnered with Yongye on a number of significant Chinese real estate investments. At the same time Mr. Peterson and the Chairman expanded their dealings in real estate, secretly acquiring real estate from Morgan Stanley and investing in other endeavors. Mr. Peterson did not disclose these dealings to his firm as required.
In one transaction Mr. Peterson encouraged his firm to sell an interest in Shanghai real estate to Yongye. Mr. Peterson falsely represented that the purchaser, a shell company, was owned by the Chinese company. In fact it was owned by Mr. Peterson, the Chairman and a Canadian lawyer. Mr. Peterson thus negotiated for both sides. He secured Morgan Stanley’s approval for the sale at a discounted price. As a result of the deal the shell company had an immediate profit of about $2.5 million.
In 2006 Morgan Stanley was negotiating at least five separate Chinese real estate investments involving Yongye. Mr. Peterson invited the Chinese official to invest along with Morgan Stanley and its funds to reward him for what he had done for the firm and further incentivize him. He set up an arrangement for Morgan Stanley to sell the Chinese official a 3% interest in each deal he brought to the firm for the cost of 2%. This gave the official a discount of 1% which Mr. Peterson called a “finders fee.” Mr. Peterson also promised the official an added return. When Mr. Peterson disclosed this arrangement to his supervisors he was warned of the FCPA bribery implications and told to drop the arrangement. Nevertheless, Mr. Peterson paid the official.
Both the DOJ and the SEC acknowledged Morgan Stanley’s internal controls and compliance procedures. Those policies were regularly updated to reflect regulatory developments and specific risks and prohibited bribery. They also addressed the corruption risks associated with giving gifts, business entertainment, travel, lodging, meals, charitable contributions and employment. The proceures also provided for periodic training. In addition the firm regularly monitored transactions and required employees to disclose outside business interests.
Mr. Peterson received FCPA training seven times and was reminded to comply with the Act on 35 occasions. In one instance the firm specifically told him that employees of Yongye were government officials for FCPA purposes. He was also furnished with written materials which he maintained in his office. Periodically Morgan Stanley required Mr. Peterson to certify compliance with the Act. Those certifications were maintained as a part of his permanent record.
The DOJ concluded that Morgan Stanley’s internal policies and procedures “provided reasonable assurances that its employees were not bribing government officials.” In view of those procedures, as well as the fact that the firm voluntarily reported the matter and cooperated, the DOJ declined to prosecute the firm. The SEC also acknowledged the cooperation of Morgan Stanley.