On April 25, 2012, the Securities and Exchange Commission ("SEC") charged a former Morgan Stanley executive with violating the Foreign Corrupt Practices Act (FCPA) as well as securities laws. The SEC has alleged that the Morgan Stanley executive secretly acquired millions of dollars worth of real estate investments an influential Chinese official who in turn steered business to Morgan Stanley's funds.
The SEC alleged that Garth R. Peterson, a former Morgan Stanley managing director, had a secret business relationship with the former Chairman of Yongye Enterprise (Group) Co. - a Chinese state-owned entity with influence over the success of Morgan Stanley's real estate business in Shanghai. According to the SEC, Peterson secretly arranged to have at least $1.8 million paid to the Chinese official and to himself that he disguised as finder's fees that Morgan Stanley's funds owed to third parties. Peterson also secretly arranged for the Chinese official, an attorney, and himself to acquire valuable Shanghai real estate from a Morgan Stanley fund. In exchange for offers and payments from Peterson, the Chinese official helped Peterson and Morgan Stanley obtain business while personally benefitting from some of these same investments. The SEC has taken the position that Peterson's deception, self-dealing, and misappropriation breached the fiduciary duties he owed to Morgan Stanley's funds as their representative.
Peterson agreed to settle the SEC's charges, including permanent disbarment from the securities industry, $250,000 in disgorgement, and giving up his interest in the Shanghai real estate that he secretly acquired. 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," said Robert Khuzami, Director of the SEC's Division of Enforcement.
Kara Novaco Brockmeyer, Chief of the SEC Enforcement Division's FCPA Unit, added, "As a rogue employee who took advantage of his firm and its investment advisory clients, Peterson orchestrated a scheme to illegally win business while lining his own pockets and those of an influential Chinese official."
According to the SEC's complaint filed in U.S. District Court for the Eastern District of New York, Peterson's violations occurred from at least 2004 to 2007. Morgan Stanley terminated Peterson in 2008 due as a result of Peterson's FCPA misconduct.
According to the SEC's complaint, Peterson's internal e-mails credited the Chinese official with helping obtain approvals required from other Chinese government entities for a deal to close. Peterson wrote in an e-mail that, "...YY gave us this deal. ... So we owe them a favor relating to this deal. ..." In another e-mail, with regard to the Chinese company, Peterson wrote, "...WE OWE THEM A FAVOR."
Morgan Stanley's compliance department apparently sent Peterson at least 35 FCPA compliance reminders, but Peterson nonetheless committed the FCPA violations. The SEC's complaint charges Peterson with violations of the anti-bribery, books and records and internal control provisions of the FCPA, and with aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act of 1940.