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SEC Charges Former Morgan Stanley Executive with FCPA Violations

The U.S. Securities and Exchange Commission recently charged a former
executive at Morgan Stanley with violating the Foreign Corrupt
Practices Act (FCPA) as well as securities laws for investment advisers
by secretly acquiring millions of dollars worth of real estate
investments for himself and an influential Chinese official who in turn
steered business to Morgan Stanley’s funds.

The SEC alleges that
Garth R. Peterson, who was a managing director in Morgan Stanley’s real
estate investment and fund advisory business, had a personal friendship
and 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.
Peterson secretly arranged to have at least $1.8 million paid to himself
and the Chinese official that he disguised as finder’s fees that Morgan
Stanley’s funds owed to third parties. Peterson also secretly arranged
for him, the Chinese official, and an attorney to acquire a valuable
Shanghai real estate interest from a Morgan Stanley fund. Peterson was
acquiring an interest from the fund but negotiated both sides of the
transaction. 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.
Peterson’s deception, self-dealing, and misappropriation breached the
fiduciary duties he owed to Morgan Stanley’s funds as their
representative.

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
interest in the valuable Shanghai real estate (currently valued at
approximately $3.4 million) that he secretly acquired through his
misconduct. 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. “This case illustrates
the SEC’s commitment to holding individuals accountable for FCPA
violations, particularly employees who intentionally circumvent their
company’s internal controls.”

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. His principal responsibility at Morgan Stanley was to evaluate,
negotiate, acquire, manage and sell real estate investments on behalf
of Morgan Stanley’s advisers and funds. He was terminated in 2008 due to
his FCPA misconduct.

The SEC alleges that Peterson led Morgan
Stanley’s effort to build a Chinese real estate investment portfolio for
its real estate funds by cultivating a relationship with the Chinese
official and taking advantage of his ability to steer opportunities to
Morgan Stanley and his influence in helping with needed governmental
approvals. Morgan Stanley thus partnered with Yongye on a number of
significant Chinese real estate investments. At the same time, Peterson
and the Chinese official expanded their personal business dealings both
in a real estate interest secretly acquired from Morgan Stanley as well
as by investing together in Chinese franchises of well-known U.S. fast
food restaurants. Peterson failed to disclose these investments in
annual disclosures that Morgan Stanley required him to make as part of
his employment.

According to the SEC’s complaint, Peterson openly
credited the Chinese official with helping obtain approvals required
from other Chinese government entities for a deal to close. He wrote to
several Morgan Stanley employees in response to an e-mail discussing the
terms of one of Yongye’s purported investments, “Everyone pls keep in
mind the big picture here. YY gave us this deal. … So we owe them a
favor relating to this deal. … This should be very easy and friendly.”
In another e-mail a week later, Peterson described “YYI” as “our
friends who are coming in because WE OWE THEM A FAVOR.”

The SEC
alleges that a Morgan Stanley compliance officer specifically informed
Peterson in 2004 that employees of Yongye, a Chinese state-owned entity,
were government officials for purposes of the FCPA. Peterson also
received at least 35 FCPA compliance reminders from Morgan Stanley, but
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. Peterson consented to a court order requiring him
to disgorge $254,589 and relinquish to a court-appointed receiver the
interest he secretly acquired from Morgan Stanley’s fund in the Jin Lin
Tiandi Serviced Apartments. Peterson’s interest has a current estimated
value of approximately $3.4 million. The proposed settlement is subject
to court approval. Peterson also has consented to permanent industry
bars based on the anticipated entry of the injunctions against him and
his criminal conviction.


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