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Former Morgan Stanley Managing Director Pleads Guilty for Role in Evading Internal Controls Required by FCPA

FOR IMMEDIATE RELEASE
April 25, 2012

WASHINGTON – A former managing director for Morgan Stanley’s real estate business in China pleaded guilty today for his role in a conspiracy to evade the company’s internal accounting controls, announced Assistant Attorney General Lanny A. Breuer of the Justice Department’s Criminal Division; U.S. Attorney Loretta E. Lynch for the Eastern District of New York; and Janice Fedarcyk, Assistant Director in Charge of the FBI’s New York Field Office.

Garth Peterson, 42, an American citizen living in Singapore, pleaded guilty to one-count criminal information charging him with conspiring to evade internal accounting controls that Morgan Stanley was required to maintain under the Foreign Corrupt Practices Act (FCPA).  Peterson pleaded guilty in Brooklyn, N.Y., before Senior U.S. District Judge Jack B. Weinstein. 

“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,” said Assistant Attorney General Breuer.  “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.”

“This defendant used a web of deceit to thwart Morgan Stanley’s efforts to maintain adequate controls designed to prevent corruption.  Despite years of training, he circumvented those controls for personal enrichment. We take seriously our role in detecting and prosecuting efforts to evade those controls,” said U.S. Attorney Lynch.

“The defendant engaged in a pattern of self-dealing and deception that perpetuated his unjust enrichment,” said FBI Assistant Director Fedarcyk.  “He not only circumvented his employer’s internal controls; he violated the law.”

According to court documents, Morgan Stanley maintained a system of internal controls meant to ensure accountability for its assets and to prevent employees from offering, promising or paying anything of value to foreign government officials.  Morgan Stanley’s internal policies, which were updated regularly to reflect regulatory developments and specific risks, prohibited bribery and addressed corruption risks associated with the giving of gifts, business entertainment, travel, lodging, meals, charitable contributions and employment.  Morgan Stanley frequently trained its employees on its internal policies, the FCPA and other anti-corruption laws.  Between 2002 and 2008, Morgan Stanley trained various groups of Asia-based personnel on anti-corruption policies 54 times.  During the same period, Morgan Stanley trained Peterson on the FCPA seven times and reminded him to comply with the FCPA at least 35 times.  Morgan Stanley’s compliance personnel regularly monitored transactions, randomly audited particular employees, transactions and business units, and tested to identify illicit payments.  Moreover, Morgan Stanley conducted extensive due diligence on all new business partners and imposed stringent controls on payments made to business partners.

According to court documents, Peterson conspired with others to circumvent Morgan Stanley’s internal controls in order to transfer a multi-million dollar ownership interest in a Shanghai building to himself and a Chinese public official with whom he had a personal friendship.  The corruption scheme began when Peterson encouraged Morgan Stanley to sell an interest in a Shanghai real-estate deal to Shanghai Yongye Enterprise (Group) Co. Ltd., a state-owned and state-controlled entity through which Shanghai’s Luwan District managed its own property and facilitated outside investment in the district.  Peterson falsely represented to others within Morgan Stanley that Yongye was purchasing the real-estate interest, when in fact Peterson knew the interest would be conveyed to a shell company controlled by him, a Chinese public official associated with Yongye and a Canadian attorney.  After Peterson and his co-conspirators falsely represented to Morgan Stanley that Yongye owned the shell company, Morgan Stanley sold the real-estate interest in 2006 to the shell company at a discount to the interest’s actual 2006 market value.  As a result, the conspirators realized an immediate paper profit of more than $2.5 million.  Even after the sale, Peterson and his co-conspirators continued to claim falsely that Yongye owned the shell company, which in reality they owned.  In the years since Peterson and his co-conspirators gained control of the real-estate interest, they have periodically accepted equity distributions and the real-estate interest has appreciated in value.

At sentencing, scheduled for July 17, 2012, Peterson faces a maximum penalty of five years in prison and a maximum fine of $250,000 or twice his gross gain from the offense.  After considering all the available facts and circumstances, including that Morgan Stanley constructed and maintained a system of internal controls, which provided reasonable assurances that its employees were not bribing government officials, the Department of Justice declined to bring any enforcement action against Morgan Stanley related to Peterson’s conduct.  The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation.

The Securities and Exchange Commission today announced civil charges and a settlement with Peterson.

The criminal case is being prosecuted by Trial Attorney Stephen J. Spiegelhalter of the Criminal Division’s Fraud Section and Assistant U.S. Attorney John Nowak of the Eastern District of New York.  The Criminal Division’s Office of International Affairs also provided assistance in this matter.  The case was investigated by the FBI’s New York Field Office.

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