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Stop Drinking The Kool-Aid

Monday, November 5th, 2012

Since April the Department of Justice has been running a Kool-Aid stand and many people have been drinking the Kool-Aid.

The Kool-Aid being served up and consumed is Morgan Stanley’s so-called declination.

As noted in this prior post, in April in resolving an enforcement action against Garth Peterson (a former managing director for Morgan Stanley’s real estate business in China), the DOJ stated as follows concerning Morgan Stanley.

“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.”

Since then, Morgan Stanley’s so-called declination has been the talk of the FCPA conference circuit and has been the basis for many FCPA Inc. client alerts and marketing material. It seems as if many (but not all) have merely carried forward the DOJ’s statement without an ounce of analysis. (See here for the prior post “Morgan Stanley’s So-Called Declination”). This recent press release demonstrates that Morgan Stanley’s so-called declination is even being used to peddle compliance products. In this recent webinar, Morgan Stanley and its counsel, Davis Polk, engaged in what seems like a victory lap celebration.

Since opening up its Kool-Aid stand, the DOJ has been on a marketing blitz as to its “product.” In this September speech, Assistant Attorney General Lanny Breuer stated as follows. ”Because Morgan Stanley voluntarily disclosed Peterson’s misconduct, fully cooperated with our investigation, and showed us that it maintained a rigorous compliance program, including extensive training of bank employees on the FCPA and other anti-corruption measures, we declined to bring any enforcement action against the institution in connection with Peterson’s conduct. That is smart, and responsible, enforcement.”

In this October speech, Breuer likewise stated as follows. “Because Morgan Stanley voluntarily disclosed Peterson’s misconduct, fully cooperated with our investigation and showed us that it maintained a rigorous compliance program, including extensive training of bank employees on the FCPA and other anti-corruption measures, we declined to bring any enforcement action against the institution in connection with Peterson’s conduct. Prosecutors need to be smart about how they use their discretion in the FCPA context, as in every context. And, as we did in the Peterson case, we always attempt to strike an appropriate balance between vigorous and responsible enforcement.”

An experienced FCPA practitioner, who otherwise holds Breuer in high regard, recently told me that Breuer’s recent speeches on Morgan Stanley’s so-called declination are a “joke.”

I agree and suggest that before anyone speaks or writes another word about Morgan Stanley’s so-called declination, they do something basic and old-fashioned. Read the original source documents.

The original source documents evidence the following as to Peterson’s involvement in a real estate investment scheme with Chinese Official 1.

According to the DOJ’s information (here) and as noted in this prior post:

“Peterson and Chinese Official 1 had a close personal relationship before Peterson joined Morgan Stanley.”
A shell company used to facilitate the scheme was owned 47% by Chinese Official 1 and 53% by Peterson and a Canadian Attorney.
“Without the knowledge or consent of his superiors at Morgan Stanley, Peterson sought to compensate Chinese Official 1″
“Peterson concealed Chinese Official 1’s personal investment [in certain properties] from Morgan Stanley”
“Peterson used Morgan Stanley’s past, extensive due diligence [as to certain of the investment properties] to benefit his own interests and to act contrary to Morgan Stanley’s interests.”

Consistent with these allegations, in the DOJ’s release Breuer himself stated as follows. “Mr. Peterson admitted … that he actively sought to evade Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official.”

Additional original source documents became available in connection with Peterson’s sentencing and shed additional light on information relevant to Morgan Stanley’s so-called declination. As noted in this prior post, in its sentencing submission, the DOJ stated that Peterson “repeatedly and consistently lied to his Morgan Stanley supervisors and co-workers” concerning the conduct at issue and that “each of Peterson’s [Morgan Stanley required FCPA certifications] was but another lie that lulled his employer into trusting Peterson.” In his sentencing submission, Peterson stated as follows concerning the Chinese Official he had a relationship with prior to joining Morgan Stanley. “The Chinese Official was a close friend of Peterson’s – in many ways a father figure to him – and Peterson helped him in order to repay the help that the Chinese Official had given him through his career.” Peterson also asserted that his attempt to influence the ”father figure” Chinese Official in the investment project giving rise to the enforcement action was an attempt to recoup an investment for this mother.

In the recent Morgan Stanley – Davis Polk webinar (here), Morgan Stanley’s counsel specifically said that Peterson was acting “for his own benefit” and that Morgan Stanley had the advantage of facts because Peterson had “personal interests in the transactions” at issue and that he acted for “his own benefit” not “Morgan Stanley’s.”

In the webinar, Davis Polk stated that part of its advocacy to the DOJ and SEC was that the agencies needed to publicly send a message on compliance and that the Morgan Stanley – Peterson case provided an “ideal case to do so.”

Interestingly, the webinar was moderated by Davis Polk attorney Greg Andres who called the Morgan Stanley declination “unprecedented and important” and that it was “important and new, it is news that sets precedent.” Andres is not exactly an impartial observer on this issue. Prior to recently rejoining Davis Polk, he was the Assistant Attorney General (DOJ, Criminal Division) during most of the time period relevant to the enforcement action and he seemed to be using the webinar to justify the compliance defense views he offered on behalf of the DOJ during the Nov. 2010 Senate FCPA hearing and the June 2011 House FCPA hearing. (See here and here for the transcripts of the hearings). In short, Andres testified that a compliance defense is not needed because the DOJ already considers a company’s compliance efforts internally when deciding how to proceed in any particular case.

Morgan Stanley may indeed have being doing the right thing in its compliance program and for that it deserves credit.

However, the DOJ’s use of the Peterson enforcement action (a situation in which an individual acted for his own benefit with a person he had a prior close relationship with to recover his mother’s investment) to champion its policy position that a compliance defense is not needed because it already takes compliance into account is off-base.

The reason Morgan Stanley was not prosecuted for Peterson’s actions is because there was no basis to hold Morgan Stanley liable even under lenient respondeat superior standards.

Should you remain unconvinced, consider what U.S. District Court Judge Jack Weinstein (E.D.N.Y.) noted in the case - ”it is likely that [Morgan Stanley] would be considered a victim” of Peterson’s conduct. (See 859 F.Supp.2d 477).

Stop drinking the Kool-Aid.

Assistant Attorney General Lanny Breuer On …

Wednesday, October 24th, 2012

Yesterday, Assistant Attorney General Lanny Breuer spoke at IBC Legal’s World Bribery & Corruption Compliance Forum in London. See here for his remarks. Breuer touched upon a number of topics (but not FCPA guidance as noted by the FCPA Blog here), including the following as excerpted below.

General

“I am asked to speak about efforts in the United States to fight foreign bribery perhaps more than on any other subject, and all over the world.”

“As you may know, no criminal FCPA case can be brought in the United States without the Fraud Section’s authorization. I have said before that I personally believe our FCPA work is so important. It helps to level the playing field for U.S. and foreign companies, and motivates corporations to create genuine cultures of compliance. Moreover, corruption has such negative effects, particular in emerging economies, that we must use every tool at our disposal to fight it. Not only does corruption corrode the public trust and weaken democratic institutions, but it also creates gaps in government structures that organized criminal groups and terrorist networks can exploit. The FCPA, which has been on the books for approximately 35 years, was the first effort of any nation to specifically criminalize the act of bribing foreign officials. But only in the last several years has the law become a strong enforcement tool.”

“In recent years, we have witnessed a significant awakening to the problem of corruption around the globe. Russia, China and India are taking foreign bribery more seriously than ever before; the U.K. has an important new Bribery Act; and, perhaps due in part to United States enforcement efforts, companies and individuals doing business around the world are coming to appreciate that they will be held accountable for the way they conduct business with foreign officials. In short, the world is moving in one direction only with respect to anti-corruption efforts. There is still plenty of work to be done. But we are making progress, and I hope and believe that we will continue to make strides in this area together.”

Asset Recovery

“Criminal enforcement is a critically important aspect of our anti-corruption work. But, in the Criminal Division, we have also been developing an asset forfeiture initiative – the Kleptocracy Asset Recovery Initiative – that involves civil actions against the proceeds of foreign official corruption. Attorney General Holder announced the initiative in Uganda in 2010, and my team and I have been building the initiative in the Criminal Division’s Asset Forfeiture and Money Laundering Section since then. Our theory is simple: Even if we cannot pursue you criminally in the United States – because we lack criminal jurisdiction, for example – corrupt leaders should not be permitted to use the United States as a safe haven for the proceeds of their corrupt activities. We have recently had our first Kleptocracy Initiative successes. In July, for example, we announced that we had secured a restraining order against more than $3 million in corruption proceeds related to James Onanefe Ibori, the former governor of the oil-producing Delta State in Nigeria; and, earlier this month, we executed restraints against an additional $4 million in Ibori assets, including the proceeds from the sale of a penthouse unit in the Ritz-Carlton in Washington, D.C. Ibori was previously convicted here in the United Kingdom on money laundering and fraud charges and sentenced to 13 years in prison. Another example involves two civil forfeiture complaints we have filed against approximately $70 million in assets allegedly belonging to Teodoro Nguema Obiang Mangue, a government minister for Equatorial Guinea and the son of that country’s president. According to the complaints, despite an official government salary of less than $100,000 per year, Minister Obiang corruptly amassed wealth of more than $100 million. Among the items that we are seeking to forfeit are a Gulfstream jet, a mansion in Malibu, Calif., and $1.8 million worth of Michael Jackson memorabilia.”

DPAs / NPAs

“As a result both of increased FCPA enforcement and increased policing of corporate conduct in general, I think that the culture of corporate compliance has improved in recent years. As I explained in a speech in New York City recently, until roughly 20 years ago, prosecutors in the United States, when they encountered corporate misconduct, were usually faced with a stark choice – either to indict, or walk away. That began to change in the 1990s, when the government started doing something new: agreeing to defer prosecution against the corporation in exchange for an admission of wrongdoing; cooperation with the government’s investigation, including against individual employees; payment of monetary penalties; and concrete steps to improve the company’s behavior. And, over the past decade, deferred prosecution agreements, or DPAs, have become an important part of corporate criminal law enforcement. I am aware that the U.K. government recently put forth a proposal to introduce DPAs as a way of resolving corporate cases in the U.K. Based on the United States experience, my sense is that the availability of DPAs here would represent a positive step forward. In the United States, the increased use of DPAs has meant far greater accountability for corporate wrongdoing. Whereas prosecutors often declined when their only choice was to indict or walk away, now companies know that avoiding the disaster scenario of an indictment does not mean an escape from accountability. [...] DPAs and NPAs are appropriate in certain circumstances and, therefore, they can be useful alternatives to criminal indictments. But they cannot be a substitute for criminal charges.”

Individual Prosecutions

“As I have said repeatedly, the strongest deterrent against corporate wrongdoing is the prospect of prison time. That is why I have put such a high priority on making sure that individuals are prosecuted when the evidence warrants prosecution.”

Morgan Stanley

“A former managing director of Morgan Stanley, Peterson pleaded guilty to conspiring to evade the bank’s internal FCPA controls and was sentenced to prison in August. Because Morgan Stanley voluntarily disclosed Peterson’s misconduct, fully cooperated with our investigation and showed us that it maintained a rigorous compliance program, including extensive training of bank employees on the FCPA and other anti-corruption measures, we declined to bring any enforcement action against the institution in connection with Peterson’s conduct. Prosecutors need to be smart about how they use their discretion in the FCPA context, as in every context. And, as we did in the Peterson case, we always attempt to strike an appropriate balance between vigorous and responsible enforcement.”

*****

I had the pleasure to Chair the 2010 World Bribery & Corruption Compliance Forum in London. See here for my opening remarks.

In my remarks I stated as follows regarding NPAs and DPAs. “Non and deferred prosecution agreements share a common thread – they both remove, whether in whole or in part, an independent judiciary from a critical role in a transparent legal system founded on the rule of law – and that is ensuring that provable facts support each element of the crime alleged and ensuring that resolution specifics are in the public interest. In his recent Innospec sentencing remarks, Lord Justice Thomas cited a paper – “The Risk of Abusing a Dominant Position” – that notes, among other things, that the newly enacted SFO guidance on“alternative methods to the disposal of criminal investigations by way of negotiated pleas or other resolutions by corporate defendants” may “introduce some unintended risks of abuse.” I share this concern and assert that it is troubling when an area of law largely develops outside of the judicial system via privately negotiated agreements – agreements that corporates often feel compelled to enter into, regardless of facts or legal theories, mindful of the “sticks” the enforcement agencies posses. I support the study Transparency International (“TI”) has called for in its recent “Progress Report on the OECD Convention.” That report expresses a concern that negotiated settlements could be“questionable deals” between enforcement agencies and companies and it calls for procedures to make settlement terms subject to judicial approval independent from the prosecutor’s office.”

See here for my recent post on Breuer’s unconvincing defense of NPAs and DPAs.

Judge (Again) Significantly Rejects DOJ’s Recommendation In Sentencing Garth Peterson, Peterson Goes On Offense And Says The DOJ Is Lying About Morgan Stanley’s FCPA Compliance Procedures

Monday, August 20th, 2012

While FCPA enforcement is largely devoid of judicial scrutiny, sentencing of individual FCPA defendants remains a judicial function and provides an opportunity for someone other than the DOJ to have input on some aspect of the DOJ’s positions when it comes to FCPA enforcement.

While there are a few examples of federal court judges harshly sentencing defendants consistent with DOJ sentencing recommendations (the majority of those sentences have been issued by Judge Jose Martinez in the S.D. of Florida), the clear trend is for judges to significantly reject the DOJ’s FCPA sentencing recommendations. See here, here, here and here for previous posts among others.

Given this trend, it is not surprising that last week Judge Jack Weinsten (E.D.N.Y.) significantly rejected the DOJ’s sentencing recommendation of 51-60 months in sentencing Garth Peterson to 9 months in prison. See here for the Reuters article. See here for the previous post discussing the April 2012 DOJ and SEC enforcement action against Peterson.

Of note, in its sentencing memo (here), the DOJ accused Peterson of making several misrepresentations in his sentencing submission. The DOJ stated as follows. “Peterson’s efforts to mislead the Court concerning the genesis of his crime – a crime fundamentally based upon deceit – call into serious question his assertion that he understands the gravity of the crime he committed, that he is unlikly to engage in such deception in the future, and that he accepts responsibiity for his wrongful conduct. Peterson should be sentenced within the advisory guidelines because he circumvented Morgan Stanley’s internal controls to bribe an official of the Chinese government – an action that has serious consequences for the United States and for American companies transacting business in China.”

The sentencing memos of both parties (see here for Peterson’s sentencing submission and here for his reply) also shed light on additional information relevant to Morgan Stanley’s so-called declination (see here for the prior post). In its submission, the DOJ stated that Peterson “repeatedly and consistently lied to his Moran Stanley supervisors and c0-workers” concerning the conduct at issue and that “each of Peterson’s [Morgan Stanley required FCPA certifications] was but another lie that lulled his employer in trusting Peterson.” In his sentencing submission, Peterson stated as follows concerning the Chinese Official he had a relationship with prior to joining Morgan Stanely. “The Chinese Official was a close friend of Peterson’s – in many ways a father figure to him – and Peterson helped him in order to repay the help that the Chinese Official had given him through his career.” Peterson also asserts that his attempt to influence the ”father figure” Chinese Official in the investment project giving rise to the enforcement action was an attempt to recoup an investment for this mother.

*****

On the eve of his sentence, Peterson sat for an exclusive interview on CNBC. See here a video clip, here for the transcript.

In the interview, Peterson stated as follows concerning the investment at issue in the enforcement action.

“The government hasn’t released some important background about that. I made that investment before I joined Morgan Stanley. When I joined, I declared it to Morgan Stanley. Then, Morgan Stanley became familiar with that deal, and decided they wanted to buy in as well. So, I helped them to do that. Then, in– two– about a year and a half after that– essentially, just to make it very simple, Morgan Stanley forced me out of that deal. And I felt that was unfair, because it had been something I’d had before. Then, I brought them in, and then they were forcing me out. And so, about a year after that, I found a way to buy back in at the same price that I’d been forced out at. That’s still—a wrong action. When Morgan Stanley forced me out of the deal, I should’ve either quit, and thereby kept the investment, or I should’ve just accepted that they didn’t want me to be involved in the deal as long as the company was involved. But I don’t believe that that should be characterized as a, “web of deceit,” and whatever, to– you know, to take things from Morgan Stanley.”

The following exchange occurred between Scott Cohn (CNBC) and Peterson as to his decision to plead guilty.

COHN: So, why did you plead guilty to anything?

PETERSON: You know, it’s– I think, hopefully most people will never be in the position I had to be in. But when you’re an individual against the weight of the U.S. Government– and the U.S. Government, the Department of Justice, the SEC, perhaps it’s their way of doing things. They can have—a heavy stick, you know. That if you don’t cooperate with us, you’ll– you know, we’re going to do all these other things. And so, I just cooperated. You know, everybody’s different. Some people are fighters. I guess I’m not.

COHN: But, I mean, you– you’re giving away a lot. You’re– potentially giving away your freedom for a number of years?

PETERSON: In some sense, they took that away a long time ago in reality. Because once I started to cooperate– when they wanted to speak to me, I had to go speak to them. They were– literally, the SEC was harassing my family for years. But– at the end of the day, like I said, I agreed to cooperate, and so, I took that path.

In the interview Peterson criticized Morgan Stanley’s FCPA procedures and said the DOJ is lying to the public.

COHN: Do you– do you– do you feel like Morgan Stanley threw you overboard?

PETERSON: Yeah. Look, I did things wrong. I deserved to get fired. I never bribed anybody, so it’s still a mystery, a little bit why– you know, this whole case is– has been focused on that. Because as I’ve said, I know what I did. These are the things I did wrong. Morgan Stanley got off scot-free. And I think, you know, I have no– you know, desire for them to be harmed in any way, or you know. So– it’s not that. But what I feel bad about is– the government lying to the– to the public. And– saying that– they had this wonderful compliance– program, when in fact the government knows that it wasn’t getting into people’s heads. Which is what really matters.

Morgan Stanley’s So-Called “Declination”

Thursday, July 26th, 2012

This past spring, FCPA Inc. was abuzz when, in the context of the Garth Peterson individual enforcement action (see here for the prior post), the DOJ publicly stated it declined to prosecute Peterson’s employer, Morgan Stanley.

Specifically, in its release (here), the DOJ stated as follows. “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.”

In this update, Arent Fox noted that the development “shows the government is ready to give a corporation credit for ‘adequate procedures’ in evaluating any potential FCPA violation.” The authors concluded that “only time will tell whether [the DOJ's actions] reflect the government’s adoption of a de facto ‘adequate procedures’ defense to FCPA violations.”

In this client memo, Willkie Farr stated as follows. “While the government charged the former managing director with FCPA violations, the government notably declined to charge the firm, Morgan Stanley, with any wrongdoing due in large part to the company’s established system of internal controls and its continued efforts to enforce its anticorruption policies among company employees, including the individual who was charged in the government’s civil and criminal cases.”

Let’s pause for a moment and consider what the term declination means in the FCPA context.

In talking to others, I know that there is a range of opinions on this issue, but here is my definition of declination - an instance in which the DOJ has concluded it can prove beyond a reasonable doubt all the necessary elements of a cause of action, yet decides not to pursue the action.

With this definition in mind, was the DOJ’s decision not to prosecute Morgan Stanley based on Peterson’s conduct truly a declination?

Let’s start by analyzing certain relevant allegations made by the DOJ in the Peterson information (here) which involved a real estate investment scheme with Chinese Official 1.

According to the information, “Peterson and Chinese Official 1 had a close personal relationship before Peterson joined Morgan Stanley.”

According to the information, a shell company (Asiasphere Holdings Limited) used to facilitate the scheme was owned 47% by Chinese Official 1 and 53% by Peterson and a Canadian Attorney.

According to the information, “without the knowledge or consent of his superiors at Morgan Stanley, Peterson sought to compensate Chinese Official 1″

According to the information, “Peterson concealed Chinese Official l’s personal investment [in certain properties] from Morgan Stanley.”

According to the information, “Peterson used Morgan Stanley’s past, extensive due diligence [as to certain of the investment properties] to benefit his own interests and to act contrary to Morgan Stanley’s interests.”

Consistent with these allegations, in the DOJ’s release Assistant Attorney General Lanny Breuer stated as follows. “Mr. Peterson admitted … that he actively sought to evade Morgan Stanley’s internal controls in an effort to enrich himself and a Chinese government official.”

Based on the above, was there even a basis to hold Morgan Stanley criminally accountable even under the lenient respondeat superior standards?

Like with most things in the corporate FCPA enforcement context, we will never know. However, if the answer is no, then the DOJ’s decision not to charge Morgan Stanley was not a declination, it was what the law commanded and it is a sorry state of affairs indeed to praise the DOJ for concluding what the law commands.

In this article, Steptoe & Johnson rightly stated as follows. “… [T]he element of personal benefit derived by Peterson from his conduct is likely significant. [...] Such benefits call into question whether Peterson was really acting for the benefit of his employer, a key requirement for corporate vicarious liability. Moreover, it seems clear that the government believes Morgan Stanley was ultimately duped by its employee and entered into transactions in good faith, without knowledge of the personal benefits being derived, despite their controls.”

The timing of the DOJ’s first-ever publicly stated so-called declination is also noteworthy. As Larry Boyd (Executive Vice President, Secretary & General Counsel, Ingram Micro, Inc.) recently stated at this Chief Legal Officer Leadership forum – “If you’re of a cynical frame of mind like I am, though, I will tell you that I suspect that this announcement by the Justice Department had as much to do with the effort that the U.S. Chamber of Commerce has been mounting over the last 18 months to try to get Congress to amend the Foreign Corrupt Practices Act as it does with Morgan Stanley’s good conduct.”

Likewise, Steptoe & Johnson (in the article linked above) identified the same issue as follows. “[D]eclination was [possibly] motivated by the enforcement agencies’ desire to respond to entreaties from companies and business groups to demonstrate the value of compliance efforts. The Peterson case comes as the DOJ and SEC are drafting long-awaited public guidance on the statute, in the wake of concerns that the implementing regulations for the Dodd-Frank whistleblower provisions gave short shift to corporate compliance efforts.”

Too Much Guanxi

Thursday, April 26th, 2012

“In the end, Garth Peterson, a rising star at Morgan Stanley in China, was undone by his pursuit of “guanxi.” So begins this 2009 Reuters article that details the rise and fall of Peterson, fired by Morgan Stanley in 2008, ”amid suspicions” that he had violated the FCPA. According to the article, Morgan Stanley, voluntarily reported the case to U.S. authorities after a nine month internal investigation.

Yesterday the DOJ and SEC announced a joint enforcement against Peterson.

DOJ

In this release, the DOJ announced that Peterson, a former managing director for Morgan Stanley’s real estate business in China, pleaded guilty to a one count criminal information (unavailable at this point) for ”conspiring to evade internal accounting controls that Morgan Stanley was required to maintain under the FCPA.”

The release states as follows.

“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.”

Assistant Attorney General Lanny Breuer stated as follows. “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. 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.”

Peterson is to be sentenced on July 17th.

As to Morgan Stanley, the release states as follows.

Kudos to the DOJ. Would anything really change with an FCPA compliance defense – see here for “Revisiting a Foreign Corrupt Practices Act Compliance Defense”?

SEC

In this complaint, the SEC alleged in summary as follows.

“From at least 2004 to 2007, Defendant Garth Peterson, while employed at Morgan Stanley & Co., Inc. ‘s (“Morgan Stanley”) real estate investment and fund advisory business, secretly acquired millions of dollars worth of real estate investments from Morgan Stanley’s funds for himself, the former Chairman of Yongye Enterprise (Group) Co. (“Yongye”) -a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai-and others. Peterson also arranged to have paid to himself and the former Chairman of Yongye (“the Chinese Official”) at least $1.8 million in what he misrepresented were finder’s fees Morgan Stanley’s funds owed to third parties. 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. This self-dealing and misappropriation by Peterson breached the fiduciary duties he and Morgan Stanley owed to their clients.”

Based on the above conduct, the SEC charged Peterson with violating the FCPA’s anti-bribery and internal controls provisions, as well as aiding and abetting violations of the anti-fraud provisions of the Investment Advisers Act.

In this release, the SEC noted that 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.”

Robert Khuzami (Director of the SEC’s Division of Enforcement) stated as follows. “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. 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) stated as follows. “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.”

As to Yongye and the Chinese Official, the complaint states as follows.

“Yongye Enterprise (Group) Co. Ltd. was a large real estate development arm of the Luwan District Government in Shanghai, China. Since its inception in 1994, Yongye held leases for many prime areas in the Luwan District. Yongye’s business was to keep or take a small share in real estate joint ventures, including with Morgan Stanley and its funds, in exchange for helping its joint venture partner obtain the proper licensing from the local government. Yongye owned and developed residential and commercial real property, sold and brokered real estate to Morgan Stanley and its funds, and partnered with Morgan Stanley and its funds in various real estate investments.”

“The Chinese Official was the Chairman of Yongye at all pertinent times until his retirement in September 2006. As Chairman, he exercised control over Y ongye and had the authority to make investment decisions for it. Before Yongye, the Chinese Official worked for the Luwan District government. After his retirement in September 2006, the Chinese Official continued to work with Morgan Stanley as a private real estate developer and broker until approximately the time Peterson was terminated in 2008.”

The complaint contains an entire section titled “Morgan Stanley’s FCPA Compliance Program and Internal Controls” which states as follows.

“Morgan Stanley trained Peterson on the FCPA numerous times during his employment, as follows:

(1) Morgan Stanley trained Peterson on anti-corruption policies and the FCPA at least seven times between 2002 and 2008. In addition to other live and web-based training, Peterson participated in a teleconference training conducted by Morgan Stanley’s Global Head of Litigation and Global Head of Morgan Stanley’s Anti-Corruption Group in June 2006.

(2) Morgan Stanley distributed to Peterson written training materials specifically addressing the FCPA, which Peterson maintained in his office.

(3) 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.

(4) Peterson received from Morgan Stanley at least thirty five FCPA-compliance reminders. These reminders included FCPA-specific distributions; circulations and reminders of Morgan Stanley’s Code of Conduct, which included policies that directly addressed the FCPA; various reminders concerning Morgan Stanley’s policies on gift-giving and entertainment; the circulation of Morgan Stanley’s Global Anti-Bribery Policy; guidance on the engagement of consultants; and policies addressing specific high-risk events, including the Beijing Olympics.

(5) Morgan Stanley required Peterson on multiple occasions to certify his compliance with the FCPA. These written certifications were maintained in Peterson’s permanent employment record.

Morgan Stanley required each of its employees, including Peterson, annually to certify adherence to Morgan Stanley’s Code of Conduct, which included a portion specifically addressing corruption risks and activities that would violate the FCPA. Morgan Stanley required its employees, including Peterson, annually to disclose their outside business interests. Morgan Stanley had policies to conduct due diligence on its foreign business partners, conducted due diligence on the Chinese Official and Yongye before initially conducting business with them, and generally imposed an approval process for payments made in the course of its real estate investments. Both were meant to ensure, among other things, that transactions were conducted in accordance with management’s authorization and to prevent improper payments, including the transfer of things of value to officials of foreign governments.”