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.”