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.
- “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.