The Securities and Exchange Commission today charged a former executive at Morgan Stanley, Garth R. Peterson, for secretly acquiring millions of dollars in real estate investments for himself and a Chinese official who steered business to Morgan Stanley’s funds. Peterson violated the Foreign Corrupt Practices Act, as well as the securities laws for investment advisers.
The SEC alleges 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 Morgan Stanley’s real estate success in Shanghai.Peterson arranged to have $1.8 million paid to himself and the official, but disguised as finder’s fees owed to third parties.
Peterson also arranged for him, the 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 official helped Peterson and Morgan Stanley obtain business. Peterson’s deception, self-dealing, and misappropriation breached the fiduciary duties he owed to Morgan Stanley’s funds as their representative.
“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,” says 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 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.
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. Morgan Stanley partnered with Yongye on a number of significant Chinese real estate investments. Peterson expanded their personal business dealings through Morgan Stanley and by investing in Chinese franchises of U.S. fast food restaurants together.
Peterson failed to disclose these investments in annual disclosures that Morgan Stanley required him to make as part of his employment.
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 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 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, which is currently valued at approximately $3.4 million. The U.S. Department of Justice has filed a related criminal case against Peterson.