SEC Charges Former Morgan Stanley Executive with FCPA Violations and Investment Adviser Fraud

April 25, 2012

The SEC charged a former executive at Morgan Stanley with violating the Foreign Corrupt Practices Act (FCPA) as well as securities laws for investment advisers by secretly acquiring millions of dollars worth of real estate investments for himself and an influential Chinese official who in turn steered business to Morgan Stanley’s funds.
The SEC alleges that Garth R. 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 Co., a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai. Peterson secretly arranged to have at least $1.8 million paid to himself and the Chinese official, disguised as finder’s fees that Morgan Stanley’s funds owed to third parties. Peterson also secretly arranged for him, the Chinese 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 Chinese official helped Peterson and Morgan Stanley obtain business while personally benefitting from some of these same investments. Peterson’s deception, self-dealing, and misappropriation breached the fiduciary duties he owed to Morgan Stanley’s funds as their representative.
Peterson agreed to a settlement 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).
According to the SEC’s complaint, Peterson’s violations occurred from at least 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 due to his FCPA misconduct.
The SEC alleges that 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 and taking advantage of his ability to steer opportunities to Morgan Stanley and his influence in helping with needed governmental approvals. Morgan Stanley thus partnered with Yongye on a number of significant Chinese real estate investments. At the same time, Peterson and the Chinese official expanded their personal business dealings both in a real estate interest secretly acquired from Morgan Stanley as well as by investing together in Chinese franchises of well-known U.S. fast food restaurants. Peterson failed to disclose these investments in annual disclosures that Morgan Stanley required him to make as part of his employment.
According to the SEC, Peterson openly credited the Chinese official with helping obtain approvals required from other Chinese government entities for a deal to close in emails to several Morgan Stanley employees. The SEC alleges that 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.
Click here to access the administrative action.


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Enforcement Actions, Investment Advisers, Investment Companies