The US Department of Justice (DOJ) has announced that former Morgan Stanley Real Estate Investing (MSREI) managing director for China Garth Peterson has pleaded guilty in a federal court in New York for his role in a conspiracy to evade the company’s internal accounting controls in order to enrich himself and an unnamed Chinese government official.
Peterson, who worked for the firm in Hong Kong, then Shanghai, from mid-2002 to December 2008, when he was fired, is alleged to have conspired to dodge MSREI’s controls in order to transfer a $2.5 million stake in a Shanghai apartment from the bank to himself and the official in 2006.
The scam came as Peterson convinced Morgan Stanley to sell the interest to Shanghai Yongye Enterprise Group, a state-controlled company through which Shanghai’s Luwan District managed and invested in properties, at a discount to its then-market value, according to DOJ’s court documents. In reality, the interest was not sold to Shanghai Yongye Enterprise Group but to a shell company called Asiasphere Holdings which was controlled by Peterson, the official and a Canadian lawyer. During their ownership, they are said to have accepted a series of equity distributions from the asset and their interest has also appreciated in value to as much as $3.4 million.
According to allegations from the Securities and Exchange Commission (SEC), Peterson also arranged to pay himself and the official at least $1.8 million in finders fees which they represented to Morgan Stanley as fees required to be paid to third parties. In exchange for offers and payments from Peterson, the official is alleged to have helped Peterson and Morgan Stanley obtain business from which they personally benefited.
The DOJ’s assistant attorney General Breuern said in its statement: “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.” Following his sentencing, scheduled on July 17, Peterson could be imprisoned for a maximum of five years in prison and a maximum fine of $250,000 or twice his gross gain from the offense.
Meanwhile, Peterson has agreed with the SEC to relinquish his interest in the Shanghai property as well as be permanently barred from the securities industry. A settlement hearing for the SEC is scheduled to happen on May 2.
As far as his former employer was concerned, the DOJ determined that Morgan Stanley’s system of internal controls had provided reasonable assurances that its staff were not bribing government officials and, as a consequence, would not be bringing any enforcement action against the Wall Street bank related to Peterson’s actions. “The company voluntarily disclosed this matter and has cooperated through the department’s investigation.”
Morgan Stanley itself condemned Peterson’s actions as an “intentional circumvention” of its controls and a “deliberate and egregious violation of our values and policies.” The bank said: “Morgan Stanley is pleased that this matter is resolved. We cooperated fully with the government and we are very satisfied with this outcome.”