Garth Peterson, the ex-Morgan Stanley Real Estate Investing (MSREI) head of China, was sentenced to serve nine months in prison yesterday for conspiring to evade Morgan Stanley’s internal controls in an effort to enrich himself, a Chinese government official and a Canadian lawyer.
Peterson pleaded guilty in a New York federal court in April for actions taken in the early to late noughties related to transfers of a stake in a Shanghai apartment block. The transfers happened, at a discount, from a MSREI opportunity fund to offshore companies controlled by Peterson, Wu Yonghua, the former chairman of state-owned company Shanghai Yongye Enterprise, and the lawyer whose identity has yet to be reported.
The investigation, first by Morgan Stanley and then by the US authorities, into Peterson’s actions was treated seriously particularly given he also circumvented the Foreign Corrupt Practices Act (FCPA). Peterson was accused of secretly buying the stake in the Shanghai apartment with his co-conspirators partly to gain favorable access to other deals for MSREI in China.
The US Department of Justice (DoJ) said in an announcement at the time of Peterson’s plea that he could face a maximum prison sentence of five years and a fine of $250,000. In a separate but related action, the US Securities and Exchange Commission (SEC) wanted him barred from practicing in the securities industry and for him to relinquish his holding in the appartment and to pay a civil penalty.
At yesterday’s sentencing he received no fine. Furthermore, his custodial sentence of nine months after which he will be subject to supervised release for three years, was considered in some quarters as a light punishment.
The Wall Street Journal reported that prosecutors had wanted Peterson to serve at least four years and three months in jail. But in a separate report by Reuters, one business law professor said judges often impose prison terms of less than one year in FCPA cases, and that the Peterson case underscores the inability of prosecutors to win greater punishments.
In terms of Morgan Stanley, the DOJ determined in April 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,” it said.
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.”
Peterson, who was fired in 2008 pending the original, internal investigation, reportedly apologised to his family and to Morgan Stanley for his actions. But in an interview with CNBC on the evening of his sentencing he accused the US government of “lying to the public” by stating Morgan Stanley had “this wonderful compliance programme”.
Despite receiving multiple training sessions and correspondence from Morgan Stanley about complying with the FCPA, Peterson admitted not taking them seriously enough and accused the bank of previously sidelining its importance. “You know that’s not right, but that’s the way it worked,” he said.
He also said: “The DoJ particularly, also the SEC maybe to a lesser extent, are so keen on finding some example they can get by scruff of the neck and say ‘See here? Remember this law? You know, nobody do this again.”
PERE spoke with people familiar with MSREI and with Peterson for an in-depth analysis of Peterson’s actions and their consequences which was published in June. To read it, click here.