SEC v. Peterson

[Ed.’s note: The casebook excerpt is an indictment, not a judicial opinion. Therefore, there is no rule of law or holding and reasoning.] From 2002 through 2008, Garth Peterson (defendant) worked for Morgan Stanley, a global financial services firm that was publicly traded on the New York Stock Exchange. As a publicly traded company, Morgan Stanley was required to file certain reports with the Securities and Exchange Commission and was considered an issuer subject to the Foreign Corrupt Practices Act (FCPA). Pursuant to the FCPA, Morgan Stanley was required to maintain internal accounting controls designed to prevent fraudulent activity, including bribery of foreign officials. Accordingly, Morgan Stanley established a robust internal compliance department. The compliance department frequently trained Morgan Stanley employees and implemented a transaction-approval system intended to prevent improper payments to officials of foreign governments. During the period of Peterson’s employment, Morgan Stanley employed over 500 compliance officers. The compliance department provided anticorruption training for all Morgan Stanley employees. In addition to general antifraud training, Morgan Stanley also implemented region-specific antifraud programs, including for China. Morgan Stanley’s anticorruption policies addressed the FCPA and risks associated with providing gifts or anything of value to foreign-government officials. Peterson served as managing director of the real estate group’s office in Shanghai, China. The real estate group created and managed real estate investment funds for institutional investors and high-net-worth individuals. Each fund was organized as a limited partnership under Delaware law. At the time Peterson joined Morgan Stanley, he had a close personal relationship with an individual (Chinese Official 1) who served as a senior executive of Shanghai Yongye Enterprise (Group) Co. Ltd., (Yongye), a limited-liability company owned by the Luwan District government of Shanghai, formed to purchase, hold, manage, and sell the Luwan District’s real estate investments. Because Yongye was wholly owned by a subdivision of the Chinese government, it was considered an instrumentality of a foreign government under the FCPA, and Chinese Official 1 was considered a foreign official. Beginning on or before January 1, 2006, Peterson held an ownership interest in a British Virgin Islands shell company named Asiasphere Holdings, Limited, which was also partially owned by Chinese Official 1 and partially owned by a Canadian attorney. In his capacity as managing director of the real estate group in Shanghai, Peterson was frequently provided with anticorruption training, both live and via web-based programs. Peterson is alleged to have conspired to evade Morgan Stanley’s internal controls.