A Man Overboard Will Not Sink the Ship: How Robust FCPA Compliance Can Keep a Company Out of Hot Water Even When An Executive is Neck Deep

[author: Reid Whitten]

The story of one man prosecuted by the SEC and the DOJ for an FCPA violation may run a little below the radar these days, when allegations of bribery by manufacturing, retail, and entertainment companies plaster the headlines.  The guilty plea entered by an ex-Morgan Stanley executive, Garth Peterson, however, holds a very important lesson for companies that do not wish to see their own names on the broadsheets above a story about corruption enforcement actions. The lesson is simple: robust corporate compliance can protect a company even when a high-level employee commits brazen acts of bribery.

The alleged facts of Peterson’s bribery are relatively straightforward, if somewhat stunning in measure.  According to the SEC, Mr. Peterson was a personal friend of the chairman of a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai.  Mr. Peterson secretly arranged to have at least $1.8 million paid to himself and the Chinese official that he disguised as finder’s fees.  Mr. Peterson and his co-conspirators are alleged to have made a profit of more than $2.5 million on their illegal dealings.

Under the terms of his plea agreement with the DOJ and settlement with the SEC, Mr. Peterson will pay a civil fine of $250,000 and disgorge $3.4 million in property interests in Shanghai real estate that were allegedly wrongfully obtained under the scheme.  In addition, on July 17, Mr. Peterson is scheduled to face sentencing on criminal charges, subject to which he may receive a maximum $250,000 criminal fine and up to five years in prison.

Thus far, the story sounds like a run-of-the-mill foreign corruption story. 

The single line that U.S. and foreign businesses should sit up and take note of is this: the DOJ and SEC declined to bring enforcement actions against Morgan Stanley in the matter.  According to court documents:

Morgan Stanley maintained a system of internal controls meant to ensure accountability for its assets and to prevent employees from offering, promising or paying anything of value to foreign government officials. Morgan Stanley’s internal policies, which were updated regularly to reflect regulatory developments and specific risks, prohibited bribery and addressed corruption risks associated with the giving of gifts, business entertainment, travel, lodging, meals, charitable contributions and employment. Morgan Stanley frequently trained its employees on its internal policies, the FCPA and other anti-corruption laws. [1]

Mr. Peterson actively subverted the controls set in place by Morgan Stanley.  When the company learned of Mr. Peterson’s activity, however, Morgan Stanley fired Mr. Peterson due to his misconduct.  According to the SEC, Morgan Stanley also “conducted a thorough internal investigation to determine the scope of the improper payments and other misconduct involved.”  What Morgan Stanley discovered was neatly summarized by U.S. Attorney Loretta E. Lynch, “[Mr. Peterson] used a web of deceit to thwart Morgan Stanley’s efforts to maintain adequate controls designed to prevent corruption.  Despite years of training, he circumvented those controls for personal enrichment.”

The possibility of behavior such as that by Mr. Peterson is what keeps the general counsel and executives at every company up late at night.  This case suggests, however, that companies that develop, maintain, and train personnel on robust compliance policies, then respond appropriately to compliance red flags, may be treated fairly by the government and be able to rest a little easier. 


[1] Former Morgan Stanley Managing Director Pleads Guilty for Role in Evading Internal Controls Required by FCPA,  DOJ press release, Wednesday April 25, 2012.

 

Published In: Administrative Agency Updates, Business Organization Updates, Criminal Law Updates, International Trade Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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