You have to give the Justice Department credit – they are crafty and can be very politically astute. The Justice Department played a very subtle political game with the Morgan Stanley settlement. You have to give them credit for how they used the case to make a point.
The Justice Department wanted to show everyone that they can be reasonable, credit a corporate compliance program, and exercise discretion not to charge a company even though it could have easily done so. DOJ will cite Morgan Stanley as a case in which they did not inflexibly rely on the doctrine of respondeat superior to hold every company liable for the acts of a single, rogue employee.
More importantly, Morgan Stanley is a precedent that will be limited to the facts of the case, which were unusual. The case gave DOJ the opportunity to show reasonableness without creating a precedent that would seriously hamper the FCPA enforcement program. It is unusual to have the facts play out in such a clean way.
Garth Peterson, the former head of Morgan Stanley’s Shanghai office, settled FCPA charges with the DOJ and the SEC. Mr. Peterson, a U.S. citizen, pleaded guilty to one count of conspiracy to evade the company’s internal accounting control. He also settled with the SEC, and agreed that he violated bribery and books and records and internal control provisions. He agreed to the entry of an injunction and to pay disgorgement of $250,000. In addition, Mr. Peterson gave up his interest in Shanghai real estate valued at about $3.4 million.
Mr. Peterson’s violations stem from his dealings with the former Chairman of Yongye Enterprise (Group) Co., a Chinese state-owned entity involved in real estate. From 2004 through 2008 Morgan Stanley partnered with Yongye on a number of real estate investments. Mr. Peterson negotiated and carried out secret arrangements for these deals without disclosing it to his supervisors in Morgan Stanley. When he did so, the supervisors warned him that he was violating the FCPA and instructed him to drop the deals. Mr. Peterson did not follow the instructions.
DOJ declined to prosecute Morgan Stanley, even though they could have done so based on the doctrine of respondeat superior. Morgan Stanley’s compliance record was exemplary, except for the fact that they did not adequately monitor Mr. Peterson and his actions. Morgan Stanley’s compliance procedures were regularly updated to reflect regulatory developments and specific risks and prohibited bribery. They also addressed the corruption risks associated with giving gifts, business entertainment, travel, lodging, meals, charitable contributions and employment. Morgan Stanley provided for periodic training; Peterson received FCPA training seven times and was reminded to comply with the Act on 35 occasions. Morgan Stanley advised him that employees of Yongye were government officials for FCPA purposes. Mr. Peterson regularly certified that he was in compliance with the FCPA and understood the requirements of the FCPA.
DOJ could have prosecuted Morgan Stanley. They could have cited Peterson’s actions as evidence of the failure of Morgan Stanley’s compliance program. But they did not do so. They wanted to gain political points. DOJ was shrewd and did nothing to undermine its overall FCPA enforcement program.