CNBC EXCLUSIVE: CNBC SENIOR CORRESPONDENT SCOTT COHN SPEAKS WITH FORMER MORGAN STANLEY MANAGING DIRECTOR GARTH PETERSON
WHEN: TODAY, FRIDAY, AUGUST 17TH
WHERE: CNBC’S BUSINESS DAY PROGRAMMING
Following is an excerpt from the unofficial transcript of a CNBC EXCLUSIVE interview with former Morgan Stanley Managing Director Garth Peterson. Following are links to the video of the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000109869&play=1 and http://video.cnbc.com/gallery/?video=3000109695&play=1.
All references must be sourced to CNBC.
SCOTT COHN: All right, let's first of all talk about your time at Morgan Stanley-- pretty amazing time as the boom was taking off, the property boom in China. Tell me what you did there, how you grew the business, and what your function was?
GARTH PETERSON: I started as an associate. So, I was a junior person. I was given the freedom to try to source deals, and-- I found that I could. And I was given-- more and more support, and-- the business just grew exponentially. You know, picture that in, 2002-- in the whole of Asia Pacific-- Morgan Stanley Real Estate didn't invest at all. And-- just five years later, we invested $5 billion of equity in one year. So, it just gives you an idea of the scale of growth.
SCOTT COHN: And you were sort of uniquely positioned for that, as an American, but someone who grew up in Asia, knew the language, you knew the culture. Tell me about the importance of your role in building that business?
GARTH PETERSON: As far as the China business goes, I had the leading role in building it. And-- you're right, I mean, the language is-- you know, essential, I would say, being able to speak Mandarin well. But beyond that, also it was because I worked in the Chinese real estate industry since, 1993. So, I was able to bring together investment banking experience, together with-- real estate experience. And so, I built not only the investing business for Morgan Stanley in China, but also the-- real estate related investment banking business.
SCOTT COHN: So, it obviously has been a long fall from there. We're talking here on the eve of your sentencing. Why talk now? Why do you want to get your story out now?
GARTH PETERSON: I have had to keep quiet for a long time-- because I took-- I made the decision that I would cooperate with the government. And-- I think a lot of the things that have been written about me in the press have been inaccurate, and I think a lot of the things that the government-- is saying, are also inaccurate.
And I guess, just the-- resentment over that has made me decide that I want to-- I want people to know what I think the truth is, and some important-- differences between what actually happened, and what-- the government says happened.
SCOTT COHN: So, let's talk about that. You pleaded guilty on, April 25th. The Justice Department, that day, puts out a press release-- that says, you were pleading guilty to your role in evading internal controls required to-- by the Foreign Corrupt Practices Act. The head of the Justice Department's Criminal Division, this is one of the top-ranking law enforcement-- officials in the country, said, you lied and cheated your way to personal profit.
The U.S. Attorney in the Eastern District of New York said, you used a, "Web of deceit to thwart Morgan Stanley's internal controls, despite years of training." Basically, you were held up as a poster-child for enforcement of the Foreign Corrupt Practices Act. What's-- what was your reaction to that? What-- what's wrong with those statements?
GARTH PETERSON: I think, let's just focus for a minute on the transaction for which I'm being charged. The government hasn't released some important background about that. I made that investment before I joined Morgan Stanley. When I joined, I declared it to Morgan Stanley. Then, Morgan Stanley became familiar with that deal, and decided they wanted to buy in as well.
So, I helped them to do that. Then, in-- two-- about a year and a half after that-- essentially, just to make it very simple, Morgan Stanley forced me out of that deal. And I felt that was unfair, because it had been something I'd had before. Then, I brought them in, and then they were forcing me out.
And so, about a year after that, I found a way to buy back in at the same price that I'd been forced out at. That's still—a wrong action. When Morgan Stanley forced me out of the deal, I should've either quit, and thereby kept the investment, or I should've just accepted that they didn't want me to be involved in the deal as long as the company was involved. But I don't believe that that should be characterized as a, "web of deceit," and whatever, to-- you know, to take things from Morgan Stanley.
SCOTT COHN: Well, at the heart of the charge, and what you pleaded guilty to was the way you found to buy back in?
GARTH PETERSON: Correct.
SCOTT COHN: And they say that, you basically tricked Morgan Stanley into selling their interest to you, this Canadian attorney, and the Chinese government official, that you had a reason to want in your pocket, essentially, according to the government's charges. True?
GARTH PETERSON: Well-- yeah, I-- did have to work with other people in order to get it done, because I couldn't on the face of it, be the one buying back in. But as far as I was concerned, what I was trying to do was to buy back at the same price that I'd sold--
SCOTT COHN: Which at that point would've been—a discount? I mean, the market was--
GARTH PETERSON: Would've--
SCOTT COHN: --moving, right?
GARTH PETERSON: I agree, it would've.
SCOTT COHN: So what they're saying is that, as part of that deal, this Chinese government official, right off the bat, got a couple million dollars in paper profits?
GARTH PETERSON: You see, it's actually-- the details are very complex. You'd have to ask yourself, at this point, why he's still fine and has no problems. And the reason is that, actually, he didn't invest as well. He just fronted for me and two other people. So, the Chinese government did its own investigation, and determined I never bribed him. Yeah, I probably shouldn't have, you know, secretly invested. But-- I never bribed him, and that's what the Chinese government determined. And that's-- the truth, I never bribed anybody.
SCOTT COHN: So, why did you plead guilty to anything?
GARTH PETERSON: You know, it's-- I think, hopefully most people will never be in the position I had to be in. But when you're an individual against the weight of the U.S. Government-- and the U.S. Government, the Department of Justice, the SEC, perhaps it's their way of doing things. They can have—a heavy stick, you know. That if you don't cooperate with us, you'll-- you know, we're going to do all these other things. And so, I just cooperated. You know, everybody's different. Some people are fighters. I guess I'm not.
SCOTT COHN: But, I mean, you-- you're giving away a lot. You're-- potentially giving away your freedom for a number of years?
GARTH PETERSON: In some sense, they took that away a long time ago in reality. Because once I started to cooperate-- when they wanted to speak to me, I had to go speak to them. They were-- literally, the SEC was harassing my family for years. But-- at the end of the day, like I said, I agreed to cooperate, and so, I took that path.
SCOTT COHN: Morgan Stanley turned you in—and one of the things that the government talks about, and it's in the court papers, is that you were reminded 35 times about the Foreign Corrupt Practices Act. You went to training about the Foreign Corrupt Practices Act, and yet these things happened. So, Morgan Stanley pretty quickly turned you in, cooperated, they got off scot-free. What should we know about that? What's behind that whole story?
GARTH PETERSON: I guess, the crux of it is, actually the compliance situation at Morgan Stanley Real Estate, maybe broader than that-- wasn't good. There are two separate things. You can have programs and e-mails, but if people just delete them, if people have to do teleconferences about, you know, things which maybe we did from time to time.
But-- instead of actually listening, all you have to do is say, "Garth Peterson's on the phone," and they check the box that says, he's complied. And then you either quietly hang up, or you just put your phone aside and you do your other work. That was the culture. And-- you know, that's not right, but that's the way it worked.
Now-- in the book, there's a lot of detail about this. I won't go into all of it now. But it is very, very clear to the government, that actually there was low to zero, FCPA consciousness, not only on my part, but on virtually everyone around me. The actions of everyone around me-- you know, all the way up to the top-- completely showed that people had no consciousness of it what so ever.
So, because I can't even really remember about what courses I took and whatever, and I genuinely don't think I ever took a course in the FCPA at Morgan Stanley, despite whatever nonsense they've shown to the government. It just wasn't in my head, and it wasn't in other people's head.
SCOTT COHN: Well, isn't that on you, though, more than on the firm? If they put this-- if they put the information out there, and you choose to delete the e-mails, or not to attend the course, whether it's online or whatever-- aren't they doing their part? And isn't the rest on you and your colleagues?
GARTH PETERSON: That's absolutely correct. That's absolutely correct. But then you have to ask yourself, if it's obviously not working because people are acting-- in ways that show that they have low to zero, FCPA consciousness, then maybe those training programs and e-mails are not enough.
So, it's not the firm's fault that you don't read them, or that you don't listen, or that you just hang up. But at the end of the day, the compliance program should be about successfully-- making people conscious about things like the FCPA.
SCOTT COHN: So, there was just-- there was not consciousness of that there?
GARTH PETERSON: Zero, totally.
SCOTT COHN: Do you think that Morgan Stanley was unusual in China, or is that the way that business is done there?
GARTH PETERSON: I don't think they were unusual. I think-- it was pretty-- probably other firms are pretty much the same, yeah.
SCOTT COHN: So, tell me what-- in practical terms, what needs to happen to get things done over there? As people look at the Foreign Corrupt Practices Act, and whether we should be enforcing it as---- much as we are-- a lot of people talk about, "Well, why should the U.S. be going it alone in this-- if this is how you get things done over there?" What's it like in the real world?
GARTH PETERSON: I think you've got a lot of questions there. Let me just try to you know-- you asked me one question is--how can firms do this better? Well, you know, like I say, with that example, when you hiring some-- Chinese citizen-- there should be some effort to find out who they are, or why you're hiring them.
No questions about that. All the e-mails were just about, "Hey, you're not giving us enough time. You know-- " things like this. Never came out. Now-- and more broadly, I would say, 'cause you-- asked me, how do the-- this-- how can it be done better? When you have an investment committee-- book, and it says that you have to make a payment to an individual, it should-- everyone should be conscious that, immediately you have to ask the question, who is this? Is it an official?
You know what I mean-- so that, you don't get yourself into trouble. At Morgan Stanley, it wasn't like that. It went all the way up to the top, finance, function, everything else; no one ever asked the question. But perhaps compliance should be always part of-- investment decisions, you know, they should be.
SCOTT COHN: And they're not currently?
GARTH PETERSON: I don't know now. But back in those days? No.
SCOTT COHN: Is-- part of the question I asked you before though is, is the FCPA-- essentially, is the FCPA practical in the real world? Can--
GARTH PETERSON: Right--
SCOTT COHN: --or do people just-- find work-arounds? I mean, is it-- is it something that's realistic in the real world, particularly in China?
GARTH PETERSON: Definitely, the idea behind the FCPA is a good idea. You know, you do have situations around the world, where-- you have to make payments for things to government officials, in order to get them. Which you shouldn't be doing it, they shouldn't be getting the money. And it—and that kind of corruption, probably, you know, leads to problems in their country, and in the relationship between the countries. I can see all that.
So, the law itself, I think, is good in its spirit. It's always the question of, how it's enforced. And if it gets enforced-- too rigorously, sometimes it can-- then it can hurt American companies. Let me give you an example. When I worked at Morgan Stanley, in the 6 1/2 years, there were very, very, very few occasions where me and other Morgan Stanley people paid when we went out with clients.
They just always paid for us. Partners just paid for us. It was just kind of a culture thing, because we were outsiders, and it's their country, and that's how their culture-- you know, "No, no, no, we must pay." But at some point, you feel like-- you know, there must be something that we can do to show them that we're just not takers all the time.
So, in 2004, the NBA played an exhibition game, first time they'd ever done this in China. And-- I got the idea to say, "Hey, you know, let's buy tickets for this game. It's an American thing, we're an American bank, we-- it's some way to just show some appreciation back to them." And that's the one occasion where I remember, FCPA being mentioned to me.
I was told that, we're not allowed to buy tickets for anybody deemed to be a Chinese official. And-- here's the difficulty of that from a practical point of view; there was no idea of this being-- bribe to anyone. And yet, actually, under the FCPA, if that got done, it would be an FCPA violation. It would. You don't even have to solicit something. You just have to give something of value to a foreign official. Boom, you've got yourself an FCPA violation.
That, in practice, makes it-- could very-- make it difficult for American businesses in places like China, because if you're taking all the time from them, but you're never allowed to just reciprocate, just take them to dinner for one time. You know, do-- you know, take them to the NBA game. It's maybe a $75 ticket. I think, if-- you know, the French can do it, and the British can do it, and the Italians can do it, well, at some point maybe, they'll end up being more competitive then.
So, just it's so hard to maybe work out the details. But if you could-- if you could really punish the real-- cases of bribery, and strip out these-- let's say, real business kind of entertainment things, I think-- the law itself would be a better law.
SCOTT COHN: And when it comes to enforcement, and particularly in your case, again, the firm got off scot-free. And you say, that there was-- really no compliance culture. You got thrown overboard?
GARTH PETERSON: Let me just, even before you say that, what I feel is if the FCPA is-- going to be enforced so strictly, they should also enforce-- U.S. citizens-- and employees of U.S. companies not accepting things from deemed foreign officials. You understand what I mean?
SCOTT COHN: Uh-huh, Uh-huh.
GARTH PETERSON: And so, if it's such a bad thing to take a foreign official to an NBA game, then you better be sure that you're not allowing your employees, your citizens to be taken to-- football game by him. Do you understand what I mean? And-- see, that was another problem of compliance, though, at Morgan Stanley. There were rules about how much-- clients could pay when they took you out.
No one paid any attention. Zero. And thousands of dollars would get spent on a night, a few people, nobody thought about it. And compliance never worried about that, you know. So, that put-- that can easily put somebody in a difficult position, where it's okay to be taking from deemed officials, but never being able to give something back to them.
And again, this is where it's a difficult thing, especially in a place like China, where you get the guanxi thing, where you do something for me, I do something back for you, you do something-- me. And-- yeah, it would be interesting to see how, if at all, the FCPA can be-- can take, you know, those kind of factors into consideration.
SCOTT COHN: Do you-- do you-- do you feel like Morgan Stanley threw you overboard?
GARTH PETERSON: Yeah. Look, I did things wrong. I deserved to get fired. I never bribed anybody, so it's still a mystery, a little bit why-- you know, this whole case is-- has been focused on that. Because as I've said, I know what I did. These are the things I did wrong.
Morgan Stanley got off scot-free. And I think, you know, I have no-- you know, desire for them to be harmed in any way, or you know. So-- it's not that. But what I feel bad about is-- the government lying to the-- to the public. And-- saying that-- they had this wonderful compliance-- program, when in fact the government knows that it wasn't getting into people's heads. Which is what really matters.
SCOTT COHN: Uh-huh. Garth, the book talks a lot about the culture of investment banking in China at the beginning of the last decade, and some of the things that were going on. And it was a wild time, wasn't it?
GARTH PETERSON: It was out of control.
SCOTT COHN: Tell me about it?
GARTH PETERSON: I guess, just three words, you know-- drinking, smoking and womanizing, you know, all the time.
SCOTT COHN: And a lot of money flowing around in-- I mean, a lot of money?
GARTH PETERSON: A lot of money, yeah. I mean-- this is where I go back to, you know, in being in China, and the clients could, you know, take us out, and-- there were sometimes three, four nights a week I'd be out and-- karaoking the whole night, and drinking like crazy, pass out, go home, you know, there's some girl next to me. I didn't even know who she is.
You know, wake up the next day-- sometimes-- one time I even woke up, and I got a note that-- from two girls saying, "We hope you feel better in the morning." I didn't even remember them. And-- I---- you know, I-- the one time, when I went out with this client down in Southern China-- he was very wealthy, very, very wealthy man. Just on about five or six of us, he spent-- $200,000 U.S. on just the alcohol in one night, $200,000 U.S. on alcohol in one night. That was an extreme one. But there were a lot that were pretty crazy.
SCOTT COHN: Right. So, the narrative that's likely to come out of this sentencing is-- rogue investment banker in China, pays off public official, the firm that has a robust compliance regime turns him in, Foreign Corrupt Practices Act is there front and center. Big message sent to everybody. I take it, from what we've been talking about, that's not the narrative that you want people to come away with?
GARTH PETERSON: That's complete rubbish. It's complete rubbish. I've said, you know, I did things wrong. The one thing wrong in relation to this transaction that-- that the government has studied, and finally, is punishing me for. As I say, I made the investment, I was pushed out of it. I bought back in at the same price that I was pushed out of it.
There's actually nothing in relation to all of that ever has anything to do with a bribe. But the Department of Justice, particularly, also the SEC, maybe to a lesser extent, are so keen on finding some example that they can get by the scruff of the neck and say, "See, here? Remember this law? You know, nobody do this again."
And so, I totally understand that that's going to be really, really effective. I think now, people really, probably are more aware of the FCPA in-- in banking in China. They probably-- very much more aware. But they need their--the DOJ needs this example, you know, to hang up like this, and they're getting it at the expense of truth, at the expense of truth. At the expense of truth.
SCOTT COHN: You are someone who's confessed to a felony. You've had a lot of personal issues in your life, as you said, drinking, smoking, women-- a lot. Why should we believe you?
GARTH PETERSON: I guess, you know-- people should, you know, read the book, if they want to-- know a lot of the details. A lot of people around can corroborate, you know, many of the things that I've said--and many of the things that are written in that book-- if they chose to try to, you know, investigate it out.
You know, at the end of the day, there are always going to be some people that believe you. There are always going to be some that don't, and that's fine, you know. I'm glad that-- Jeremy, you know, took the time to get the book done, and it just tells it from my point of view, you know.
GARTH PETERSON: Scott, if I may-- you know, many people would naturally ask the question, well, you know, if really the compliance culture, in effect, at Morgan Stanley, you know, in-- in Asia was really as bad as you're saying, why would the government be covering it up now? And I think there are two reasons for that.
One, is that-- the DOJ, basically is rewarding Morgan Stanley for handing me over. So, you know, all this-- everything comes onto me. And so, the-- government-- "Thank you, for doing this. This is what companies should do, hand 'em over." The DOJ clearly, you know, also-- it makes their case easier to sit-- remember, I'm getting charged for violating internal controls, right? Well, if those internal controls are-- shambles, then it doesn't look quite as good from the DOJ's point of view, as to hold them up as some stellar example of how companies should run themselves.
And then, I'm the rogue over here that kind of-- clash, you know, between this beautiful situation here, and this bad guy here. It makes it easier for the DOJ to accomplish what they want-- by bringing out a kind of contrast between me and my employer. Rather than saying-- "You know, Garth did some things a little bad, and by the way, the his company was a mess, as well. And they really need to clean themselves up." So.
SCOTT COHN: Yeah, okay. Are you prepared for what's to come?
GARTH PETERSON: I can't wait. After 3 1/2 years, you know?
SCOTT COHN: So, it's almost like, this is-- this is going to be a relief?
GARTH PETERSON: Oh, totally a relief. Totally a relief.
SCOTT COHN: Garth, thank you.
GARTH PETERSON: Yeah, cheers.
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