Garth Peterson’s timing was impeccable.
He had joined Morgan Stanley in Asia in 2002, just as the Chinese real estate market was taking off. His job would be making real estate deals for the firm, and Peterson seemed the ideal person for the position.
A blonde, blue-eyed American raised in Singapore, Peterson — then in his early 30s — was fluent in Mandarin, and in the local culture.
“The language is, you know, essential, I would say, being able to speak Mandarin well,” Peterson said. “But beyond that, I worked in the Chinese real estate industry since 1993.”
In 2006 alone, according to news reports at the time, Morgan Stanley invested $3 billion in Chinese real estate. Peterson, by then a vice president, was at the forefront.
"Being in China, the clients could take us out, and there were sometimes three, four nights a week I'd be out and karaoke-ing 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."
“I was given more and more support, and the business just grew exponentially,” he said.
Today, his fortunes have drastically changed.
On Thursday, Peterson was sentenced to 9 months in prison and 3 years supervised release after pleading guilty to evading Morgan Stanley’s internal controls — a federal offense.
Prosecutors said he engineered a deal that transferred Morgan Stanley’s interest in a multi-million dollar Shanghai real estate development to a shell company secretly controlled by Peterson and a Chinese government official. The official, who was not identified, made an instant paper profit of $2.5 million. (Related:Former Morgan Stanley Director Pleads Guilty to Conspiracy.)
The Justice Department has held up the case as an example of tough enforcement of the Foreign Corrupt Practices Act — the anti-bribery law that is the subject of a multi-year crackdown.
When the case came to light in 2009, it was a bombshell in the wild and wooly Asian property business. Morgan Stanley placed two other executives on leave. Both were cleared of wrongdoing, as was Morgan Stanley, which first reported the conduct to the authorities. Morgan Stanley fired Peterson in December, 2008.
“We cooperated fully with the government throughout this process,” Morgan Stanley said in a statement following Peterson’s sentencing. “Mr. Peterson’s intentional circumvention of Morgan Stanley’s internal controls was a deliberate and egregious violation of our values and policies.”
Those policies have won praise from the government.
“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,” the Justice Department said in a statement.
But in an exclusive interview conducted on the eve of his sentencing, Peterson told Investigations Inc. there is more to his case than meets the eye — and less than the victory against corruption that Morgan Stanley and the government are claiming.
“What I feel bad about is the government lying to the public and saying that they (Morgan Stanley) 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,” he said.
Peterson also insisted that the real estate deal in question was not about bribing the Chinese official as the government claims, but was about recouping his own investment in the real estate development, which he said pre-dated his employment at Morgan Stanley. He said he was angry when the firm required him to divest his interest in the deal.
“I brought them in, and then they were forcing me out,” he said. “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.”
By then, of course, the real estate market had gone even higher. So Peterson — and the Chinese official who was secretly helping front the deal — were buying at a deep discount.
Peterson admits the deal was wrong.
“I probably shouldn’t have secretly invested. But I never bribed him. I never bribed anybody.”
He believes the government — and Morgan Stanley — are making a show of his case to highlight the Foreign Corrupt Practices Act. But he says in fact, there was little attention paid to the anti-bribery law during his time in Asia.
“The Department of Justice particularly, also the SEC maybe to a lesser extent, are so keen on finding some example they can get by the scruff of the neck and say, ‘See here? Remember this law? You know, nobody do this again.’ They’re getting it, at the expense of truth,” he said.
A former colleague of Peterson’s at Morgan Stanley, speaking on the condition of anonymity, agrees that little attention was paid to the U.S. anti-bribery laws during the Chinese real estate boom, and says most employees “knew very little” about the FCPA until Peterson’s activities were uncovered in 2008.
“The system got much better after that,” the person said.
The Justice Department, in praising Morgan Stanley’s compliance efforts, said the firm trained various groups of Asia-based employees on anti-corruption policies 54 times between 2002 and 2008, but the source says the lack of specifics in the Justice Department’s statement is telling.
“You notice they don’t put dates,” the person said.
A Morgan Stanley spokesman declined to comment on whether the firm’s policies were strengthened after Peterson found a way around them.
Peterson describes an atmopshere of "drinking, smoking [and] womanizing."
Peterson said the go-go atmosphere during the boom often left compliance on the sidelines.
“There was low to zero FCPA consciousness, not only on my part, but on virtually everyone around me,” he said, describing the overall business climate in China — not just at Morgan Stanley — as “out of control.”
“I guess just three words, you know, drinking, smoking, womanizing, all the time,” he said.
“Being in China, the clients could take us out, and there were sometimes three, four nights a week I'd be out and karaoke-ing 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.”
The money, he said, flowed along with the booze.
“I went out with this client down in Southern China. He was a 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.”
In addition to speaking to CNBC, Peterson has also told his story to a writer friend in Singapore, Jeremy Tarrier, who, operating under the pen name “Robin Fitzooth,” has turned it into a manuscript for a book entitled “The Rise and Fall of an American in China.”
“Here in Asia, the method of doing business is highly relationship based,” Tarrier told CNBC. “So what is a cut and fast rule within say Europe or the U.S.A may not translate directly to what is practical here.”
But Peterson’s former Morgan Stanley colleague disputes the idea that Peterson’s conduct was the norm.
“Garth went off the reservation,” the person said. “He went local.”
As for whether Peterson should have known about the anti-bribery laws, court documents show he received personal training on the FCPA seven times at Morgan Stanley, and was reminded about it 35 times. But Peterson said that, too, does not tell the full story.
“You can have programs and e-mails, but if people just delete them; if people have to do teleconferences 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," he said. "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.”
A Morgan Stanley spokesman declined to comment on the firm's compliance policies beyond its written statement.
Peterson said he agrees with “the idea behind the FCPA,” but said it should be strengthened to take real world situations into account, including the acceptance of bribes from foreign officials in addition to bribes paid to them. He said it is a particular issue in China, where the business culture revolves around guanxi, or relationships.
“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,” he said. “It would be interesting to see how, if at all, the FCPA can take, you know, those kinds of factors into consideration.”
—By CNBC's Scott Cohn