Ex-Morgan Stanley China Dealmaker Under Investigation

HONG KONG/NEW YORK (Reuters) – Morgan Stanley (MS.N) has fired the China head of its property investment arm for suspected violations of the U.S. Foreign Corrupt Practices Act, several people with knowledge of the matter told Reuters.

The Wall Street bank said in a filing with the U.S. Securities and Exchange Commission on Wednesday it had fired a China-based employee who initiated actions that “appear to have violated the Foreign Corrupt Practices Act,” or FCPA, which is a U.S. securities law related to bribery.

Morgan Stanley did not identify the person, but several people familiar with the matter said it is Garth Peterson, who was managing director of Morgan Stanley Real Estate in China’s financial hub Shanghai and was sacked in December.

The episode has also resulted in Morgan Stanley’s global head of property investing being placed on administrative leave.

It underscores a potential risk multinationals face when doing business in emerging markets such as China, where corruption is deeply rooted.

The U.S. securities watchdog believes Peterson may have violated the FCPA rules in relation to property deals for the bank in China, the sources said.

Morgan Stanley declined to comment or provide details beyond its SEC filing.

Peterson did not respond to repeated calls to his China mobile phone.

“The SEC investigation has been ongoing for a few months and Morgan Stanley lawyers are now also involved in the case to assist the investigation related to Garth Peterson,” said one source close to Peterson and the U.S. bank.

“The focus of the investigation is a Shanghai property deal led by Peterson in the early 2000s,” said the source, who declined to elaborate.

The Wall Street bank also said in its filing to the SEC that it reported the employee, based at “an overseas real estate subsidiary,” to authorities, and is continuing an investigation.

Sonny Kalsi, the global head of Morgan Stanley Real Estate Investing, has been placed on administrative leave in connection with the China case, one of the sources said.

Kalsi is replaced by Owen Thomas, who assumes the role in addition to his duties as Morgan Stanley’s chief executive for Asia, the person said. Kalsi could not immediately be reached for comment and an email reply said he was out of the office.

HOT PROPERTY MARKET

Morgan Stanley began making property investments in Shanghai in 2003 and undertook real estate projects with local partners including Forte (2337.HK) and Shanghai Dragon, an investment arm of the city government.

Morgan Stanley Real Estate officially opened its Shanghai office responsible for China deals in 2006.

Peterson was promoted to managing director at Morgan Stanley in 2007 after he led several landmark deals on top-end residential projects in China for Morgan Stanley’s property arm.

One senior Chinese financial source once described Peterson as “a rising star” at Morgan Stanley, which was at one time the most aggressive foreign investor in China’s property market.

Before the recent downturn, surging property markets in major Chinese cities like Shanghai and Beijing occasionaly drew anger from local residents complaining that foreign investors were driving up prices.

In the past decade, domestic investigations into illegal land auctions at local government level also rose sharply. In Shanghai, several property officials were sacked or sentenced for wrongdoing related to corruption, the official Xinhua news agency reported last year.

FCPA FOCUS

The U.S. Securities and Exchange Commission, which often works jointly with the Department of Justice, has increasingly set its sights on prosecuting companies for possible violations of bribery laws, in particular the FCPA, which was first enacted in 1977.

The FCPA makes it illegal for U.S. companies or their agents to use bribery to win business in foreign countries. Similar laws exist in other nations.

Foreign companies including Siemens AG (SIEGn.DE), General Electric Co (GE.N), International Business Machines Corp (IBM.N) and Avon Products Inc (AVP.N) have been caught up in U.S. government probes into business dealings in China.

The U.S. government treats China as a high risk country for corruption and bribery, lawyers have said.

The oil and oil services, defense contracting and healthcare industries have been more prone to involvement in overseas bribery cases than other sectors, U.S. legal experts have said.

But some lawyers have said the SEC has seen an uptrend of cases involving financial firms, with problems more likely to emerge in a market downturn.

Financial firms have also ramped up their presence in fast-growing emerging markets in recent years.

By George Chen and Jonathan Spicer

(Additional reporting by Tony Munroe in HONG KONG, Samuel Shen in SHANGHAI, Martha Graybow and Joseph Giannone in NEW YORK and Rachelle Younglai in WASHINGTON, D.C.)