On Monday night, Houston Astros manager Brad Mills went
to the mound five times to change pitchers against five straight New York Mets
batters. This set the Astros twitter community literally 'a-twitter' as it was
noted that, according to the Elias Sports Bureau, the "Astros became the
1st team in MLB history to use 5 different pitchers against 5 consecutive
hitters." Why did he do so? Mills has not made public his reasons yet it seemed
to work out as only one of the five hitters was able to get a hit against the
normally abysmal Astro relief corp. And the Astros actually won the game, which
is an increasing rare occurrence this season since having a winning record of 2-1
after three games.
I thought about the Mills treks to the mound last night
when reading the recent Foreign Corrupt Practices Act (FCPA) enforcement action
against former Morgan Stanley Managing Director Garth Peterson. According to
the US Department of Justice (DOJ) Press Release,
Peterson pled guilty to one count of criminal information charging him with
"conspiring to evade internal accounting controls that Morgan Stanley was
required to maintain under the FCPA." Assistant Attorney General Lanny Breuer
was quoted as saying, "Mr. Peterson admitted today that he actively sought to
evade Morgan Stanley's internal controls in an effort to enrich himself and a
Chinese government official. As a Managing Director for Morgan Stanley, he had
an obligation to adhere to the company's internal controls; instead, he lied
and cheated his way to personal profit. Because of his corrupt conduct,
he now faces the prospect of prison time." Peterson will be sentenced in June.
According to the DOJ Press Release, Peterson conspired
with others to circumvent Morgan Stanley's internal controls in order to
transfer a multi-million dollar ownership interest in a Shanghai building to
himself and a Chinese public official with whom he had a personal friendship.
Peterson encouraged Morgan Stanley to sell an interest in a Chinese real-estate
deal to Shanghai Yongye Enterprise (Yongye) a state-owned and state-controlled
entity through which Shanghai's Luwan District managed its own property and
facilitated outside investment. Peterson falsely represented to others
within Morgan Stanley that Yongye was purchasing the real-estate interest, when
in fact Peterson knew the interest would be conveyed to a shell company
controlled by him, a Chinese public official associated with Yongye and an
un-named Canadian attorney. After Peterson and his co-conspirators falsely
represented to Morgan Stanley that Yongye owned the shell company, Morgan
Stanley sold the real-estate interest in 2006 to the shell company at a
discount to the interest's actual 2006 market value. As a result, the
conspirators realized an immediate paper profit of more than $2.5 million. Even
after the sale, Peterson and his co-conspirators continued to claim falsely
that Yongye owned the shell company. In the years since Peterson and his
co-conspirators gained control of the real-estate interest, they have
periodically accepted equity distributions and the real-estate interest has
appreciated in value.
Declination to Prosecute
However, the greater import of this enforcement action
for my money was what did NOT happen to Morgan Stanley. They were not indicted.
In fact both the DOJ, in its Press Release, and Securities and Exchange Commission
(SEC), in its civil Compliant, went out of their way to praise the Morgan
Stanley compliance program. This written praise demonstrated that not only do
company's receive credit from the DOJ for having a compliance program in place
but also gave solid information as to why the DOJ declined to prosecute Morgan
Stanley. In other words, it was a very public pronouncement of a declination to
The SEC Complaint
detailed the compliance program it had in place and how it directly related to
Peterson. The Compliant specified:
(1) Morgan Stanley trained Peterson on anti-corruption
policies and the FCPA at least seven times between 2002 and 2008. In addition
to other live and web based training, Peterson participated in a teleconference
training conducted by Morgan Stanley's Global Head of Litigation and Global
Head of Morgan Stanley's Anti-Corruption Group in June 2006.
(2) Morgan Stanley distributed to Peterson written
training materials specifically addressing the FCPA, which Peterson maintained
in his office.
(3) A Morgan Stanley compliance officer specifically
informed Peterson in 2004 that employees of Yongye, a Chinese state-owned
entity, were government officials for purposes of the FCPA.
(4) Peterson received from Morgan Stanley at least thirty
five FCPA-compliance reminders. These reminders included FCPA-specific
distributions; circulations and reminders of Morgan Stanley's Code of Conduct,
which included policies that directly addressed the FCPA; various reminders
concerning Morgan Stanley's policies on gift-giving and entertainment; the
circulation of Morgan Stanley's Global Anti-Bribery Policy; guidance on the
engagement of consultants; and policies addressing specific high-risk events,
including the Beijing Olympics.
(5) Morgan Stanley required Peterson on multiple
occasions to certify his compliance with the FCPA. These written certifications
were maintained in Peterson's permanent employment record.
(6) Morgan Stanley required each of its employees,
including Peterson, annually to certify adherence to Morgan Stanley's Code of
Conduct, which included a portion specifically addressing corruption risks and
activities that would violate the FCPA.
(7) Morgan Stanley required its employees, including
Peterson, annually to disclose their outside business interests.
(8) Morgan Stanley had policies to conduct due diligence
on its foreign business partners, conducted due diligence on the Chinese
Official and Yongye before initially conducting business with them, and
generally imposed an approval process for payments made in the course of its
real estate investments. Both were meant to ensure, among other things, that
transactions were conducted in accordance with management's authorization and
to prevent improper payments, including the transfer of things of value to
officials of foreign governments.
Based on the foregoing, the DOJ declined to prosecute
Morgan Stanley and noted in its Press Release, "After considering all the
available facts and circumstances, including that Morgan Stanley constructed
and maintained a system of internal controls, which provided reasonable
assurances that its employees were not bribing government officials, the
Department of Justice declined to bring any enforcement action against Morgan
Stanley related to Peterson's conduct. The company voluntarily disclosed
this matter and has cooperated throughout the department's investigation."
Compliance Program as Compliance Defense
The second point of note in this enforcement action is
that if it was not clear that a company receives credit for having a best
practices compliance program it is now. Recognizing that a compliance
program is not available as a formal affirmative defense, it is clear that
Morgan Stanley was able to use not only their written compliance program, but
its ongoing maintenance, communication and due diligence aspects to shield the
employer from liability. Remember that Peterson was a Managing Director for
Morgan Stanley. This is not a low level functionary but a person far up the
food chain. Neither the DOJ nor the SEC invoked the doctrine of Respondeat
Superior in any enforcement action against Morgan Stanley. The bottom line
is what the DOJ and SEC representatives have been saying all along and that is
that companies with best practices compliance programs receive credit in
negotiating with the government. Here the DOJ spelled it out in their Press
Release so kudos to the DOJ and SEC for doing so in such a public manner.
What Can You Do?
So what can you as a compliance officer do with the
lessons learned from this enforcement action? Borrowing from my This
Week in FCPA Colleague Howard Sklar's recent blog post, entitled "The
Most Marketable Compliance Officer In The World" I suggest the
(1) Regularly update your policies and
procedures. The DOJ has said over and over, and has
included in Schedule C - its description of an effective anti-corruption
compliance program - that companies must update programs, and have several
areas of compliance mentioned. Morgan Stanley took that lesson and did exactly
what the DOJ expected.
(2) Increase the frequency of your training.
Peterson was trained on the FCPA seven times and over a 7-year period Morgan
Stanley trained its Asia-based employees 54 times on anti-corruption. This
clearly shows that training is important and the documentation of training is
critical. How else was Morgan Stanley able to demonstrate the DOJ just how many
training sessions Peterson had sat through?
(3) Send out compliance reminders.
Peterson received reminders about FCPA compliance 35 times. This is an easy and
quick action that you can take often. You can send them out by email, use your
internal messaging system or a myriad of other media. Better yet, you could
write an email for your company President pointing out that Morgan Stanley was
NOT indicted because it had such a robust compliance program.
(4) Engage in ongoing Due Diligence,
including transaction monitoring. As Howard noted, "Morgan
Stanley had a robust due diligence program. The program included transaction
monitoring - a sure sign that a company really cares about diligence is the
extent it realizes diligence is ongoing - and included random audits of people
and partners." Ongoing due diligence and monitoring is becoming the new normal
so I suggest that you get ahead of the curve, as in now.
I believe that the Peterson enforcement action is one of
the most significant in 2012 to date. It provides solid guidance to the
compliance practitioner on what the DOJ and SEC think is important and gives
you actions that you can engage in now to increase the visibility of your
compliance program within your company. Kudos to Morgan Stanley for their
compliance victory. You do not have to parade in five pitchers to pitch to five
different batters as Brad Mills did, but I think the import should be to take
Visit the FCPA Compliance and Ethics Blog,
hosted by Thomas Fox, for more commentary on FCPA compliance, indemnities and
other forms of risk management for a worldwide energy practice, tax issues
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© Thomas R. Fox, 2012
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