SPECIAL REPORT-A Morgan Stanley star falls in China =3
SUSPECTED PROBLEMS
During the review, some projects handled by Peterson were reported internally by Morgan Stanley compliance officers for "suspected problems".
Peterson was fired in December 2008. In February, the firm announced in a regulatory filing that it had uncovered actions by an employee in China that "appear to have violated the Foreign Corrupt Practices Act."
Sources identified that employee as Peterson.
As a result of the disclosure, the firm put Kalsi and Andrew Yoon, the chief financial officer for the Asian real estate business, on administrative leave. Kalsi recently resigned from Morgan Stanley, but Yoon is planning to return to the firm.
A spokeswoman for Kalsi said "Morgan Stanley's internal investigation found no evidence that Kalsi caused or authorized the alleged misuse of assets." She added that he played "a key role in initiating Morgan Stanley's internal investigation."
Morgan Stanley lawyers interviewed employees and reviewed more than 7.4 million pages of e-mail and related documents, all at Morgan Stanley's expense, according to the investor letter.
The investigation found that in a "discrete number of instances, investment assets were used for improper purposes not authorized by senior management," the letter said.
CORRUPT PRACTICES
Cultural differences make China an especially tough place when it comes to corruption.
What might be seen as a bribe in other countries too often is seen as "just business" in China, said Philip Urofsky, a former U.S. Department of Justice attorney who holds the distinction of trying more Foreign Corrupt Practices Act cases than any other DOJ attorney.
(For a graphic on corruption in China, click on http://graphics.thomsonreuters.com/119/CN_CORRUP1109.gif)
"It's a gift-giving culture," said Michael Pace, a senior managing director for FTI Consulting in Chicago and a former federal prosecutor. "When the government or a government-owned entity is your customer, there can become serious FCPA question by even giving modest gifs."
Blake Coppotelli, a senior managing director in the New York office of the risk consultant Kroll, said he is seeing an increase in clients with concerns about doing business in China.
"It is just accepted practice that government officials at the local level or higher might have some expectation of benefits being provided," Coppotelli said. "The problem is that it has been endemic and breaking that endemic cycle and breaking the cultural acceptance of it takes time."
THE GUANXI NETWORK
There was nothing subtle about Peterson's pursuit of guanxi -- and riches.
In July 2003, Morgan Stanley Real Estate and Shanghai Yongye Group announced their first partnership -- a roughly $90 million investment in a real estate project to build a top-end apartment building in the Xintiandi area, a famous bar and nightlife area in downtown Shanghai.
As a result of that deal, Peterson became more influential in Shanghai's property and government circles.
Shanghai Yongye was backed by Shanghai's local Luwan district government. Luwan is to Shanghai as midtown is to New York city. Shanghai Mayor Han Zheng is a former Luwan district chief.
Wu Yonghua, former chairman of Shanghai Yongye Group, was a friend of Peterson's who introduced him other Chinese officials, expanding the American banker's guanxi network.
Wu's daughter, Linda Wu, was hired by Peterson to join Morgan Stanley Real Estate's Shanghai office as an associate after she finished her studies in the United States. She resigned around the same time Peterson was fired in late 2008.
A source with direct knowledge of the situation told Reuters that U.S. and Chinese investigators were interested to know more about the connections between Wu Yonghua, Wu's daughter and Peterson and wanted to investigate if her hiring was part of a quid pro quo.