## Facts

- From 2002 through 2008, Garth Peterson worked for Morgan Stanley, a global financial services firm whose securities traded on the New York Stock Exchange.
- As a public company, Morgan Stanley was an “issuer” subject to the Foreign Corrupt Practices Act (FCPA), including requirements to maintain internal accounting controls designed to prevent improper payments and related misconduct.
- Morgan Stanley maintained a large compliance program, including an employee training program, transaction-approval procedures, and a compliance staff reported to exceed 500 personnel during the relevant period, along with China-focused anticorruption training.
- Peterson served as a managing director in Morgan Stanley’s Shanghai real estate group, which created and managed real estate investment funds for investors. The funds were organized as Delaware limited partnerships.
- Peterson had a close personal relationship with a senior executive at Shanghai Yongye Enterprise (Group) Co. Ltd., an entity owned by a subdivision of the Shanghai government. For FCPA purposes, Yongye was treated as an instrumentality of a foreign government and the executive as a “foreign official.”
- Beginning on or before January 1, 2006, Peterson held an ownership interest in a British Virgin Islands shell company, Asiasphere Holdings, Limited, which was also partially owned by the foreign official and partially owned by a Canadian attorney.
- Charging papers alleged Peterson concealed conflicts and ownership interests and conspired to evade Morgan Stanley’s internal accounting controls.
- The United States charged Peterson by information in the Eastern District of New York (No. 12-CR-224) with conspiracy under 18 U.S.C. § 371 to circumvent internal accounting controls (by conspiring to violate Exchange Act internal-controls provisions associated with the FCPA).
- On April 25, 2012, Peterson pleaded guilty in the criminal matter.
- The Securities and Exchange Commission filed a parallel civil enforcement action the same day (No. 12-CV-2033), alleging FCPA-related and other securities-law violations arising from the same general course of conduct, and submitted a proposed consent judgment for court approval.
- The district judge (Weinstein, J.) addressed the plea and the proposed civil settlement in memoranda and orders that required court review before entry of the civil consent judgment.

## Issues

1. Whether the district court should immediately approve the SEC’s proposed consent judgment at the outset of the civil case, given the related guilty plea and pending sentencing in the criminal case.
2. What review a district court must conduct before entering an SEC consent decree, including whether the court must determine that the decree is “fair and reasonable.”
3. Whether, and how, the court should account for the interaction between criminal monetary remedies (such as forfeiture and restitution) and civil remedies (such as disgorgement and penalties) when deciding whether to approve the SEC settlement.

## Decision

- The court denied the SEC’s request for immediate approval of the proposed civil settlement and set a schedule for further submissions and a hearing on the proposed settlement’s reasonableness.
- After additional process, the court evaluated the proposed consent judgment under the “fair and reasonable” standard and approved the settlement.
- In the related criminal case, the court proceeded from Peterson’s guilty plea toward sentencing, later imposing a below-Guidelines custodial sentence and issuing written reasons for the sentence.

## Legal Principles

- A federal district court does not act as a rubber stamp when asked to enter an SEC consent judgment; it must exercise independent judgment and determine whether the proposed decree is “fair and reasonable.” (citing SEC v. Wang, 944 F.2d 80 (2d Cir. 1991)).
- In evaluating whether an SEC consent decree is fair and reasonable, the court may consider the connection between the civil resolution and related pending or prospective criminal and civil matters, including how overlapping financial obligations may affect victims, deterrence, and the public interest.
- Where a defendant faces multiple potential payments (restitution, private damages, fines, forfeiture, disgorgement, and penalties), coordinated treatment may be necessary to avoid inconsistent or conflicting outcomes and to inform the fairness analysis of any one settlement.
- In criminal sentencing, when a court varies from the advisory Guidelines range, it must provide reasons tied to the factors in 18 U.S.C. § 3553(a) and must state those reasons as required by 18 U.S.C. § 3553(c).

## Conclusion

In these related civil and criminal proceedings arising from alleged circumvention of Morgan Stanley’s FCPA-related internal controls, the Eastern District of New York refused to enter the SEC’s consent judgment immediately, required submissions and a hearing, and applied an independent “fair and reasonable” review that considered the overlap between civil remedies and the then-pending criminal case before approving the settlement.


SEC v. Peterson, Nos. 12-CV-2033 and 12-CR-224 (2012)