In the end, Garth Peterson, a rising star at Morgan Stanley in China, was undone by his pursuit of "guanxi."

A central concept in Chinese society, guanxi loosely translates as "connections" and relationships." But to Chinese people, it means much more than that: Guanxi equals power.

"Sometimes, money cannot buy you guanxi. But if you have guanxi, you will definitely have money," according to a Chinese saying.

When Peterson, an American then in his early 30s, joined Morgan Stanley's real estate investment operation in China about eight years ago, he had not yet accumulated much guanxi. But he would soon possess a surplus, fueling his rapid ascent at the bank.

With his blond hair and blue eyes, he spoke fluent Mandarin and the Shanghai dialect, and was described by his Morgan Stanley colleagues as a serial networker, making friends with the sons and daughters of powerful Beijing and Shanghai leaders and charming the Chinese executives of multinational corporations.

His downfall, however, was just as precipitous. Morgan Stanley fired Peterson in December amid suspicions that he had violated the U.S. Foreign Corrupt Practices Act, a law meant to crack down on bribes being paid to public officials overseas.

Morgan Stanley, which voluntarily reported the case to the US authorities, declined to comment on its specifics.

After a nine-month internal investigation, the bank has turned its findings over to the US Department of Justice and US Securities and Exchange Commission, which have opened their own probes, according to an investor letter obtained by Reuters.

"Based on the investigation to date, it is believed the possible violations were centered on the conduct of a single former employee in the Shanghai real estate office," according to the letter dated October 29 to Morgan Stanley real estate investors.

At a time when the US and Chinese economies have become increasingly intertwined, the Peterson case illustrates the potential peril of doing business in China, where more and more foreign companies are hoping to take advantage of the world's most dynamic economy.

In early 2008, Morgan Stanley Real Estate sent Peterson to a Foreign Corrupt Practices Act workshop, where he was briefed by lawyers who advise on how to avoid conflicts, bribery, and related fraud, according to a source with direct knowledge of the matter.

The firm's concerns about corruption are well-founded. US companies often cite China as a nation where there are significant risks and challenges of complying with the Foreign Corrupt Practices Act. A study by Deloitte in May said more than nine in 10 US businesses are worried about the potential for FCPA violations while doing business in China. And the Department of Justice is ramping up its prosecution of FCPA cases globally.

An October report by law firm Shearman & Sterling showed that at least two dozen US companies have had recent FCPA issues involving China, and at least nine have ongoing investigations. Recent and ongoing investigations have touched such companies as Siemens AG, Avon Products, and Avery Dennison Corp.

Peterson, who according to his former Morgan Stanley colleagues now lives in Singapore, could not be reached for comment. Interviews with those who know and have worked with him say his story is one of an ambitious and hard-working expatriot who appears to have crossed the line in his zeal to get ahead in the Chinese business world.

Fast Ascent

Peterson joined Morgan Stanley Real Estate's Hong Kong Office in mid-2002. A University of Chicago MBA graduate and a former associate of JPMorgan Chase & Co, he was hired as an associate to focus on China properties. But his natural networking ability and language skills helped him gain a quick promotion.

Beginning in early 2003, he traveled frequently to Shanghai, often spending entire months in China's booming financial hub to help Morgan Stanley Real Estate accelerate its expansion. It was Peterson's job to identify and complete real estate deals in China.

Peterson was promoted to vice president in 2003, and then executive director two years later; in early 2006, he relocated to Shanghai. Once there, he taught himself the local dialect, which helped him get even closer to local officials and businesspeople.

After a series of hugely profitable investments, Morgan Stanley appointed Peterson a managing director in December 2007, making him responsible for property investments across the nation.

That year he married a woman from Singapore and bought a luxury apartment in downtown Shanghai for his family. Friends say he would often escort his daughter in person to her historic kindergarten in Shanghai named after the wife of Sun Yat-sen, the revolutionary and political leader referred to as the father of modern China.

The school is known for attracting the sons and daughters of the influential. Getting in requires guanxi.
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