CHINA: Morgan Stanley's Chinese Land Scandal

Since the height of China's property boom, Morgan Stanley's huge real estate deals here have been the envy of the industry. Then, scandal hit.

Last month, with property prices here and elsewhere in free fall, the bank dropped a bombshell: in a Securities and Exchange Commission filing, it said it had fired an executive in its China real estate division after uncovering evidence that he might have violated the United States Foreign Corrupt Practices Act, which bars American business people from bribing foreign officials.

That executive, Garth Peterson, was a star deal maker who had become a powerful figure on the Shanghai investment scene, people knowledgeable about the investigation said. His supervisor, the head of global real estate investing, was placed on administrative leave.

In China, which is struggling to deal with corruption and bribery, the revelation is the latest bit of sobering news after a wild real estate boom suddenly went bust late last year, leaving some of the world's biggest financial institutions with potentially huge losses.

For Morgan Stanley, which runs one of the world's biggest real estate funds, it is a black mark on an otherwise sterling reputation. People knowledgeable about the case say that Morgan Stanley has sent both United States and Chinese officials documents indicating that Mr. Peterson, the bank's highest-ranking real estate executive in China, may have secured some transactions by offering cash or gifts to Chinese officials. His partners in some deals were Chinese government investment funds.

The Shanghai Securities Daily, a government-controlled publication, said in an article on Friday that China was investigating a number of Morgan's real estate deals here. These include the company's purchase last year from Agile Property, a large developer, of a 30 percent stake in a Chinese resort development for $775 million.

Morgan Stanley declined to comment on whether China was investigating alleged bribery by Mr. Peterson or whether the company's deal to acquire a large stake in a project developed by Agile has come under scrutiny. The bank said an internal investigation had concluded that "questionable activity was isolated to a discrete set of real estate transactions in China."

Mr. Peterson, who speaks fluent Chinese, could not be reached for comment over the weekend. His telephone was turned off and Morgan Stanley declined to discuss his situation.

As a booming economy sent the country's real estate market soaring during the last five years, more than a dozen major banks and private equity groups rushed in, investing billions of dollars in Chinese property developers and glittering real estate projects.

Morgan Stanley was a first mover, plowing hundreds of millions of dollars into Chinese real estate projects as early as 2004, when prices began a spectacular three-year ascent. The bank helped feed the real estate boom by helping to take Agile Property public in 2005, raising $460 million.

Agile Property, which is based in southern China's Guangdong Province, halted trading in its stock in Hong Kong on Friday, citing volatile trading after the report in the Shanghai Securities Daily. The company called the news report misleading and said it had never been contacted by any government.

According to Agile's public filings in Hong Kong, from February 2007 to June 6, 2008, Agile paid about $350 million for a vast plot of land in Clearwater Bay, Hainan, where it planned to build villas and luxury hotels.

On June 27, 2008, a Morgan Stanley affiliate acquired a 30 percent stake in that project from Agile for about $775 million, valuing the project at more than $2.5 billion.

In a telephone interview on Friday, Zheng Qiyong, a Chinese government official in Hainan, also called the deal proper, saying that Agile was simply short of money and Morgan supplied a big boost. At the time, Agile's earnings had also slumped, and its shares had plunged about 50 percent from their high.

Last September, Agile said it had booked a profit of about $600 million on the partial sale of the Hainan stake. The company said Friday that because of the Morgan Stanley deal last year, Agile gave shareholders a special dividend of $135 million - about $78 million of which went to the family that founded Agile. They collectively own about 58 percent of the company's shares.

Some analysts who cover the company declined to comment publicly on the deal but privately said they were surprised at how much Morgan Stanley had paid for its stake, shortly after Agile bought the land.

For Morgan Stanley, which has seen the value of many of its China properties plummet in a depressed property market here, the challenge may be in selling properties associated with the investigation.

The company has not disclosed which properties were involved. But in its statement on Friday, Morgan Stanley said, "Based on what we know, we have no reason to believe that the value of any of the properties in any of the funds have been materially affected by the activity at issue."

AMP Section Name:Financial Services, Insurance and Banking
  • 104 Globalization
  • 106 Money & Politics
  • 185 Corruption
  • 201 Executive Compensation
  • 208 Regulation

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