A former Morgan Stanley executive pleaded guilty today to criminal and civil charges for secretly funneling millions of dollars in bribes to a Chinese official, who then helped the company acquire business while enriching himself through similar means.

Garth R. Peterson, 42, who served as managing director of the company’s real estate investment and fund advisory business, worked with the former chairman of Yongye Enterprise (Group) Co., to arrange acquisitions of valuable Shanghai real estate and at least $1.8 million for the pair.  The Securities and Exchange Commission complaint ^[1], filed today in the Eastern District of New York, describes Yongye as “a Chinese state-owned entity with influence over the success of Morgan Stanley’s real estate business in Shanghai.” It operates as the Luwan District government’s real-estate development arm.

Peterson, an American citizen who lives in Singapore, was employed by Morgan Stanley from 2002 to 2008 before he was fired for his misconduct. The official, identified only as “Chinese Official 1,” was a senior executive at Yongye from 1995 to late 2006 when he retired, according to the criminal information filed by the Justice Department ^[2] and the SEC complaint. The release also identifies an unnamed Canadian attorney as a co-conspirator and part owner of Peterson’s holding company Asiasphere Holdings Limited, which they falsely represented as being owned by Yongye.

According to court documents, Peterson took advantage of a close relationship with the Chinese official to steer opportunities to Morgan Stanley, leading the company to partner with Yongye on a number of significant Chinese real estate investments. He also simultaneously “secretly acquired” real estate interest from Morgan Stanley on behalf of the official and himself. Peterson did not disclose these and other investments made with the official in his required internal annual disclosures.

According to the SEC’s complaint, Peterson openly credited the Chinese official in company emails with helping secure a deal with other Chinese government entities.  He wrote to several Morgan Stanley employees in response to an e-mail discussing the terms of one of Yongye’s purported investments: “Everyone pls keep in mind the big picture here.  YY gave us this deal. … So we owe them a favor relating to this deal. … This should be very easy and friendly.”  In another e-mail a week later, Peterson described “YYI” as “our friends who are coming in because WE OWE THEM A FAVOR.”

According to a news release ^[3] from the Justice Department, Peterson faces a maximum five years in prison and a fine of $250,000, or twice his gross gain from the conduct. The Justice Department said in the release that Peterson and unnamed conspirators gained an immediate paper profit of $2.5 million from their illicit real estate transactions. He is scheduled to be sentenced July 17. He is charged with a single count of conspiracy to circumvent internal controls.

Peterson also settled charges with the SEC today, agreeing that he will be permanently barred from the securities industry, pay more than $250,000 in disgorgement and give up his interest in the real estate in question, valued at approximately $3.4 million. The SEC charged him with one count of violating the FCPA, which prohibits payments to foreign officials to win business, a count of violating internal controls and one count of fraud.

The SEC’s foreign bribery team has been examining practices in the private equity industry, including its dealings in the real estate sector. It is unclear however whether today’s action is related to that broader examination. FCPA unit chief Kara Brockmeyer called Paterson a “rouge employee” in a statement today. The SEC also stressed that Morgan Stanley had cooperated with the probe and has not been charged.

Both the DOJ and the SEC emphasized the company’s cooperation and disclosure of the violations.

“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,” said Assistant Attorney General Lanny Breuer said in a statement.  “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.”

The Justice Department said in the release that it had declined to prosecute Morgan Stanley and detailed in the information numerous instances in which Peterson subverted the company’s internal controls or certified his compliance with the FCPA.

“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 release stated. “The company voluntarily disclosed this matter and has cooperated throughout the department’s investigation.”

The criminal case was prosecuted by trial attorney Stephen J. Spiegelhalter and Assistant Attorney General John Nowak of the Eastern District of New York.

Peterson is represented by Abigail Rosen and Frank Wohl of Lankler Siffert & Wohl LLP. His attorneys did not immediately respond to a request for comment.