Securities and Exchange Commission v. Peterson

Filing 12

MEMORANDUM ON PROPOSED SETTLEMENT AGREEMENT. Ordered by Senior Judge Jack B. Weinstein, on 5/9/2012. (Barrett, C)

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filED
IN CLERK'S OFFICE
U.S . DI STRICT COURT E.D.NY

* MAY 10 2012 *

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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UNITED STATES OF AMERICA

BROOKLYN OFFICE

MEMORANDUM
: ON PROPOSED SETTLEMENT
AGREEMENT

- againstGARTH PETERSON,

12-CR-224
Defendant.

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SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff,
- against-

12-CV-2033

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GARTH RONALD PETERSON,
Defendant.

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JACK B. WEINSTEIN, Senior United States District Judge:
Before the Court are two related cases involving the same defendant, Garth Peterson:
In the criminal case, 12-CR-224, the defendant has pled guilty to conspiracy to
circumvent internal controls in violation of 18 U.S.C. § 371. He is scheduled to be sentenced on
July 17,2012.
In the civil case, 12-CV-2033, a hearing was held on May 2, 2012 on a motion seeking
approval of the Securities and Exchange Commission's (SEC) proposed settlement agreement
with Peterson. He is accused of violating the anti-bribery and internal controls provisions of the
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Foreign Corrupt Practices Act of I 977-specifically, Sections 13(b)(5) and 30A of the Securities
and Exchange Act of 1934,15 U.S.C. §§ 78m(b)(5), 78dd-I-and of aiding and abetting
violations of the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-6(l)-(2).
A district court has the duty to determine whether a consent decree based on a proposed
settlement is "fair and reasonable." See, e.g., SE.C v. Wang, 944 F.2d 80,84-85 (2d Cir. 1991).
Necessarily considered, among other factors, is the connection between the settlement and any
related pending or prospective criminal or civil cases. The same defendant may be subject to
multiple obligations, including the need to pay restitution to victims of his criminal conduct;
private civil damages as a result of breach of contract or tortious activities; fines; and forfeiture
to the government in both criminal and civil actions.
Because the rights of one party to be compensated for its losses may conflict with those
of others, coordinated treatment is necessary. See, e.g., Adam S. Zirnmerman & David M. Jaros,

The Criminal Class Action, 159 U. Pa. L. Rev. 1385, 1439-41 (201 I); Essay, Compensation/or
Mass Private Delicts: Evolving Roles 0/Administrative, Criminal, and Tort Law, 2001 U. III. L.
Rev. 947, 975-981 (2001); see also, e.g., United States v. Kenneth Marsh, et al., 1O-CR-480
(E.D.N.Y.), with related case, Securities and Exchange Commission v. Gryphon Holdings, Inc.,
10-CV-1742 (E.D.N.Y.).
In the instant case, the SEC admitted that the defendant has limited assets. It crafted its
proposed settlement accordingly, waiving disgorgement of25% of Peterson's ill-gotten gains
"based on [the defendant's] demonstrated inability to pay and promise of cooperation with the
SEC and any Receiver appointed by the Court." PI. SEC's Letter in SUpp. of Approval and
Entry of the Proposed Consent J., Case No. 12-CV-2033, Doc. Entry 6, May 1,2012. In light of
the settlement agreement and the complexity of the asset transfers involved, the United States

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Attorney decided to forgo forfeiture in the parallel criminal case. See Tr. ofHr'g, Case No. 12CV-2033, May 2, 2012.
The SEC's proposed settlement apparently did not reflect any restitution that might be
owed to victims of Peterson's criminal conduct. Since the funds available to the defendant are
limited, the disgorgement sought by the SEC could prevent his victims from recovering under
the mandatory restitution statute. See 18 U.S.C. §§ 3663A-3664. Nor does it take into account
any possible private civil action that might look to Peterson's assets for recovery of a damage
award .
At the hearing on the proposed settlement in the SEC's action, the question was put by
the court to the attorney for Morgan Stanley, the defendant's former employer, whether the bank
would seek restitution in the criminal case. It is likely that the bank would be considered a
victim and would be eligible to collect restitution if it chose to exercise its rights in the criminal
case. See 18 U.S.C. § 3663A(a) ("(1) Notwithstanding any other provision oflaw, ... the court
shall order, in addition to . . . any other penalty authorized by law, that the defendant make
restitution to the victim of the offense or, if the victim is deceased, to the victim's estate. (2) For
the purposes of this section, the term "victim" means a person directly and proximately harmed
as a result of the commission of an offense for which restitution may be ordered .... ").
At the hearing, Morgan Stanley initially stated that it had no objection to the settlement
agreement proposed by the SEC, but indicated that it had not yet decided whether it would make
a claim for restitution or some other remedy at a later date. In order to preserve Morgan
Stanley's right to recover possible restitution, the court orally suggested that paragraph five of
the SEC's settlement agreement be amended by adding the following (language to be added in
italics):

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The clerk shall deposit the funds into an interest bearing account utilized by the
Court. These funds, together with any interest and income earned thereon, shall be
held in the interest bearing account until further order of the Court, including an
appropriate order in connection with the sentence to be imposed as restitution, if
any, in the criminal case, United States v. Peterson, 12-CR-224. By making this
payment, defendant relinquishes all legal and equitable right, title and interest in
the fund and no part of the fund shall be returned to defendant.
See Tr. of Hr'g, Case No. l2-CV-2033, May 2,2012. The parties were granted a short
continuance to discuss the issue.
When the parties reconvened, Morgan Stanley, through its counsel, stipulated that it
would not seek restitution in the criminal case. It reserved the right to pursue civil relief in a
separate proceeding at a later date. A subsequent letter confirmed this decision. See Letter from
Morgan Stanley, Case No. 12-CR-224, Doc. Entry II, May 4, 2012.
In light of Morgan Stanley's stipulation and the lack of any conflict between the plea in
the related criminal case and the SEC's proposed settlement agreement, the additional language
suggested by the court is not necessary. No other restitutee is in in the offing.
So far as a possible civil lawsuit by Morgan Stanley is concerned, there is no reason to
believe that it would be contingent on, or interfere with, the outcome in the instant related
criminal and civil cases. By failing to take action civilly, Morgan Stanley may find itself with a
judgment debtor bereft of funds because the government has stripped him, but that will be due to
the bank's litigation decisions. The court has put it on notice of the implications of approval of
the proposed settlement and acceptance of the plea.
The detailed reasons for the settlement outlined by the SEC fully support its
reasonableness. See PI. SEC's Letter in Supp. of Approval and Entry of the Proposed Consent J.,
Case No. 12-CV-2033, Doc. Entry 6, May 1,2012. The proposed agreement is approved.

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SO ORDERED.

Jack B. Weinstein
Senior District Judge
Dated: May 9, 2012
Brooklyn, N.Y.

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