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 U.S. authorities, declined to comment on its specifics.

After a nine-month internal investigation, the bank has turned its findings over to the U.S. Department of Justice and U.S. 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 U.S. 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. U.S. 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 U.S. 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 U.S. 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 <4915.Q>, 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 expatriate 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.

OFFICE TURBULENCE

At around this time, Peterson developed what sources describe as a swagger that rubbed some colleagues the wrong way.

I can understand why he is cocky, said one former colleague of Peterson. Blame his fast promotion and high pressure.

The source added, In Peterson's role, you have to appear tough, strong and even sometimes arrogant. That's the nature of the job. It's a rich job but it can also be very distressing.

In the property investment industry, the two most important roles are buyer and operator.

Peterson's role was always the buyer while Robert Naso, a Morgan Stanley Real Estate executive director in Shanghai, was the operator. Naso would improve the projects or properties acquired by Peterson, and then help market them to a new buyer for a higher price. The two worked closely, according to one former colleague.

In May 2008, Naso was transferred to Singapore with a new title -- Asia head of asset management for Morgan Stanley Real Estate. Five months later, Peterson's boss, Zain Fancy, a Pakistani who was based in Hong Kong, announced he was leaving.

His departure was followed by three others. Sonny Kalsi, Morgan Stanley's global head of real estate, was dispatched to the Shanghai office to pick up the pieces.

From Singapore, the firm's Asia management team launched a region-wide review in mid-2008 of all major Morgan Stanley Real Estate projects in Asia. The review was initially intended as a reassessment of investment strategies, giving Asia project managers like Naso a full picture of Morgan Stanley's regional portfolio.

SUSPECTED PROBLEMS

During the review, some projects handled by Peterson were reported internally by Morgan Stanley compliance officers for suspected problems.

Peterson was fired in December 2008. In February, the firm announced in a regulatory filing that it had uncovered actions by an employee in China that appear to have violated the Foreign Corrupt Practices Act.

Sources identified that employee as Peterson.

As a result of the disclosure, the firm put Kalsi and Andrew Yoon, the chief financial officer for the Asian real estate business, on administrative leave. Kalsi recently resigned from Morgan Stanley, but Yoon is planning to return to the firm.

A spokeswoman for Kalsi said Morgan Stanley's internal investigation found no evidence that Kalsi caused or authorized the alleged misuse of assets. She added that he played a key role in initiating Morgan Stanley's internal investigation.

Morgan Stanley lawyers interviewed employees and reviewed more than 7.4 million pages of e-mail and related documents, all at Morgan Stanley's expense, according to the investor letter.

The investigation found that in a discrete number of instances, investment assets were used for improper purposes not authorized by senior management, the letter said.

CORRUPT PRACTICES

Cultural differences make China an especially tough place when it comes to corruption.

What might be seen as a bribe in other countries too often is seen as just business in China, said Philip Urofsky, a former U.S. Department of Justice attorney who holds the distinction of trying more Foreign Corrupt Practices Act cases than any other DOJ attorney.

(For a graphic on corruption in China, click on http://graphics.thomsonreuters.com/119/CN_CORRUP1109.gif)

It's a gift-giving culture, said Michael Pace, a senior managing director for FTI Consulting in Chicago and a former federal prosecutor. When the government or a government-owned entity is your customer, there can become serious FCPA question by even giving modest gifs.

Blake Coppotelli, a senior managing director in the New York office of the risk consultant Kroll, said he is seeing an increase in clients with concerns about doing business in China.

It is just accepted practice that government officials at the local level or higher might have some expectation of benefits being provided, Coppotelli said. The problem is that it has been endemic and breaking that endemic cycle and breaking the cultural acceptance of it takes time.

THE GUANXI NETWORK

There was nothing subtle about Peterson's pursuit of guanxi -- and riches.

In July 2003, Morgan Stanley Real Estate and Shanghai Yongye Group announced their first partnership -- a roughly $90 million investment in a real estate project to build a top-end apartment building in the Xintiandi area, a famous bar and nightlife area in downtown Shanghai.

As a result of that deal, Peterson became more influential in Shanghai's property and government circles.

Shanghai Yongye was backed by Shanghai's local Luwan district government. Luwan is to Shanghai as midtown is to New York city. Shanghai Mayor Han Zheng is a former Luwan district chief.

Wu Yonghua, former chairman of Shanghai Yongye Group, was a friend of Peterson's who introduced him other Chinese officials, expanding the American banker's guanxi network.

Wu's daughter, Linda Wu, was hired by Peterson to join Morgan Stanley Real Estate's Shanghai office as an associate after she finished her studies in the United States. She resigned around the same time Peterson was fired in late 2008.

A source with direct knowledge of the situation told Reuters that U.S. and Chinese investigators were interested to know more about the connections between Wu Yonghua, Wu's daughter and Peterson and wanted to investigate if her hiring was part of a quid pro quo.

SHANGHAI DRAGON

About one year after the first Shanghai Yongye project, Morgan Stanley Real Estate announced an alliance with Shanghai Dragon Investment Co, a low-profile but highly important investment arm of the city government.

The purpose of the partnership was to seek investment opportunities in Shanghai's real estate deals, according to Chinese media reports at that time.

The deal came complete with guanxi opportunities. Shanghai Dragon was led by a government entity. Chen Liangyu, Shanghai's then-Communist Party Chief and effectively the city's top boss, often oversaw Shanghai Dragon directly.

Shanghai Dragon rents a villa in the Xingguo Hotel as its office. The Xingguo Hotel, a state guest house near the U.S. Consulate-General in Shanghai, was one place where Mao Zedong, the founder of the People's Republic of China, and his third wife, Jiang Qing, often stayed.

CORRUPTION PROBE

In late 2006, Chen was detained by investigators from the central Chinese government amid a snowballing corruption probe, which cost dozens of senior Shanghai and Beijing officials' jobs or even lives.

Between 2007 and 2008, the city's state asset supervision commission, which was in charge of Shanghai Dragon, was shaken up as most senior officials at the commission were arrested, sentenced or fired.

Shanghai Yongye's Wu, a government official-turned businessman, resigned in mid-2007 amid a widening investigation into senior Shanghai officials, including a long-time strong government ally of Wu.

When Beijing sent dozens of investigators to Shanghai for the Chen Liangyu case, some officials suspected connections between Peterson and Shanghai officials, but evidence was scant, according to one government source familiar with the situation.

At the time Peterson was fired by Morgan Stanley in 2008, Beijing investigators were alerted and monitored the Peterson case closely, the government source added.

The investigation by the Shanghai city government targeting local officials related to the Peterson case is still ongoing, according to the government source.

A COMEBACK?

Once the investigations conclude, Peterson plans a second act in the real estate investment industry, a friend said.

He is unlikely to be jailed as he and the firm are expected to pay damages and fees, possibly through a deferred prosecution agreement, said industry sources who were not directly involved in the Peterson case but familiar with similar FCPA cases.

Peterson, meanwhile, is now living in Singapore. He told a friend that he is unlikely to return to China, but would explore other emerging markets in Southeast Asia.

Wherever he ends up, he won't be able to count on his guanxi. (Reporting by Steve Eder in New York and George Chen in Shanghai; Editing by Jim Impoco)

Investment China Morgan Stanley