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RPT-SPECIAL REPORT-A Morgan Stanley star falls in China

*Firm’s probe finds ex employee may have bribed officials

*U.S. and Chinese government investigations continue

*Number of corruption cases in China are on the rise (Repeats item from Nov. 10)

SHANGHAI/NEW YORK, Nov 10 (Reuters) - 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 MS.N 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 Oct. 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.