Russian Fallout

In September, the U.S. Department of Justice filed suit in federal district court in Boston, seeking $120 million in damages from Harvard University, one tenured professor, and three other individuals who, the complaint alleges, defrauded the government and "abused their positions as high-level and trusted advisers to, and on behalf of, the United States in Russia."

The civil suit climaxes a three-year investigation into the actions of professor of economics Andrei Shleifer '82 and his colleague Jonathan Hay, J.D. '92, who headed a Harvard Institute for International Development (HIID) project intended to help the Russian government restructure its economy and its political institutions (see "Harvard in Russia: Conflicts of Interest," July-August 1997, page 63). The U.S. attorney also considered a criminal indictment, but concluded that the evidence fell short of standards of proof for criminality. Because the government, through the U.S. Agency for International Development (USAID), spent $40 million on the Russian project from 1992 to 1997, the suit asks for triple damages of $120 million, the maximum the law allows if defrauding the government is proven.

Shleifer and Hay, plus Shleifer's wife, Nancy Zimmerman, and Hay's wife (then companion), Elizabeth Hebert, stand accused of several conflicts of interest involving their private investments in parts of the Russian economy touched by their development advisory work. HIID's then-director, Stone professor of international trade Jeffrey Sachs '76, Ph.D. '80, removed the two men from the project in 1997, citing their violation of HIID's strict conflict-of-interest rules, which prohibited advisers even from keeping their personal funds in interest-bearing accounts in local currencies. USAID terminated funding soon thereafter. (Sachs resigned as HIID director in 1999 and this year, the University closed down HIID entirely; see "HIID, Dismantled," March-April, page 77.)

In response to the civil suit, Shleifer's attorney, Earl Nemser, asserted that his client was a consultant on the project, not an employee, and so was not bound by any restrictions on his personal investments. Nemser claims that Shleifer was at all times an employee of Harvard, even during the year-long leave of absence when he was in Moscow directing the project. However, the thrust of the government's complaint is that the defendants violated not HIID's or Harvard's conflict-of-interest rules, but provisions of the cooperative agreement between the University and USAID. In particular, U. S. attorney Donald Stern claimed, "The United States paid Harvard for impartial and unbiased economic advice, both in fact and appearance."

Stern also charged that "Harvard failed miserably in its obligations to oversee this overseas project." Noting that the complaint itself refers to the secretive nature of the alleged self-dealing activities--for example, asserting that Shleifer, Zimmerman, and Hay bought several hundred thousand dollars' worth of stock in Russian oil companies in the name of Shleifer's father-in-law--University vice president and general counsel Anne Taylor responds: "To my knowledge, absolutely no one at Harvard was aware of these alleged investments. If, as the government claims, there were efforts to conceal things such as purchasing stocks outside the workplace, it's hard to imagine how the University could have known about them."

Taylor also questions the government's settling of supervisory responsibility entirely on the University's shoulders. The cooperative agreement between USAID and Harvard stipulates that both institutions share management of the venture, and USAID had a Moscow office that never found anything amiss with the project, which by all accounts dispensed first-rate economic and political advice to the Russian government. "Yet now," says Taylor, "it is only Harvard that is alleged to have failed."

Taylor adds, "We've asked the government time and again to be forthcoming about the evidence on which these claims are based." However, with sporadic exceptions, "We haven't had access," she says. "Once discovery starts, we'll be able to learn about this and get a better handle on what responsibility the University might have in the matter. We are a stand-up institution and will do the right thing." Quite possibly, the lawsuit will eventually be settled out of court.

Andrei Shleifer's Inefficient Markets
[buy this book]


The investigation so far has hardly slo

wed the academic career of Shleifer, who last year received one of the most prestigious prizes in economics, the John Bates Clark Medal, given biennially by the American Economic Association to an economist under age 40 who has made the most significant contribution to the field. The award recognized his work in examining securities markets and the role of government in regulating markets and fostering economic growth. Shleifer has published two books in recent years; the newest is Inefficient Markets: An Introduction to Behavioral Finance. The other, with Daniel Treisman, Ph.D. '95, is Without a Map: Political Tactics and Economic Reform in Russia.

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