Harvard May Face Millions in Damages After Employee Fraud

Harvard liable for up to $34 million; two of its economists for up to $102 million

Two University economists “conspired to defraud” the U.S. government by making improper investments while administering Harvard’s government-funded program to rebuild the Russian economy, a federal judge ruled Tuesday.

Jones Professor of Economics Andrei Shleifer ’82 and former Harvard employee Jonathan Hay violated the False Claims Act by making investments in Russia through family while advising the Russian government on its transition to capitalism under a $34 million contract with the U.S. Agency for International Development (USAID), Judge Douglas P. Woodlock found.

Woodlock concluded that the University, which is also a defendant in the federal government’s lawsuit, is liable for breaching the USAID contract due to its employees’ misconduct. But he absolved Harvard of responsibility for the more significant charges of intentional fraud under the False Claims Act, which might have subjected it to triple punitive damages of up to $102 million.

The University could face damages of up to $34 million plus accumulated interest for breach of contract, but because Shleifer and Hay were found to have violated the Act, they may still face damages of up to $102 million plus interest each.

Woodlock is scheduled to consider damages at a July 19 hearing. Because it is a civil suit, none of the defendants bear criminal liability.

While the case may go to a jury trial, a jury could only decide the amount of damages awarded for all but one charge. In that claim, which Woodlock said would have to be decided at trial, Shleifer asserts he was a “consultant” to the project and therefore not subject to USAID conflict-of-interest regulations, while the government argues he is bound by them.

Shleifer, one of the world’s top economists, and Harvard Law School graduate Hay, formerly the top two officials in the now-defunct Harvard Institute for International Development

(HIID), made personal investments in Russia through their families while leading HIID’s “Russia Project,” thus violating USAID conflict-of-interest policy, the government claims.

HIID was hired by the U.S. government in 1992 to advise Russian officials in setting up a market-based economy after the fall of communism. The project ended in May 1997 when USAID suspended and then terminated the program. HIID was disbanded in 2000 by then-University Provost Harvey V. Fineberg ’67.

MIXED DECISION

Woodlock found that Shleifer and Hay are liable for hundreds of thousands of dollars of investments by family members, including investments by Shleifer’s wife and Hay’s girlfriend and father.

While Woodlock found no institutional wrongdoing and concluded that Harvard could not reasonably have known about the misconduct, it is still liable for its employees’ fraud.

“We are pleased that the court did find in favor of the government against each of the defendants,” U.S. Attorney Michael Sullivan told The Associated Press Tuesday. “The remaining issue is really damages.”

Sullivan’s office did not respond to calls for comment yesterday.

Paul F. Ware, an Boston attorney who represents Harvard, said he was gratified by the court’s finding that Harvard as an institution had not intentionally falsified funding requests to USAID when it certified that HIID was in compliance with the regulations governing the grant. That claim would have tripled potential damages.

“The University was encouraged by the court’s conclusion that at no time did Harvard know of or engage in any fraudulent conduct, a position which Harvard has been asserting to the government since the inception of the lawsuit,” he said. “As to the breach of contract claim, even that is a function of conduct of which the University was unaware.”