News
Harvard Square Welcomes Egyptian-Influenced Luxor Cafe
News
HUD Acting Secretary Breaks Ground on Cambridge Affordable Housing Project
News
HUA Funding Remains the Same Despite 10 Percent Drop in SAF Funding
News
Cambridge School Committee Talks MCAS Scores, Superintendent Search
News
The HUA Formed a Team to Resolve a Constitutional Crisis. It’s Not Going Well.
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.”
Harvard asserts that despite the breach of contract claim, its work in Russia was still valuable and thus it should not be subject to repayment of the entire $34 million grant.
But Shleifer was found liable for conspiring to get the U.S. government to pay false claims on the project because he knew about the investments when funding requests were submitted. Shleifer was traveling and could not be reached for comment, his assistant said.
Earl H. Nemser, a New York lawyer representing Shleifer, said he was pleased that the judge had narrowed the case, dismissing charges that Shleifer made—rather than conspired to make—fraudulent claims.
“It’s something we can kind of put our arms around and put some definition to,” he said. “In that respect, we’re a lot further along than we were before.”
“We think that several aspects of the court’s decision will probably not withstand analysis and we would intend to pursue those aspects further in the court proceeding,” he added.
The court’s findings against Hay, who currently practices law at the London office of Cleary, Gottlieb, Steen & Hamilton, were most serious. He was found liable for entering false claims, making false statements in support of false claims and conspiring to defraud the government to pay false claims.
“A reasonable jury could only conclude that Hay was acting in reckless disregard” of his duties, Woodlock decided.
Hay and his New York lawyer, Lawrence S. Spiegel, declined comment yesterday.
IS THE DAMAGE DONE?
The government argues that Harvard should be liable for the entire value of the contract because conflicts of interest tainted the project.
“The government contends that the conflict of interest rendered HIID’s advice to Russia worthless,” Woodlock wrote.
The University maintains that the government must show “actual harm,” noting that the government is unlikely to get the millions of dollars it seeks.
“In all likelihood any damages assessed against Harvard for the contract violation would be only a fraction of the damages originally sought by the government,” the University said in a statement.
“The government’s claim that the work on this project was valueless is an insult to the scores of HIID employees and consultants who gave their souls to this project,” said David J. Apfel, who was then representing the University, when the University filed arguments disputing the claims last year.
Nemser added that he doubted Shleifer would be liable for anywhere near the $102 million the government could seek.
“We’re not in a world of big numbers,” he said. “What Professor Shleifer could be on the hook for would not be appreciable.”
Nemser and Ware both said they hoped the project’s successes would be weighed when considering damage awards.
“Professor Shleifer received great praise for the project,” Nemser said. “Against that background, it’s very hard that the government would be able to prove any damage at all—they certainly haven’t been able to come up with a theory of damage that has impressed anyone at this point.”
Woodlock is set to determine the future course of the case, including a potential trial on damages and unresolved claims, at the July hearing. While the parties could settle, Nemser said his team is not currently in talks with the government, although it has been at various points in the past.
The University has already settled a related civil fraud claim filed by Maine mutual fund company Forum Financial Group. Forum had alleged that Hay and the University deprived it of millions of dollars in profit from the rights to Russia’s first mutual funds firm.
The settlement was reached in November 2002 and its terms were undisclosed.
Dean of the Faculty William C. Kirby, who could consider disciplinary action against Shleifer, declined comment through spokesperson Robert Mitchell yesterday, citing the ongoing litigation.
University President Lawrence H. Summers, a close friend of Shleifer, testified in depositions released in summer 2002 that after his selection to lead the University, he urged then-Dean of the Faculty Jeremy R. Knowles to keep Shleifer at Harvard.
“I expressed to Dean Knowles at some point that I was concerned to make sure that Professor Shleifer remained at Harvard,” Summers testified. “I felt that he made a great contribution to the economics department.”
He also said that there was a perception in the economics department “that Andrei was in some way or another being screwed.”
Summers has legally recused himself from the case and internal University considerations of the matter.
—Staff writer Stephen M. Marks can be reached at marks@fas.harvard.edu.
Want to keep up with breaking news? Subscribe to our email newsletter.