Suit Accuses Univ. of Backing Illegal Loan

A real estate developer accused Harvard of backing a loan with 42 percent interest—twice the legal limit—in a lawsuit filed last week.

Fred Fahey, the developer who filed the suit, charged that Harvard and other institutions, including endowments at Yale and Princeton, violated a law that was intended to curb loan sharks, who impose excessive rates on borrowers, often backed by threats of violence.

The lawsuit claimed that Harvard and the other institutions invested in Realty Financial Partners, which charged an interest rate that exceeded state limits. Other parties that were named in the suit included the University of Notre Dame, Oberlin College in Ohio, Spelman College in Atlanta, and the MacArthur Foundation.

Though Massachusetts state law only permits loans below 20 percent, higher loans are permissible if the lender files notice with the state attorney general every two years. David Rich, the lawyer representing Realty Financial Partners, told Bloomberg News last week that the lenders’ notices had been filed on time.

The lawsuit was filed by Fahey, who intended to use the loan to build a 186-home community and golf course in Dracut, Mass.

According to Bloomberg News, Fahey received two loans that amounted to more than $10 million. The interest rate of 42 percent—which was applied to one of the loans that he received—meant that Fahey was required to pay approximately $6.7 million.

Bloomberg News reported that the first time that Fahey sought a loan from Realty Financial Partners was in March 2001.

Fahey is seeking approximately $20 million in damages, the amount he says he would have earned on the project.

The defendants argued in court papers that because they were not directly involved in the investment’s management, state law shielded them from Fahey’s accusations.

The Harvard Management Company’s outgoing president, Mohamed A. El-Erian, could not be reached for comment.

—Staff writer Kevin Zhou can be reached at kzhou@fas.harvard.edu.