A Costly Case

One case of faculty misconduct could cost Harvard much more than prestige.

Jones Professor of Economics Andrei N. Shleifer ’82 has been embroiled in an ongoing lawsuit with the federal government stemming from his mid-1990s work privatizing the post-Soviet Russian economy.

Shleifer, then a project director for the now-defunct Harvard Institute for International Development (HIID), was accused by the government in 1997 of making private investments in Russia through family while administering the HIID Russia project under a pair of contracts from the U.S. Agency for International Development (USAID) totalling $57.8 million.

The government filed suit for fraud in 2000, alleging that the investments made by Shleifer and project manager Jonathan Hay, a former Harvard employee, violated USAID’s conflict of interest policy. The University was also named in the suit, which sought over $100 million in damages.

Hay was fired from the University in 1997. Shleifer was removed from HIID but remained on the Faculty.

In 1999 he received the prestigious John Bates Clark Medal, awarded to the most promising American economist under the age of 40; in 2002 he netted an endowed chair at Harvard.

New York University’s Stern School of Business tried to lure Shleifer away from Cambridge in 2002 with a reported half-million dollar offer, but he ultimately decided to stay put. Harvard officials told The Crimson at the time that the University would fight to retain its star professor, though they remained mum on the possibility of a counteroffer.

Last June, Shleifer and Hay were found liable for conspiring to defraud the government. Federal Judge Douglas P. Woodlock found that the two economists had violated the False Claims Act and that their actions made Harvard liable for breach of contract.

The University may now face damages of up to $34.8 million for its employees’ misconduct; Shleifer personally faces damages of up to $104 million plus interest. (Please see story, page C2.)

Harvard has not publicly admonished or disciplined Shleifer in any way since the case began, and he continues to teach and research at the University.

Shleifer has asked Harvard to pick up the tab for his legal fees, The Wall Street Journal reported in October. But the Corporation—Harvard’s top governing body—declined to hear an in-person appeal from the economist, the Journal reported.

University and FAS spokesmen declined to comment on Shleifer’s request and on whether Shleifer has been internally disciplined, saying that the case is ongoing. Shleifer did not return repeated requests for comment.

If the University had taken action against Shleifer, one lawyer says Harvard’s liability in the case would likely not have been affected.

“In a criminal trial it’s unlikely that an action taken in an internal employee disciplinary matter will be entered into evidence of that case,” says John F. Stoviak ’73, an attorney in Philadelphia who has handled several fraud cases. He adds that most courts would be reluctant to use this type of evidence in civil trials as well.

University President Lawrence H. Summers, a close friend and longtime mentor to Shleifer, has legally recused himself from the affair.

But Summers—who stayed at Shleifer’s home when he interviewed at Harvard for the presidency in 2000, and has spent summers with the economist in Cape Cod—has said in the past he was “concerned to make sure” that Shleifer stay at Harvard.

In a deposition given to U.S. attorneys on March 13, 2002, Summers testified that he had spoken to then-Dean of the Faculty Jeremy R. Knowles about Shleifer, after Summers had been selected for the presidency of the University.

“I expressed to Dean Knowles at some point that I was concerned to make sure that Professor Shleifer remained at Harvard, because I felt that he made a great contribution to the economics department and that I knew there was a lot swirling, and expressed the hope that Dean Knowles would be attentive to that,” Summers testified.

According to his testimony, Summers did not recall whether the conversation with Knowles had taken place before or after his decision to recuse himself from the case.

Summers also testified that he was aware of a perception in Harvard’s economics department that “Andrei was in some way or another being screwed.”

Citing Summers’ decision to recuse himself, the president’s spokesman declined comment on the case.