Was Shleifer Screwed?

Was Andrei C. Shleifer screwed?

Five years ago the U.S. attorney’s office sued Shleifer, a star economist, for conspiring to defraud the government. A federal judge in Boston concurred, and this summer Shleifer agreed to pony up $2 million for his misdeeds.

But Shleifer’s colleagues, at least, still think he hasn’t received a fair shake. “It’s just fucking politics,” one Harvard economics professor told FM last week. “Two million dollars for this? Please. Andrei owed them, at most, a letter of apology. And I think most of us here would agree with that.”

Shleifer faced the lawsuit for some under-the-table investments he made in Russia while leading a U.S.-funded program to privatize the economy there in the 1990s. Conflict of interest provisions in Shleifer’s contract with the government explicitly forbid him from investing in the very economy he was in charge of developing. Harvard was also named in the suit and this summer agreed to pay $26.5 million, the largest settlement in the school’s history, according to a University spokesman.

“Everybody got screwed,” said the economics professor, who asked not to be identified for fear of ruffling feathers within the department.

University President Lawrence H. Summers, a close friend of Shleifer’s, was the first to use that delicate turn of phrase in a deposition he gave in 2002. Professors in the economics department, Summers said, were convinced that “Andrei was in some way or another being screwed.”

Summers, who hasn’t said a word about the case since, didn’t exactly explain how or why the government was treating his friend unfairly. Most of the facts in the case were never in dispute: aside from one semantic argument that went nowhere in court, the only major disagreement from the get-go was how much Shleifer and Harvard would have to pay to resolve the claim.

But if Shleifer was getting screwed by the government, he certainly hasn’t been screwed by Harvard. Since the lawsuit was filed in 2000, Shleifer has received an endowed chair at the University, a hefty raise, and a paid leave of absence. No formal punishment of the professor has been announced, though it’s possible he’s been disciplined internally. Harvard won’t comment on personnel matters.

Another advisor to the privatization program who also made forbidden investments in Russia, Jonathan Hay, was fired by the University once the U.S. Agency for International Development disbanded the program. But Hay was not a tenured professor—or, some skeptics are quick to point out, a friend of Harvard’s president.

The friendship between Summers and Shleifer added an awkward angle to the lawsuit for Harvard. The two men, both recipients of the John Bates Clark Medal, one of the most prestigious awards in economics, used to spend summers together in Cape Cod.

Lawyers for the government pressed Summers about one such get-together with Shleifer in 1996, when the president was then Deputy Secretary of the Treasury. The two of them discussed the Russia program in some depth, Summers tesitified, and even chatted about potential conflicts of interest—the very issue that ultimately landed Shleifer and Harvard in court.

Summers knew that Shleifer’s wife, Nancy Zimmerman, was running a mutual-fund company in Russia—it was the country’s first—and told his friend to be careful. But the conversation, Summers told the assistant district attorney, didn’t go much further. “It wasn’t my habit to do U.S. government business on beaches,” he said.

“There is something really haunting about that walk on the beach,” opined David Warsh in a column on his website, Economic Principals. Warsh was among just a handful of journalists outside Harvard who took an interest in the case. “Surely somebody or something was being betrayed that day.”

A year after that discussion, the government discovered Shleifer’s investments in Russia and disbanded the program. The two men, however, remained close. When Summers interviewed for the Harvard presidency, he stayed at Shleifer’s home in Newton, Mass. (Shleifer mortgaged that house this summer to pay the first $600,000 installment on his settlement.) And after becoming president, according to his deposition, Summers told then-Dean of the Faculty Jeremy R. Knowles not to fire Shleifer.

“I felt that he made a great contribution to the economics department and that I knew there was a lot swirling,” Summers said. “I expressed the hope that Dean Knowles would be attentive to that.”

Summers recused himself from the University’s legal strategy in the lawsuit, and Harvard called in former University President Derek C. Bok as an advisor. But Summers still has control over Shleifer’s fate at Harvard and seems to have stuck by his friend. In 2002, Summers’ first full year as president, Shleifer became the Whipple V. N. Jones professor of economics, adding an endowed chair at Harvard to his already lengthy resume. And the following year, when New York University’s Stern School of Business tried to lure him away with a salary of $500,000 a year, Shleifer got a raise from Harvard to keep him in Cambridge, according to the economics professor who asked not be named.

Shleifer’s legal strategy also benefited from the University’s help. Though Harvard and Shleifer maintained separate counsel, they fought the government’s claims hand-in-hand. In a portion of the case in January that ostensibly affected only Shleifer, Harvard’s lawyers were right there by his side.

According to a report in The Wall Street Journal, Shleifer even went so far as to ask the University to pay his legal bills. But Harvard said no.

It was those rising fees, Shleifer said this summer, that ultimately convinced him to settle. “An individual can fight the unlimited resources of the government for only so long,” he said in a statement. “After eight long years, I have decided to end this now—without any admission of liability on my part.”

Shleifer did not respond to repeated requests for an interview last week. He’d clearly rather put the lawsuit behind him. (As one indication of that, Shleifer’s work on the Russia privatization program appears nowhere on his 11-page curriculum vitae.) This school year, Shleifer is on leave, though he’s been commuting to his office in Littauer Center most weekdays. All along, his frienship with Summers has persisted.

A year ago, according to the economics professor who asked not to be named, Shleifer hosted Summers and several other members of the economics department, at his home to break their fasts after Yom Kippur, the Jewish day of atonement. At one point that night, the two friends played a game of ping-pong. Summers won easily, but the Harvard president is an avid tennis player, so the outcome was never really in doubt. Shleifer, one might say, was screwed.