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Boston Globe
June 29, 2002
Despite suit, Harvard backed project
By Thanassis Cambanis (tcambanis@globe.com), Globe Staff

While several employees of the Harvard Institute for International Development's Russian economic reform project voiced concern with the ethics of its leaders in the mid-1990s, the university defended the project's integrity until the US Department of Justice began an investigation and Russia cancelled the government-funded contract with Harvard, according to court documents.

Harvard president Lawrence H. Summers said in a sworn deposition made public this week that he urged a dean to keep Andrei Schleifer, director of the Russia project, on the Harvard faculty even after Schleifer was named as a defendant in a $102 million civil lawsuit involving the project in September 2000.

Summers and Schleifer are friends and also are colleagues in the field of economics.

The federal government began asking questions about Schleifer and his top deputy, former Rhodes scholar Jonathan Hay, in April 1997, and eventually sued them for fraud because they invested in Russian securities and oil companies affected by the privatization advice they were giving the Russian government.

But Harvard officials initially hesitated to remove the two men from the project, according to documents filed in the government's civil suit against Harvard, Schleifer, and Hay.

The US Justice Department is seeking $102 million in damages, alleging that Schleifer and Hay violated a conflict-of-interest policy barring them from investing in Russia and thus corrupting the entire economic reform plan funded by the US Agency for International Development.

Harvard says the agreement it signed with the government did not prohibit investments that Schleifer, Hay, or their families might have made.

Representatives of USAID informed Harvard officials in early April 1997 that they were investigating Schleifer and Hay for fraud.

The following month, the fellows of HIID wrote a letter to Neil Rudenstine, then Harvard's president, exhorting him to immediately remove Schleifer and Hay from the Russia project.

''Nothing less than HIID's integrity and ability to function effectively in the future is at stake,'' Malcolm F. McPherson wrote on behalf of the Fellows Committee.

The fellows were ''disturbed'' about the lack of response that followed HIID Director Jeffrey Sachs's request weeks earlier that Rudenstine take action against Schleifer and Hay. ''We fear that any further delay will only intensify the damage to the reputations of the Institute and the University,'' McPherson wrote.

In late May, Schleifer was taken off the Russia project and Hay was dismissed.

''We looked into matters promptly as they came to our attention,'' said Harvard spokesman Joe Wrinn. ''We had to take time to look into a complex situation once the allegations came to us. It would be impossible to do otherwise.''

In a deposition given in March of this year, Summers, who was deputy secretary of the US Department of the Treasury when the investigation began, praised HIID's work and said removing Hay and Schleifer from the Russia project in April 1997 had compromised the US government's strategic aims in Russia.

Top Russian officials complained to Summers ''with considerable vigor and bitterness'' when he was a Treasury official that the US government's investigation into the HIID project had hampered their efforts to build the foundations of a free-market economy in Russia. It ''seemed to them to be a kind of unconstructive and hostile act,'' Summers testified.

The allegations against Schleifer and Hays were not ''consequential'' and Russian government reformers probably valued their advice even more ''if they were more involved in actual private sector activities,'' Summers said.

Shortly after assuming the Harvard presidency last fall, Summers recused himself from the Russia case. But he testified that ''at some point'' after being named president he spoke to Jeremy Knowles, dean of the faculty of arts and sciences, in support of Schleifer. He could not recall whether the conversation took place before he recused himself.

''I was concerned to make sure that Professor Schleifer remained at Harvard, because I felt that he made a great contribution to the economics department,'' Summers testified in his deposition. Members of the economics department ''have on repeated occasions expressed the view that Andrei was in some way or another being screwed.''

Schleifer remains a tenured economics professor at Harvard.

''President Summers is not participating in Harvard's decisions regarding the litigation in view of his longstanding relationship with Professor Schleifer,'' Wrinn said.

Numerous ''red flags'' should have alerted Harvard to its employees' misconduct, government lawyers say, making it liable for the alleged fraud.

At least a half-dozen people told Hay they were concerned about an appearance of favoritism toward Pallada Mutual Fund Company, which was primarily owned by Hay's girlfriend at the time and now his wife, Elizabeth Hebert, according to the thousands of pages of documents and deposition testimony made public this week.

Two employees also reported the appearance of conflict of interest to Schleifer.

Once the investigation became public, according to deposition testimony in the case, Schleifer moved to dismiss one of the project employees who had reported the appearance of conflict; she said she was being forced out in retaliation.

Robert Ullmann, Schleifer's attorney, said his client had not violated any rules. ''Schleifer and his family were allowed to invest. His family invested,'' Ullmann said. ''After five years, the government's investigation has not shown that he did anything wrong.''