Govt. Launches Investigation Of HIID Experts

Two years after employees of the Harvard Institute for International Development (HIID) were accused of misusing government grant money while working in Russia, University officials confirmed this week that federal prosecutors have launched an investigation into those charges.

"They have an investigation going on," said Anne Taylor, Harvard's general counsel. "We have cooperated with the investigation."

The United States attorney's office in Boston is conducting the investigation, which The Crimson has learned could lead to a civil case against Harvard and criminal charges against HIID employees Professor of Economics Andrei Schleifer '82 and legal expert Jonathan R. Hay.

Prosecutors are demanding boxes of documents and asking questions of the principal players. But they have yet to indict either Harvard or any of its affiliates, sources close to the investigation told The Crimson this week. The sources speculated that this investigative stage may continue for up to a year.

The probe centers on HIID's work in Russia earlier in the decade, when its experts were hired to help the emerging democracy adapt to a capitalist economy. During these years, Harvard worked closely with pro-Western Deputy Prime Minister Anatoly Chubais.

HIID received millions of dollars from the American government to advise Russian President Boris N. Yeltsin--a contract that was terminated in 1997 when reports of wrongdoing surfaced.

Several years ago the government began to question how much Schleifer and Hay, two principal players in the HIID project in Russia, profited personally from their work and intimate knowledge of the Russian economy.

This alleged personal profit involved using inside knowledge of the Russian economy for personal gain, in some cases to guide investments in government bonds.

In the wake of this scrutiny, HIID has restructured its organization, reviewing its management and strengthening its oversight. Harvard has also created a new institute to take over some of HIID's functions, leaving many to question what the controversial institute's role will be in the future.

A Long Way Down

The federally-funded U.S. Agency for International Development (USAID)-- which provided HIID with a $57.7 million grantto work in Russia--accused Hay and Shleifer ofwrongdoing in a letter sent to Harvard on May 20,1997. USAID wrote that Shleifer and Hay had abused"the trust of the United States Government byusing personal relationships, on occasion, forprivate gain."

USAID claimed an investigation into the Russiaproject showed that Hay, employed by Harvard asHIID's general director in Moscow, used governmentresources to further the investments of Shleifer'swife, Nancy Zimmerman. Hay allegedly did so withthe knowledge and approval of Shleifer, HIID'sproject director at the institute's home office inCambridge.

Zimmerman allegedly used HIID and affiliatedgroups--funded by the U.S. government--asfinancial consultants to guide the Russianinvestments of a hedge fund that she ran.

Hay also bought Russian government bonds andprofited personally from them, USAID alleged inthe letter. Hay's girlfriend, Elizabeth Hebert,has also been implicated in some reports.

USAID suspended the last $14 million of the$57.7 million grant to HIID in late May 1997, andthe agency continued its investigation of the twomen and the institute.

Both Shleifer and Hay denied any wrongdoing tomany national newspapers at that time. Neithercould be reached for comment this week.

Harvard Reacts

Harvard responded to the investigation bystrongly reiterating HIID's policy for dealingwith conflicts of interest. This policy statesthat employees working on an overseas project andtheir family members are forbidden from makinginvestments in the country they are assisting.

"Our rules are stronger and more stringent thanthe government's," said Joe Wrinn, a Harvardspokesperson. "Harvard's own review found HIID'spolicies were fundamentally sound."

The University relieved both Shleifer and Hayof their duties at HIID in the wake of USAID'scharges in 1997.

"Hay was terminated," Taylor said. Shleiferretains tenure and continues to teach at Harvard."There was no determination made at the time that[Shleifer] had done anything wrong."

Taylor added that Harvard is not attempting toinvestigate Shleifer's actions.

Harvard is not the "principal investigator,"Taylor said. She said the University is waitingfor the results of the federal investigationbefore making any decisions.

Sources close to the U.S. attorney'sinvestigation said Harvard does not suspect HIIDhead and Stone Professor of International TradeJeffrey D. Sachs '76 or other top Harvardadministrators of any misuse of funds.

The Shakedown

But HIID has not escaped scrutiny from theUniversity. Harvard hired the accounting firmCoopers and Lybrand, L.L.P. to review theInstitute's management structure. Their report,issued this summer, cited numerous problems withthe oversight of HIID's international operations,according to one source.

HIID Executive Director Richard B. Pagett saidthe Institute is currently following many of thereport's recommendations.

"There is nothing inherent in any structurethat prevents people from doing what theyshouldn't," Pagett said.

Part of the difficulty with the way HIID hadbeen set up, according to Pagett, was that alldepartments reported directly to Sachs.

Pagett said HIID has now added a "second tier"of management--now each HIID department reports toone of six thematic groups.

The University has also created the Center forInternational Development (CID), which Pagett saidconcerns itself with broader, less "applied"aspects of the international development field, ascomplement to HIID.

Before the changes, HIID reported to a councilcomposed of members of the University's faculties.Now Harvard has created a new committee to overseeHIID and a second committee to oversee CID.

The two committees will work "collaboratively,"Pagett said, and should overlap in membership.

And, according to the source, they will meetjointly this spring to take up issues concerningthe future of both organizations.

According to one insider, some inside HIID feelthat the newly-created CID undermines the originalinstitute.

But Pagett stressed CID's different mission,and said HIID's more applied approach is criticalfor the University, even if dealing with "realworld problems" sometimes gets the institute into"murky" territory.

"Harvard could retreat to its Ivory Tower, butthen they should shut down Phillips Brooks Housetoo," he said. "We want a University that...triesto make its expertise available to solve realworld problems."

But, he said, the institute's conflict ofinterest policies remain "clear as they can be."CrimsonPaul S. GutmanThe HIID building, shown above, is at thecenter of an on-going investigation into illegaluse of influence in Russia.

USAID claimed an investigation into the Russiaproject showed that Hay, employed by Harvard asHIID's general director in Moscow, used governmentresources to further the investments of Shleifer'swife, Nancy Zimmerman. Hay allegedly did so withthe knowledge and approval of Shleifer, HIID'sproject director at the institute's home office inCambridge.

Zimmerman allegedly used HIID and affiliatedgroups--funded by the U.S. government--asfinancial consultants to guide the Russianinvestments of a hedge fund that she ran.

Hay also bought Russian government bonds andprofited personally from them, USAID alleged inthe letter. Hay's girlfriend, Elizabeth Hebert,has also been implicated in some reports.

USAID suspended the last $14 million of the$57.7 million grant to HIID in late May 1997, andthe agency continued its investigation of the twomen and the institute.

Both Shleifer and Hay denied any wrongdoing tomany national newspapers at that time. Neithercould be reached for comment this week.

Harvard Reacts

Harvard responded to the investigation bystrongly reiterating HIID's policy for dealingwith conflicts of interest. This policy statesthat employees working on an overseas project andtheir family members are forbidden from makinginvestments in the country they are assisting.

"Our rules are stronger and more stringent thanthe government's," said Joe Wrinn, a Harvardspokesperson. "Harvard's own review found HIID'spolicies were fundamentally sound."

The University relieved both Shleifer and Hayof their duties at HIID in the wake of USAID'scharges in 1997.

"Hay was terminated," Taylor said. Shleiferretains tenure and continues to teach at Harvard."There was no determination made at the time that[Shleifer] had done anything wrong."

Taylor added that Harvard is not attempting toinvestigate Shleifer's actions.

Harvard is not the "principal investigator,"Taylor said. She said the University is waitingfor the results of the federal investigationbefore making any decisions.

Sources close to the U.S. attorney'sinvestigation said Harvard does not suspect HIIDhead and Stone Professor of International TradeJeffrey D. Sachs '76 or other top Harvardadministrators of any misuse of funds.

The Shakedown

But HIID has not escaped scrutiny from theUniversity. Harvard hired the accounting firmCoopers and Lybrand, L.L.P. to review theInstitute's management structure. Their report,issued this summer, cited numerous problems withthe oversight of HIID's international operations,according to one source.

HIID Executive Director Richard B. Pagett saidthe Institute is currently following many of thereport's recommendations.

"There is nothing inherent in any structurethat prevents people from doing what theyshouldn't," Pagett said.

Part of the difficulty with the way HIID hadbeen set up, according to Pagett, was that alldepartments reported directly to Sachs.

Pagett said HIID has now added a "second tier"of management--now each HIID department reports toone of six thematic groups.

The University has also created the Center forInternational Development (CID), which Pagett saidconcerns itself with broader, less "applied"aspects of the international development field, ascomplement to HIID.

Before the changes, HIID reported to a councilcomposed of members of the University's faculties.Now Harvard has created a new committee to overseeHIID and a second committee to oversee CID.

The two committees will work "collaboratively,"Pagett said, and should overlap in membership.

And, according to the source, they will meetjointly this spring to take up issues concerningthe future of both organizations.

According to one insider, some inside HIID feelthat the newly-created CID undermines the originalinstitute.

But Pagett stressed CID's different mission,and said HIID's more applied approach is criticalfor the University, even if dealing with "realworld problems" sometimes gets the institute into"murky" territory.

"Harvard could retreat to its Ivory Tower, butthen they should shut down Phillips Brooks Housetoo," he said. "We want a University that...triesto make its expertise available to solve realworld problems."

But, he said, the institute's conflict ofinterest policies remain "clear as they can be."CrimsonPaul S. GutmanThe HIID building, shown above, is at thecenter of an on-going investigation into illegaluse of influence in Russia.