Star Economist Accused of Fraud After Russia Project

Facing a potential judgment in excess of $100 million, Harvard’s star economist Andrei Shleifer ’82 has tried in vain to limit his liability in the U.S. government’s ongoing fraud suit against him.

But the case has seen little substantial progress in the 12 months since a U.S. District Court judge found that Shleifer and former Harvard employee Jonathan Hay “conspired to defraud” the government while serving as lead advisors on a U.S.-funded project to privatize the Russian economy in the 1990s.

The project was suspended in 1997 after the government discovered Shleifer and Hay, along with their spouses, had made private investments in Russia while leading the privatization effort. Harvard’s contracts with the U.S. Agency for International Development (USAID) prohibited investments by employees in countries to which they were assigned.

The University itself was absolved of the fraud claims but could still face damages of up to $34.8 million for violating its contracts with USAID.

Shleifer, a close friend of University President Lawrence H. Summers, has continued teaching in the economics department since the suit was first brought. Summers long ago recused himself, and former University President Derek C. Bok has been advising Harvard on the case.

And while Harvard’s own liability has not been at issue since the summary judgement last June, the University’s lawyers have nonetheless participated in Shleifer’s defense, apparently recognizing that their fates in the case are intertwined.

In a brief and ultimately fruitless trial this December, Shleifer’s lawyers argued their client had not technically been “assigned to” Russia and was therefore not bound by the conflict-of-interest provision. Though Shleifer’s title was project director, he conducted most his work from an office at the Harvard Institute for International Development (HIID) in Cambridge.

Lawyers for the government and Shleifer sparred for three days over contractual semantics, wielding four dictionaries and a barrage of metaphors in the process.

“You were assigned to jury duty, and you were then assigned a place to sit,” Assistant District Attorney Sara Bloom told the jury. “But you don’t have to live in your seat to be assigned to jury duty.”

The 12 jurors, many of whom appeared to snooze through some of the trial’s most technical testimony, took just four hours to conclude that, indeed, Shleifer had been assigned to Russia. Their verdict effectively resolved a second count of fraud under dispute in the wider case and left Shleifer open to potentially greater monetary damages.

Hay’s lawyers have indicated they are close to a settlement with the government.

A trial to determine the damages owed by Shleifer and the University won’t begin before next spring. From Harvard, the government is seeking the amount paid out by USAID since Shleifer’s first private investment in Russia in July 1994—$34.8 million. Shleifer, because he was found liable under the False Claims Act, could face triple those damages, for a total of roughly $104 million.

—Staff writer Zachary M. Seward can be reached at seward@fas.harvard.edu.