September 27, 2000
U.S. Seeks Millions in Suit Against Advisers to Russia By CAREY GOLDBERG BOSTON, Sept. 26 — Federal prosecutors today filed a civil suit contending that two Harvard University advisers who helped mold Russia's economic reforms in the mid-1990's misused their government-financed positions in pursuit of personal gain for themselves and their wives.
The two advisers, Andrei Shleifer, a prize-winning economics star and tenured Harvard professor, and Jonathan Hay, a former Harvard legal expert, deny any wrongdoing. Harvard University, too, rejects the accusation that it failed in its obligation to supervise the advisers.
Today the univerity's general counsel called the request for damages — up to $120 million from Harvard and the defendants — far out of proportion to any harm possibly done.
The case, which has been under investigation for more than three years, concerns advisers who worked for the Harvard Institute for International Development, which spearheaded American efforts to help Russia make the transition from Communism to a market economy in the 1990's, and received more than $40 million in government grants to finance its efforts.
United States Attorney Donald K. Stern, who announced the suit today, said in a statement: "The United States paid Harvard for impartial and unbiased economic advice, both in fact and in appearance. Despite clear prohibitions against investing in Russia, Harvard advisers abused their positions and attempted to tip the playing field to their own private financial advantage."
The main accusations concern the advisers and their wives — Nancy Zimmerman, Mr. Shleifer's wife, and Elizabeth Hebert, who was then Mr. Hay's girlfriend and is now his wife. Both women are financial professionals and were actively working on investments and funds in Russia.
The four are accused of making prohibited purchases that include investments of hundreds of thousands of dollars in Russian companies and the creation of a real estate company. Prosecutors also accuse the advisers of using the staff and offices financed by the United States Agency for International Development money to make private investments.
Mr. Hay's lawyer, David M. Zornow, issued a statement on Mr. Hay's behalf today, saying: "Mr. Hay's actions were lawful and proper. Indeed, at the time Harvard's program was in effect, the highest levels of the U.S. government recognized that it was enormously successful."
In fact, prosecutors are not asserting that the Harvard advice given the Russians was bad. But, Mr. Stern said today, the situation was something like an investment counselor who has promised a client unbiased advice and then pushes stock in a company in which he owns shares. The client may make money, but a contract has been broken.
Harvard's general counsel, Anne Taylor, emphasized today that the advisers did not simply have a contract from the aid agency; they were working in cooperation with it, and under its supervision as well.
In any case, "all the services the government contracted for were delivered," Ms. Taylor said. "The government's own evaluation of the project over the years rated it extremely highly."
Furthermore, Ms. Taylor said, the government's complaint against the advisers said they worked to conceal their private investing, adding: "If there's active concealment, it seems to us unreasonable to expect that we could have caught this. Nobody with administrative authority knew about this. Nobody."
Professor Shleifer appears to be taking a different tack in his defense; his lawyer, Earl H. Nemser, issued a statement today saying that Dr. Shleifer and his wife were glad the matter was finally going to court and that the accusations against them "are meritless as a matter in law."
"In the main," it said, "the complaint proceeds from the false premise that Professor Shleifer and his wife were prohibited from investing in Russia." But "as a consultant to the project, as opposed to an employee of the project, Professor Shleifer had a specific consulting contract which did not restrict his investment activities or those of his wife."
Though prosecutors are not criticizing the Harvard advice given Russia, it does seem clear that the accusations, which were first publicly raised by American officials in 1997, harmed both the image of American aid in Russia and the reformers whom the Americans were trying to help.
"When the accusations were first made, there were Russians who said, `You see, the Americans said they would come and be a big help and be selfless, and here they were just like everybody else, dipping in the pot,' " said Marshall Goldman, associate director of the Center for Russian Studies at Harvard, who has also challenged the wisdom of the substantive advice that the Shleifer team gave. "That has caused deep harm."
Early this year, Harvard decided to disband the Harvard Institute for International Development, which had 159 employees and provided technical assistance around the world, saying it had strayed too far from the university's central missions of teaching and research. The Russian case was not a central reason, Harvard officials say, but was illustrative of problems the institute raised.
Previous talks about a settlement between Harvard and the federal government failed, but the prospect for a settlement remains.
"We are always amenable to reasonable discourse with the government," Ms. Taylor said.