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January 26, 2003
David Warsh, Proprietor


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A High-Stakes Mediation that Failed

The stand-off over the Andrei Shleifer case is scheduled to become even more tense next week, when Harvard University lays out the reasons why it believes it shouldn’t be prosecuted for the lax supervision of one of its star professors under the provisions a Civil War statute designed to deter contractors who sold the government tainted meat.

At that point, the question will be up to US District Court Judge Douglas P. Woodlock. He will be in a position to decide the case himself, or give some part of it to a jury.

Looming in the background is the hard bargain, proffered by the government, apparently declined last year by the university.

When Harvard’s lawyers asked the judge to decide the case in their favor on the basis of the small mountain of evidence that has been adduced through depositions and discovery, they affected a jaunty stance last summer:

“From December 1992 through May 1997, scores of talented and committed Harvard Institute of International Development advisors, including Andrei Shleifer and Jonathan Hay, gave advice to Russian government reformers regarding, among other things, the privatization of formerly state-owned industries, legal reform, tax reform, and the development of a stock exchange, a Russian Securities and Exchange Commission, and capital markets.

“HIID’s advisers worked round the clock and, as the government itself has acknowledged, did superb work helping to solidify the political and economic revolution in Russia.”

True, the Harvard brief acknowledged, a “handful of nominal personal investments” in Russian securities apparently had been uncovered. Shleifer (or at least his wife) had made them, as had his deputy Hay, while the two were being paid by the US government to serve as advisors to the Russian government.

Harvard denied that the investments violated the conflict of interest provisions of its contract. And even if it turned out otherwise, its lawyers mocked the US’ claim that all the team’s work under the contract had been rendered valueless by the behavior of the men at the top.

But beneath the bravado there is real concern.

For when it comes to the history of the application of the False Claims Act, the government’s argument is strong. When Boeing Co. knowingly delivered helicopters with faulty landing gear, for example, its false claim was judged to be the full price of the aircraft — even though every other component worked fine.

What does Harvard really think about what transpired during the mission to Moscow that it sponsored in the 1990s?

It depends, of course, on what you mean by “Harvard.”

One indicator is the fate of HIID, the university-based consulting service whose ancestry can be traced back to an advisory group founded in 1953 by Edward Mason to advise the government of Pakistan. Almost immediately after the US government began its investigation of the Russian project in 1997, the university assembled a task force of blue-ribbon insiders to study the arrangement.

And when HIID’s regular biennial report was issued in the spring of 2000, celebrating some twenty country projects abroad and another twenty based in Cambridge, inside the front cover of each report was tucked a printed card.

“While the manuscript for this biennial report was at the printer, Harvard University made the decision to dissolve HIID and to distribute its functions and projects to several of the teaching faculties with closely related interests.” The vanishing act had been performed by June 30 — even before the report was in the mail. Grand undertakings don’t end more unceremoniously than that.

If the decision to disband the institute was intended to forestall further unpleasantness, it didn’t work. Three months later, the US attorney in Boston filed suit against Harvard, Shleifer, Hay and their respective wives under the False Claims Act, seeking treble damages. (The judge subsequently dismissed the spouses from the complaint.)

Another measure of Harvard’s attitude is to be found in a failed mediation effort. Barely five weeks after the complaint was filed, US District Court Judge David Mazzone undertook an alternative dispute resolution on behalf of the court. (It was Mazzone who presided over the highly-successful clean-up of Boston Harbor — one of the recent landmarks of court-supervised negotiation.)

According to a source with knowledge of the case, after five months of talking, Harvard offered to settle the charges against it for $24 million, or two-thirds of the total value of the contract.

The government insisted on repayment in full, the source said. Negotiations broke down, and Judge Mazzone withdrew from the case last March. A second source confirmed that a settlement was considered to have been near, but was unable to confirm the figure. Harvard declined to comment.

Would it have been better if the government had accepted Harvard’s offer to return a startlingly large portion of its fee? Certainly the defendants think so. The government’s decision to shoot the moon, Harvard’s decision to resist the slam, will be debated in legal and political circles for years to come.

For now Harvard is facing a potentially much more serious embarrassment. The US wants more than $120 million — a huge sum even for the world’s richest university. The government believes that every card in its hand will take a trick.

That is some of the background necessary to understand coming events.

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