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November 12, 2004
David Warsh, Proprietor


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“A Narrow and Technical Issue”

Did the customary conflict-of-interest provisions apply to Harvard economist Andrei Shleifer when, under contract to the U.S. government in the mid-1990s, the young professor led Harvard’s mission to Moscow?

After a three-day trial last week, a jury took barely more than two hours to decide that indeed they did.

With the verdict, the government’s case against Harvard University and one of its star economists moved to a new level. Harvard’s potential liability escalated somewhat, beneath a roughly $40 million ceiling.  So did Shleifer’s personal exposure, conceivably as much as $120 million, on a charge of submitting false claims.

U.S. District Court Judge Douglas Woodlock entered a summary judgment against both defendants last summer — Shleifer on a previous count of fraud for having attempted to set up a mutual fund business with a colleague, Harvard on breach of its contract to provide disinterested advice, rather than the treble-damages False Claims Act violation for which the government had asked.

What the jury’s verdict really changed, according to attorneys for two of the three main parties in the matter, were the incentives to settle the case.

Now that Harvard’s bold claim has failed — that it didn’t matter if its chief adviser to the government of Russia invested hundred of thousands of dollars in Russian securities, since he was living in Newton, Massachusetts, at the time and commuting only periodically — attorneys for all sides once again will meet and attempt to come to terms.

If they don’t succeed, a second, longer jury trial looms next spring, to determine what Harvard and its errant professor (and Shleifer’s assistant, lawyer Jonathan Hay) owe as a result of its team leaders’ forbidden investments.  They brought the project, which began in 1992, to an abrupt halt in 1997. The potential for embarrassment is huge.

Harvard’s reaction Thursday was terse. “Today’s verdict related to a narrow and technical issue in the case.  Harvard remains confident that as the matter proceeds we will demonstrate that the work on the Russia Project was of great value to both the Russian Federation and the United States government.”

* * *

The power entrusted to ordinary people in a jury trial is the more astonishing the higher the stakes. It is, as Judge Woodlock observed, “with the exception of a New England town meeting, the last place in which the individual citizen can make important decisions about government directly.”

In the courtroom there are experts on all sides. The lawyers and the judge speak among themselves in low tones throughout the proceedings in a language at once so fluent, terse and hard-to-follow that it might as well be Navajo.  Beforehand, they go over the rules in detail, down to the particulars of where to stand. It is as if they were blocking a play.

At a certain point, 45 prospective jurors troop into the courtroom, sit down and proceed to identify themselves one by one, their towns, their jobs and their spouses’ jobs — forklift operator, unemployed, benefits manager, attorney, company president, nurse, attorney, actuary, school teacher and so on. The lawyers among them are immediately excused from duty, as are any others with interests in the matter at hand.

The attorneys trying the case then huddle together — four for the defense, two for the government — comparing notes, darting glances, consulting lists, until, after a seemingly long time, they have assembled lists of those whose presence on the panel they would challenge peremptorily, no reasons given, only hunches played, singling out those who might be unsympathetic, occupationally or temperamentally. 

Thirty-one citizens are excused on this basis, before twelve are chosen and two remaining candidates returned to the pool.  All at once the average age of the panel drops by a decade, to perhaps 35.  There are eight woman and four men.  None knows anything to speak of about Russia, Harvard, government contracts.

The judge adjures them to pay attention. “Rather than thinking, ‘well, when I get a chance, I’ll look at the transcript,’” he says, “You won’t get a chance to look at the transcript. It won’t be available to you in connection with the trial.” No note taking, either.

The jurors, all of them, remain alert throughout.

And when the government finally rests its case Wednesday afternoon, having invested three days, the jury deliberates for an hour and then goes home. They return Thursday morning. They talk among themselves for a further ninety minutes, enjoy the snack that’s provided, and announce that they are ready to return to the courtroom.

They find for the government.  The judge polls them one by one, compliments them, thanks them for “a relatively short jury service, but a very significant one,” and sends them home with instructions not to talk to the parties to the case without permission.

On the way, outside the courthouse one of them says, “Are you kidding?  Of course he was assigned to Russia. That was clear from the very beginning. How come they had to take three days?”

* * *

Justice Department attorney Sara McLlean made the government’s opening argument. “This is a case about conflict of interest rules and common sense,” she began. “Harvard professor Andrei Shleifer was the head of a very important foreign aid project in Russia, and now his lawyers and Harvard’s lawyers are going to come in here and tell you that the conflict of interest rules for that project didn’t apply to him.

“The conflict of interest rules in question said that people couldn’t invest in the foreign countries to which they were assigned, and as Judge Woodlock has just told you, the question for you is going to be: Was Russia a foreign country to which Professor Shleifer was assigned?”  The answer, asserted McLean, would be yes.

The single most compelling piece of evidence the government offered probably was a letter Shleifer wrote in June 1995 to Jim Norris, the Moscow representative of his employer, the U.S. Agency for International Development.

“Dear Mr. Norris,”

 “Thank you for your letter. Indeed I was well aware of your interest in meeting me. It is certainly my intention to keep you informed about the status of the HIID [Harvard Institute for International Development] projects. I very much wanted to meet with you on my last trip, but it was simply impossible. This was a very short trip, made more or less on an emergency basis at [privatization chief] Maxim Boycko’s request, and I had no spare time at all.

“I arrived in Moscow on Friday evening.  Friday night, Saturday and Sunday morning were spent in a meeting with several Russians…, discussing the possibilities of tax reform in Russia.  The result of this was a memo prepared for Maxim.  Unfortunately, given my understanding with Maxim about the confidentiality of this work, I cannot send you a copy of the memo.

“I spent Sunday afternoon at the Legal Reform Project [which was drafting measures for regulatory reform], discussing mostly personnel issues that were absolutely urgent.  As you probably know, the reduction by USAID of post-differentials has created huge problems for several people, who wanted a compensatory raise and threatened to quit. It appears that these issues have been resolved, but at a great cost of time. I also spent some time on Sunday evening with [Federal Securities Commission chairman] Dimitri Vasiliev and Jonathan Hay discussing the future of the Securities Commission and the GKI.

“As you can see, I had a pretty packed trip — even more so than usual. While I realize that it is important for me to see USAID when I come to Moscow, you should recognize the workload that I have since Maxim’s and [soon-to-be chief economic adviser Anatoly] Chubais’ promotions have been put in place has risen enormously.

“You also have permanent access to Maxim, Jonathan and others who reside in Moscow, and who are obviously intimately familiar with all HIID’s activities.  Thus, while I intended to make every effort to see you, I hope you appreciate the level of activities that I have to monitor and be involved in. And, as I have already mentioned to you…, the efforts to uses others to perform many of these tasks simply have not worked.  I run an extremely lean operation in the U.S. and most people working for us insist on dealing with me.”

Plenty of other evidence was introduced, including various Harvard blandishments of “impartial oversight” in response to government’s help-wanted advertisement that “a completely neutral third party, void of any vested interest in the [privatization] contracting process, is required.”

One Harvard proposal promised, “During the first year, Dr. Shleifer will work full-time on the project, dividing his time between the U.S. and Russia.”

The government also put three top USAID people on the stand to testify to why their understanding that the no-investments proviso applied to Shleifer led them to terminate the contract, as well as former HIID director Jeffrey Sachs, now a Columbia University professor. Sachs testified “You’re assigned to the project, you’re assigned to the foreign country because that’s your work assignment.”

Assistant U.S. Attorney Sara Bloom closed the government’s argument. “In this country, no one is above the law,” she began. “Today these defendants stand before you literally arguing that the rules, the conflict of interest rules of the United States government, do not apply to the Harvard professor who headed a $57 million U.S. government program in Russia.

“Would it make any sense to read this provision to apply to the American secretaries, to the bookkeepers, to the assistants, and not to the man at the top, the man who was giving advice to the Russian officials on the creation of securities markets in Russia, to the man who directed all the other employees, to the man who had the most information about the financial markets in Russia of everyone on the project?”

* * *

Harvard lawyers, on the other hand, and those for Shleifer, argued that the government was deliberately misinterpreting the meaning of “assigned,” in order to hound the leader of a project that had mysteriously fallen into disfavor. And therefore the case was about the government keeping its word.

“Just because it’s a famous school, and just because it’s a big deal to some people doesn’t mean that the government has the right either to back out of or to stretch the language of an agreement with Harvard, and that’s what’s going on here,” Paul Ware of the Boston law firm Goodwin, Procter told the jury.

Early on, Ware spun an elaborate distinction between a homework assignment (“a task or some work”) and assignment to a school bus or a home room (“as place, a physical location”), hoping to buttress his argument that, since Shleifer didn’t have an office, an apartment or a car in Moscow,  he wasn’t assigned to Russia.

“I was thinking about how we could communicate about the different means of ‘assigned,” he told the jury,  “and I think one way in which to do that is to think about the children that you have or you may yet have in your lives. And we often talk, for example, if your child came home and you said to your child, ‘Were you given a homework assignment?’ You would all know what that meant. That kind of assignment would be familiar to you because it has a particular context. …That’s not the assignment that’s being talked about in this contract…

“If, on the other hand, in September of the school year, your child came home from first grade or whatever, and you said, ‘Have you been assigned to a school bus?’ Or, ‘What school bus have you been assigned to?’ or, ‘What homeroom have you been assigned to?’ that would have a different meaning to you.  That wouldn’t be a task. That wouldn’t be homework. That would be a place, a physical location.”

(To which the government’s Sara Bloom later replied, “When you came in here for jury duty, you were assigned to jury duty, right? And not only that, once you got picked for the jury, you got an assigned seat.  It’s a physical location.  But it doesn’t mean you have to live there for a year to be your physical location, to be assigned.”)

The luckiest man in all of Harvard University last week was surely Dwight Perkins, the Harold Hitchings Burbank Professor of Political Economy, director of the Harvard Institute for International Development for the first two-and-a-half years of the Russia Project, and a man greatly admired for his personal rectitude.

Perkins had been scheduled to testify that Shleifer had brought the Russia Project to Harvard, and therefore it was not one to which he had been “assigned” by HIID; that he himself had been listed as principal investigator on the government grant before Shleifer took over, and that he had not felt that the conflict of interest provisions had applied to him, either.

Harvard cancelled Perkins’ appearance at the last minute.

In the end, Harvard called only two witnesses — John Owens, a USAID employee who retired in 1994, who had promised to tell the jury that the conflict of interest provision was so much “boilerplate”; and Kathleen Mercier, from the Harvard University office of Sponsored Research, who acknowledged that she was not consulted nor did she volunteer an opinion about the “assignment” issue throughout the process.

But good lawyering often is about taking words out of context.  So Harvard’s lawyers hammered away at small inconsistencies in the use of the word “assigned” in various e-mails and sworn depositions given by the government’s witnesses, including one taken by telephone after lunch the Thursday before the trial began.

“This is not a case in which a bunch of slick guys from Cambridge are trying to put one over on the jury or avoid responsibility,” said Goodwin, Procter’s Ware at the end of his summation for the defense. Murmured an observer of the local scene, “No, they’re from Boston.”

* * *

Andrei Shleifer was in the courtroom all three days. Early on, his attorney, Robert Ullmann, of Nutter, McLennen & Fish, introduced him to the jury. Shleifer forced a smile.

At 43, Shleifer no longer exhibits the boyish enthusiasm of the teenager who arrived from Russia in 1977 in Rochester, New York, knowing no more English than what he had learned from episodes of “Charlie’s Angels” on television. Within a of couple years, a sharp-eyed recruiter had offered him a scholarship to Harvard College. And there, as sophomore, he entered into a life-changing friendship when he brashly offered to correct the math errors in a paper by first-year assistant professor of economics named Larry Summers.

Today, Summers is president of Harvard University. Shleifer, too, has come a very long way. Despite the legal proceedings that have been grinding on against him for most of a decade, Shleifer has continued to rise in the economics profession. He sold his interest in a prosperous money management firm some years ago; he is a moderately wealthy man. Today, he edits the prestigious Journal of Economic Perspectives for the American Economics Association. He is considered a leading expert on finance, behavioral economics and, of all things, corruption.

To be sure, there are reminders of the old days.  He carries his papers in a canvas bag instead of a briefcase; the middle button dangles by a thread from his suit. He displays the same old seminar-room-bred willingness to engage — behavior his lawyers seek to discourage. Shleifer is, in short, still a man who people want to help.

But also, he is still tough. Still arrogant. By appearances, he is lonely. Mainly, he is a man who does not seem to possess a fundamental understanding of the predicament in which he finds himself — in the dock because of the moral compass of a handful of young government lawyers who considered that even Harvard University with its lofty good intentions must obey the law. He is hoist on his own petard in the very sort of legal system whose robust checks and balances he was supposed to explain to the government of the Russian Federation.

Attorneys for all sides are to file a joint submission on January 28 on various issues in a prospective damages trial.

* * *

So why did the trial take three days?  Why did Harvard spend all that money on a question that took a laughing jury, unanimous from the start of its deliberations (by jurors’ own accounts), little more than two hours to decide?

That is the really interesting question. There’s something unexplained about Harvard continuing to defend the integrity of its professor, the expert on corruption who began investing in Russian securities with his deputy almost as soon as he got the advisor’s job, who argues now that the conflict of interest rules didn’t apply to him.

That’s what makes this such a fascinating case. In putting the meaning of “assigned-to” to a jury, Judge Woodlock gave Harvard the benefit of every doubt. The university replied with sophistry and technicalities, and nothing more. The sheer audacity of putting so weak a case before a jury makes you think there must be something more at stake.

At a minimum, when the collective judgment of those who run America’s oldest university differs so radically from the common sense of its everyday citizens, as expressed by the jury last week, the institution itself must be alarmed, and enter into a deeper self-examination.

And at a maximum? What if the men and women at the pinnacle of American education simply don’t know wrong from right? The “narrow and technical issue” at the heart of Harvard’s ill-fated Russia Project may be one of those innumerable pivots on which American history regularly turns.

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