It was in 1974 that Harvard University created the Harvard Institute for International Development. Since 1947, the university’s little Development Advisory Service (the brainchild of economist Edward Mason) had been providing relatively disinterested macroeconomic advice on development projects to foreign governments, starting with Pakistan soon after its partition from India.
Its small corps of development experts served as links between Harvard professors in the sciences, law and economics and various officials in the countries that they advised. These were latter-day counterparts of the men who built agriculture extension services in the industrial democracies — men and women who could have made livings as college teachers but who preferred life in the borderlands, teaching everything from economic policy and public finance to public health and environmental management to those who otherwise would be bound to traditional methods. They traveled frequently, mastered languages, built their relationships.
And during the long Cold War, they relied on the ideals of academic disinterestedness and universalism to shield themselves from untoward influences. They cultivated an essential independence from the U.S. government, in order to retain the trust of their governmental hosts.
By the mid-1970s, demand was surging for Harvard’s (and many other universities’) services as an honest supplier of interdisciplinary knowledge to governments of newly industrializing nations and former command economies. The seven projects HIID inherited from DAS grew to nearly forty engagements in nations ranging from Indonesia and Vietnam to Ukraine, Bolivia and Mauritius. Some 200 persons worked for HIID all over the world, half of them professionals.
Then in 1992, an economics professor newly recruited to Harvard from the University of Chicago attracted a landmark project — a mission to advise the government of Russia on behalf of the U.S. Agency for International Development on how to quickly build a market economy where there had been none before.
Andrei Shleifer, who had himself emigrated with his family from the Soviet Union as a teenager fifteen years before, became the first Harvard faculty member to actually lead an HIID mission himself, rather than defer to a development professional.
He was no stranger to Cambridge, having graduated from Harvard College in 1984 and the Massachusetts Institute of Technology in 1986.
Suddenly, the 31-year-old Shleifer, a theorist and expert on finance, was catapulted into the top-most ranks of the world’s “country doctors,” traveling frequently to Moscow; vacationing with Russian privatization chief Anatoly Chubais. His oldest friend, economist Larry Summers, was monitoring US economic policy in Russia as Assistant Treasury Secretary for International Affairs. His wife became a celebrity manager of hedge fund with extensive investments in Russia. Within a few years, Harvard University had invested nearly 2 percent of its endowment in Russian securities.
Five years later, his $34 million project collapsed amid charges of corruption. Shleifer, his deputy, former Rhodes Scholar Jonathan Hay, and their wives, were accused of buying several hundred thousand dollars’ worth of Russian stocks, bonds and, perhaps most important, jumping to the head of the queue in order to receive, from the Russian Securities and Exchange Commission they advised, the first license to offer mutual funds in Russia — a potential goldmine.
After whistleblowers in Moscow complained, USAID investigated and fired Harvard. The Russian government, whose senior economic officials had grown close to Shleifer, severed its relationship with USAID in return. Harvard removed Shleifer as project director and fired Hay altogether
The U.S. attorney in Boston eventually sued Harvard, Shleifer and Hay for civil fraud, seeking treble damages, or something like $120 million from each.
Harvard, meanwhile, had quietly undertaken an extensive internal review. And HIID published its Biennial Report, celebrating twenty-five years of growing influence and success, just months before the government filed suit in September 2000.
Tucked inside each front cover was a black-bordered card announcing that Harvard had decided to abolish the organization, effective almost immediately.
Many of its people and projects eventually would be moved into various teaching faculties, it said. But the bottom line was that HIID’s 200 employees were out of their jobs.
All the while, the government’s civil complaint went forward, despite various measures behind the scenes to quash it — including a settlement offer of more than $20 million from Harvard which the government declined.
Last summer, after extensive discovery, deposition, argument and counterargument, U.S. District Court Judge Douglas Woodlock ruled against all three defendants in the civil suit — Harvard for simple breach of contract (reducing its maximum exposure to the $34 million of the contract), Shleifer and Hay for one count of fraud. Shleifer indicated he would appeal.
So why is Judge Woodlock hosting a three-day jury trial this week in his Boston courtroom?
Because, as he prepares for a longer trial next year to assess damages, the judge says there are some preliminary differences of opinion that only a jury can decide — including a second count of fraud.
The three-day trial this week has to do with the meaning of the phrase “assigned to,” as it appears in Harvard’s contract with USAID.
The government rules seem relatively clear. “No employee of the grantee shall engage directly or indirectly, either in the individual’s own name or through an agency of another person, in any business, profession, or occupation in the foreign countries to which the individual is assigned, nor shall the individual make loans or investments to or in any business, profession or occupation in the foreign countries to which the individual is assigned.”
Nor is there much ambiguity about why the government insists that advisers not invest in the countries to which they are giving advice. The idea is to prevent actual or apparent conflicts of interest in situations where incentives to curry favor exist in all directions
What Harvard and Shleifer maintain is that Shleifer wasn’t really “assigned” to Russia, despite the fact that he was project director and principal investigator. Therefore, he wasn’t covered by the conflict-of-interest rules. After all, he continued to live with his family in Newton, Mass., traveling to Russia only as necessary. (An earlier claim, that he wasn’t an employee of HIID, was thrown out by the judge.)
So that’s what the “assigned to” trial is all about. Harvard and Shleifer want the discussion to remain as narrow as possible. The three-day proceeding is “neither the time nor the place for an ethics seminar or a debate on the purposes of conflict of interest policies or foreign investment restrictions,” their lawyers say.
Thus they’ve sought to bar all witnesses from opining “hither and yon regarding personal morality, moralistic generalities, or about any contract of interest or investment restriction policy” separate from the government rules — meaning Harvard’s own.
The government responds that Harvard is trying to turn the case “into the parsing of a word” apart from its contractual context and real-world setting. In siding with Professor Shleifer, its lawyers wryly note, Harvard is seeking to prevent any discussion of norms that have evolved among other Harvard professors.
The government plans to call five witnesses from USAID to testify about their understanding of the contract, and only one from HIID — former director Jeffrey Sachs, an economist who dismissed Shleifer from the project after the investigation began. Sachs now is director of the Earth Institute at Columbia University in New York.
Harvard and Shleifer, on the other hand, are relying mainly on two former HIID officials to testify to their belief that Shleifer was within his rights to invest in Russian securities: former director and Harvard professor Dwight Perkins and former assistant director Rosanne Kumins. They’re calling two experts from USAID as well.
It is not an easy matter to put before a jury. We’ll report back next week on how the various parties do.