By Stephen Kurkjian
The Boston Globe
January 15, 1999
Federal prosecutors are conducting a criminal and civil investigation into whether officials of a Harvard University-sponsored effort to help Russia reconstruct its economy profited from inside market knowledge, according to Harvard and US government sources.
Even as Harvard convenes top US and Russian business and political leaders this morning for a two-day symposium on Russia's economy and investments, the university is in the awkward position of answering questions from federal investigators about the Harvard Institute for International Development.
The office of US Attorney Donald K. Stern is conducting the investigation of the institute officials, who were operating under a US government grant while they were helping Russia adapt to capitalism. Both Harvard and US government sources in Washington confirmed the existence of the investigation.
Indeed, institute officials who played a key role in Russia's economic reconstruction, including a distinguished Harvard economist, were not even invited to speak at a conference that will discuss Russian investment opportunties and mull over the fruits of their work.
According to sources familiar with the probe, the investigators are trying to determine if the principals - renowned Harvard economics Professor Andrei Shleifer and Jonathan Hay - violated federal law during the early 1990s.
In particular, the sources said, the investigators are focusing on whether Shleifer and Hay profited from investments made by Shleifer's wife and Hay's girlfriend into Russia's stock market while the institute was being paid $43 million by the US government to advise Russian President Boris Yeltsin and his economic chiefs.
Graham Allison of the John F. Kennedy School of Government, which is sponsoring the symposium, said yesterday that considering the institute's major involvement in transforming the Russian economy, it was reasonable to ask why neither Shleifer nor anyone else from the institute was participating as a moderator or panel member.
But, Allison insisted, the reason had nothing to do with the negative publicity that ensued from disclosures over the alleged conflicts of interest involving Shleifer and Hay.
Although Shleifer and Jeffrey Sachs, director of the institute, were among about 20 Harvard professors with expertise in Russia invited to attend the symposium, he said neither man has been invited to speak or moderate because the sessions are focusing on current investment opportunities and challenges.
However, another Russian scholar at Harvard said that while Shleifer's reputation remains intact at Harvard, his appearance as a moderator or panel member would have raised eyebrows because of the controversy. ''He's hot merchandise right now,'' said the Harvard professor, who asked not to be named.
Sachs, who was unaware of the alleged profiteering, has not been implicated in the scandal.
The investigators working on the case, including assistant US Attorney Sarah M. Bloom, have spoken frequently in recent months with lawyers and other officials at Harvard University and have sought volumes of documents from the Harvard Institute for International Development about its work with the Russian government. The institute's rules prohibit its employees or members of their families from investing in the country they are advising.
Stern refused to discuss the investigation yesterday. But its priority was underscored by a Justice Department letter last June asking the chairman of the House Committee on International Relations to defer a review of the institute's activity. Such a review would interfere with a ''pending criminal and civil investigation by the United States Attorney's Office for the District of Massachusetts,'' according to the letter to Representative Benjamin A. Gilman, a New York Republican.
While acknowledging the existence of the investigation, Earl H. Nemser of New York, Shleifer's lawyer, said his client was not being targeted in the probe. ''My understanding is that it does not involve Mr. Shleifer,'' Nemser said Wednesday. Yesterday, Nemser declined to answer further questions, including whether he represented Shleifer's wife, Nancy Zimmerman, in the investigation.
Although they could not be reached this week, Zimmerman, Hay - who is no longer associated with Harvard - and his girlfriend, Elizabeth Hebert, have all previously denied they engaged in conflicts of interest by investing in Russian markets.
However, an investigation by the US Agency for International Development, which funded the contract, found that Shleifer and Hay had ''gained influence'' over Russian capital markets they were helping to set up, and had ''abused the trust of the United States government by using personal relationships ... for private gain.'' Among the allegations: Hay invested in Russian government securities while advising the Yeltsin government on capital markets; and helped Hebert establish a Russian mutual fund, the first allowed to sell such funds to the Russian public.
A second charge, that Hay directed a center he and the institute established with USAID funds to assist Zimmerman in her Russian investments, was determined to be unfounded by a World Bank audit. But the damage was already done: In May 1997, USAID canceled its contract with the Harvard institute, cutting off the final $14 million installment of a $57 million grant.
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