Assistant Attorney-General for the Department of Justice's Civil Division Peter Keisler; United States Attorney Michael J. Sullivan; Arnold J. Haiman, Acting General Counsel of the United States Agency for International Development and Bruce Crandlemire Acting Inspector General of the United States Agency for International Development's Office of Inspector General, have announced that the United States has successfully resolved its civil case against Harvard University, Andrei Shleifer and Jonathan Hay.
In a settlement reached with the United States, Harvard, Shleifer, Hay and FFIA, formerly known as Farallon Fixed Income Associates, LP, have agreed to pay a total amount in excess of $31 million to resolve civil claims arising out of the false billings from Harvard to the US Agency for International Development ("USAID").
The two senior Harvard University advisors, Shleifer, as Project Director, and Hay, as Project Manager, were paid under a USAID grant to lead a project to provide advice to the nascent Russian economy on privatisation following the fall of communism and the creation of fair and open markets and the rule of law.
The United States alleged that instead, Shleifer and Hay used their positions and substantial influence over Russian officials at this pivotal time in Russian history to advance their own and their spouses' private financial interests.
Under the settlement, the total payments will exceed $31 million. Specifically the settlement calls for Harvard to pay $26.5 million, Shleifer to pay $2 million, and Hay to pay between $1 million and $2 million (depending upon his earnings over the next 10 years).
Also factored into the settlement amount total is $1.5 million already paid to the United States by FFIA, formerly known as Farallon Fixed Income Associates, LP, a company owned by Shleifer's wife, Nancy Zimmerman. In addition, Shleifer and Hay have agreed to be debarred by USAID.
"Protecting the integrity of US funded international development programmes is essential to their success and to ensuring our government's credibility among other nations," commented US Attorney Michael Sullivan. "The defendants were entrusted with the important task of assisting in the creation of a post-communist Russian open market economy and instead took the opportunity to enrich themselves. Such conflict of interest activities only serves to undermine important development programmes.
As evidenced by the hard fought five-year litigation of this matter, the US Attorney's Office is committed to protecting federal funding from misuse and ensuring the adherence to the requirements of government contracts."
The United States' case provided extensive evidence that, despite the clear terms of the agreements, Shleifer, and Hay were making prohibited investments in Russia in the areas in which they were providing advice.
The United States further demonstrated that Shleifer and Hay were self-dealing by using their positions, as well as USAID-funded resources, to advance their own personal business interests and investments and those of their wives and friends.
Their self-dealing activities included using their influence over the Russian Securities Commission to which they were key advisors to secure for themselves and their wives the first ever launched and licensed mutual fund in Russia. The terms of the USAID grant strictly prohibited any investments in Russia by American advisors funded under the grant.
The civil complaint alleged and the court found, that while they were being paid by USAID, Shleifer and Hay engaged in the following prohibited investments and businesses in Russia:
Shleifer and his wife Zimmerman invested and reinvested $200,000 through Renova-Invest, a United States/Russian investment entity, in various Russian companies and in Russian government debt;
Shleifer, Zimmerman and Hay purchased several hundred thousand dollars worth of shares in Russian oil companies, but placed the ownership of those shares in the name of Shleifer's father-in-law, Hay and Shleifer participated in the launching and/or financing of: (a) Russia's first licensed mutual fund, which was started by Elizabeth Hebert, Hay's then girlfriend, now wife, and (b) Russia's first licensed mutual fund depository, the First Russian Specialised Depository ("FRSD"), which was started by Hebert's business partner and provided support services to the mutual fund.
The United States alleged and demonstrated that Shleifer, Hay and Harvard never disclosed any of these prohibited personal business activities and/or investments to USAID.
The civil complaint alleged that as a result of the misconduct of the defendants, USAID funds expended on the project were diverted, abused and wasted. As a result of the defendants' misconduct, USAID suspended and ultimately terminated the Harvard project in Russia.
"Conflicts of interest and corruption attack at the core of what USAID strive to achieve for developing nations throughout the world and are certainly two of the most serious threats to the success of USAID sponsored programmes," stated Acting USAID Inspector General Bruce Crandlemire.
"Eight years of intensive investigation and tireless litigation on this case represent a firm and dogged commitment by the offices charged with the protection of federal dollars to the principle that power and influence do not provide a free pass to those who would attempt to exploit their positions of public trust for private gains."
After extensive summary judgement briefings, US District Judge Douglas P. Woodlock, in a one hundred-page opinion, found liability against Shleifer and Hay under the False Claims Act, and against Harvard for breach of contract with USAID. At a federal civil trial, a jury found additional liability against Shleifer for his violation of the conflict of interest policy in USAID's contracts with Harvard.
This case was investigated by agents from the Inspector-General's Office of USAID.