Some Russian Money Flows Back to Harvard

Remember the Harvard-in-Russia scandal? In case you missed it, here is how it went, as I summarized the story in the Huffington Post:

In 1992, Andrei Shleifer, a Harvard professor and a close friend of Summers since Shleifer's college days at Harvard, became head of a Harvard project that directed U.S. government money for the development of the Russian economy. Tens of millions of dollars in noncompetitive U.S. contracts flowed to Harvard for Shleifer's Russian work, and his team directed the distribution of hundreds of millions more. Through the mid-1990s, complaints accumulated in Washington about self-dealing and improper investing by the Harvard team, and by mid-1997, the Harvard contracts had been canceled and the FBI had taken up the case. For two years it was before a federal grand jury. 

In September, 2000, the government sued Harvard, Shleifer, and others, claiming that Shleifer was lining his own pockets and those of his wife, hedge fund manager Nancy Zimmerman--formerly a vice president at Goldman Sachs under Rubin 

Soon after, when Summers became a candidate for the Harvard presidency, Shleifer lobbied hard for him in Cambridge. Rubin assured the Fellows that the abrasiveness Summers had exhibited at Treasury was a thing of the past. They named him president--in spite of what was already known about his enabling role in the malodorous Russian affair, and the implausibility of a personality metamorphosis. 

Summers did not recuse himself from the lawsuit until more than three months after his selection as president, and even then used his influence to protect Shleifer. The Fellows--including Rubin, whom Summers added to the Corporation--fought the case for years, spending upwards of $10M on lawyers. But in 2005 a federal judge found Shleifer to have conspired to defraud the government and held Harvard liable as well. To settle the civil claims, Shleifer paid the government $2M and Harvard paid $26.5M; Zimmerman's company had already paid $1.5M. Shleifer denied all wrongdoing, and Harvard disclosed nothing about any response of its own--a departure from its handling of misconduct by faculty farther from the center of power. 

Summers remained close to Shleifer, yet claimed in a February 2006 faculty meeting to know too little about the scandal to have formed an opinion about it. This prevarication brought a gasp from the assembled faculty and solidified faculty opposition to the Summers presidency.

The definitive tick-tock on this unhappy mess is David McClintick's "How Harvard Lost Russia," which appeared in Institutional Investor. The narrative is full of minor characters, including one Leonard Blavatnik, also a Russian emigre with American citizenship. Here is what McClintick had to say about Blavatnik:

In 1994, Shleifer and Zimmerman, with the help and advice of Leonard Blavatnik, a New York-based Russian emigrant and a member of the Forbes 400, placed $200,000 in a Blavatnik vehicle called Renova-Invest, which invested in a group of Russian corporations that were being privatized under Shleifer's guidance. The companies included telephone operator Rostelecom; oil and natural-gas behemoth Gazprom; aluminum smelters in the cities of Irkutsk, Sayansk and Bratsk; Vladimir Tractor; and oil producer Chernogorneft. The U.S. government alleged in its complaint against Harvard, Shleifer and Hay that these companies benefited financially not only from Shleifer's advice on privatization but also from AID-funded assistance, including free legal services. When Blavatnik was merging several aluminum companies in which Shleifer and Zimmerman had invested, Hay and other AID-funded lawyers worked on the merger documents at no cost to Blavatnik or the companies. According to a U.S. statement of "undisputed material facts" submitted with the lawsuit, Hay was aware of some of the private investments of Shleifer and his wife, which were violations of the bars against private investment in Russia. 

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In 1994, Shleifer and Zimmerman, with the help and advice of Leonard Blavatnik, a New York-based Russian emigrant and a member of the Forbes 400, placed $200,000 in a Blavatnik vehicle called Renova-Invest, which invested in a group of Russian corporations that were being privatized under Shleifer's guidance. The companies included telephone operator Rostelecom; oil and natural-gas behemoth Gazprom; aluminum smelters in the cities of Irkutsk, Sayansk and Bratsk; Vladimir Tractor; and oil producer Chernogorneft. The U.S. government alleged in its complaint against Harvard, Shleifer and Hay that these companies benefited financially not only from Shleifer's advice on privatization but also from AID-funded assistance, including free legal services. When Blavatnik was merging several aluminum companies in which Shleifer and Zimmerman had invested, Hay and other AID-funded lawyers worked on the merger documents at no cost to Blavatnik or the companies. According to a U.S. statement of "undisputed material facts" submitted with the lawsuit, Hay was aware of some of the private investments of Shleifer and his wife, which were violations of the bars against private investment in Russia. 

Shleifer is still a Harvard economics professor. I did not think this story was likely to come around again, until I read a piece by Connie Bruck in the January 20 New Yorker called "The Billionaire's Playlist." The billionaire in question is Blavatnik, and the story is about his purchase of Warner Music, and how he got to be so rich (reportedly he is worth $18 billion). In addition to summarizing the same information I quote from McClintick above, Bruck adds some more color. Blavatnik played games with some paperwork -- changing an investment from Shleifer's name to Zimmerman's in an apparent attempt to avoid those pesky conflict of interest rules after the fact -- and then relied on Zimmerman when he needed to raise some big money:

[Blavatnik] had turned his access to Americans into funding for his Russian ventures. In 1997 and 1998, Zimmerman's fund had made bridge loans that helped Blavatnik and his partners invest in Russian companies. According to Chernys's testimony, those loans amounted to at least forty-three million dollars.

Bruck quotes "an expression that is popular among Russian businessmen: 'Never ask about the first million.'" She also quotes American entrepreneur Sam Zell about why it was so difficult to compete against Blavatnik in those days. "Start with the Foreign Corrupt Practices Act and go from there."

Blavatnik has recently become a major philanthropist. His $117 million dollar gift to Oxford University resulted in the naming of the School of Government after him. He gave Harvard, from which he earned an MBA, $50 million to fund a life science entrepreneurship accelerator. He is part of the host committee welcoming president Faust to London today.

I suppose we could look at it this way: Blavatnik has used the wealth he began to accumulate with his sketchy business dealings with Shleifer to repay the $26.5 million fine Harvard paid, with $23.5 million in interest.

It's a small world. Another Russian who plays a prominent role in Bruck's tale is Viktor Vekselberg, Blavatnik's business partner and the man whose foundation paid for casting a new set of Russian bells so the originals could be returned from Lowell House to their original home in the Danilov Monastery in Russia (a story told several years ago in the New Yorker).

It's more than a little discomfiting. But so is a great deal of fundraising; the tradition of people who have become wealthy in less than honorable ways elevating their reputation through their charitable donations has worked to the benefit of many a church, university, and city over the past couple of millennia. (There are plenty of Harvard case studies -- Buddy Fletcher, for example. For that matter, Gordon McKay, the donor of my chair, was no angel.) I believe that universities are the kidneys of  the nation -- they purify their tainted nutrients.

As long as they don't get corrupted themselves, of course. As long as they don't give the tiller to people unfit to steer the ship. As long as they don't have to lie about their donors' character in exchange for the largesse -- and that is a tricky one, since attaching a donor's name to a school or a fund is a way of honoring them for who they are, not just for what they have given. As long as the money donated is merely malodorous, and not known to be the fruits of criminal activity.

I hope the Blavanik money meets that low standard. Because students are watching, and they learn from everything we do. What is the lesson here? And because the world is watching, and as I blogged last week, it is already skeptical about our motives.

And we should not forget that there is another way. Donors exist who are selfless and give not to enhance their social standing or to make up for past sins. Some people -- Larry Lebowitz, for example -- give in honor of others, and let their identity be known only in the hope that they will inspire others to do likewise. Their own names appear nowhere, and they are satisfied to have helped unknown beneficiaries in the distant future. I wish there were more of that humble spirit in this world, and more ways of showing our appreciation for it.

(penultimate para revised 9:30am 1/20/14)