Harvard: Profited by Fund's Short Selling of Enron

February 1, 2002

Harvard Students Say School May Have Profited by Fund's Short Selling of Enron

By BETH HEALY and DAVID ABEL, The Boston Globe

Boston hedge fund that manages part of Harvard University's endowment appears to have reaped millions of dollars in profits by shorting shares of Enron Corp., or betting the stock would fall, starting last summer.

The hedge fund, Highfields Capital Management, in August held 1.2 million Enron put options worth $ 58.8 million, according to a filing with the Securities and Exchange Commission. Such options give an investor the right to sell shares at a future date, and make money on a stock's drop in value. In a November SEC filing, Highfields reported another round of bets that Enron would fall, with 2.3 million put options worth $ 62.6 million. It's not clear how much Highfields gained on its bets, but Enron shares plunged 15 percent to $ 49 in the second quarter of last year and slumped by nearly 50 percent in the next three months, to $ 27. The embattled Houston energy trading company filed for bankruptcy protection last month, wiping out the value of its stock for most shareholders, including its own employees.

A Harvard student watchdog group, HarvardWatch, yesterday estimated Highfields gained at least $ 50 million on its short selling. The group alleged Highfields and the university may have improperly profited because of connections to a member of Enron's board, Herbert S. Winokur Jr.

Winokur, who runs a Greenwich, Conn., investment firm, holds three Harvard degrees and is one of seven members of the university's highest governing board. He also sits on Enron's board and chairs its finance committee. He has been asked to testify before a Senate subcommittee investigating Enron's collapse.

Emma Mackinnon, a freshman at Harvard who works with HarvardWatch, said the group has urged Harvard president Lawrence Summers to suspend Winokur from the governing board, and to investigate whether he shared insider information with Highfields. Mackinnon said the group has no evidence that Winokur tipped off Highfields to Enron's troubles. But the well-timed short selling seems "quite a coincidence," she said, "particularly given Winokur's fiduciary responsibility to Harvard."

Neither Winokur nor Highfields executive Richard Grubman could be reached at work late yesterday. A story in the Globe last month detailed an April conference call in which Grubman, who suspected trouble, challenged Enron's former chief executive, Jeffrey Skilling, on the company's financial state. A Harvard spokesman said the university had not yet studied HarvardWatch's allegations but stood by Winokur.

"Mr. Winokur is a valued member of the Harvard corporation," said Joe Wrinn, the spokesman. "We understand that he is assisting in the Enron investigations now underway. The university is reviewing the situation for any developments that have a genuine bearing on Harvard."

Wrinn said the Harvard Management Co., which oversees Harvard's total endowment, does not participate in investment decisions made by Highfields, "including its Enron investments."

It's not clear how much Harvard may have benefited from Highfields's Enron bets. Highfields manages more than $ 4.8 billion in total assets. Harvard's $ 18 billion endowment first invested $ 500 million with start-up Highfields in 1998 and has since invested more.

HarvardWatch also alleged in its report yesterday that Harvard's Kennedy School of Government had been swayed to do policy work on Enron's behalf after receiving large contributions from Enron executives. Harvard declined to comment on the allegation.
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June 27, 2002

US Seeking $102M From Harvard, Pair

By THANASSIS CAMBANIS, The Boston Globe

After settlement negotiations with Harvard University broke down, the US Department of Justice yesterday asked a federal judge to order Harvard and the two men who ran an economic reform program in Russia to repay the government $102 million, contending they mismanaged the development project.

The 130-page motion filed in US District Court, along with hundreds of pages of memos and depositions, chronicles in extraordinary detail the government's allegations against Harvard, economics professor Andrei Shleifer, and his former deputy at the Harvard Institute for International Development, Jonathan Hay, including charges they invested in companies directly affected by advice they gave the government.

"The whole purpose of having someone come from a place like Harvard is to have someone who is essentially independent coming in to provide this kind of advice," renowned Harvard development economist Jeffrey D. Sachs, who headed the institute from 1995 to 1999, testified in his deposition.

Any investments in Russia by the program staff violated ethical ground rules, Sachs said, adding that if he had been the institute's director in 1994 and had known about Shleifer's investments in Russian oil companies, he would have insisted on removing Shleifer from the project. But Harvard's lawyers say investments by the institute staff did not violate the university's agreements with the US government.

The institute, in partnership with the US Agency for International Development, advised the Russian government during the country's move from communism to capitalism from 1992 to 1997.

Shleifer and Hay, according to federal prosecutors, ignored basic ethics and the agreements they had signed when they invested hundreds of thousands of dollars in companies affected by the advice they were giving.

"Harvard and its employees, no matter how brilliant, are still subject to the laws of the United States," prosecutors from the US attorney's office in Boston argue in the motion. "This is not a case where the defendants did not know the rules - it is one where they did not care."

Prosecutors allege that $34 million of the $50 million received from the United States was tainted by fraud and are seeking triple damages on that amount, or $102 million. In the indictment unsealed in September 2000, the government originally sought $120 million in damages. US District Judge Douglas P. Woodlock earlier this month threw out claims against the spouses of Shleifer and Hay.

Both the government and Harvard have filed motions for summary judgment, asking Woodlock to decide the case based on written legal arguments, documents entered into evidence, and the record of 97 days of deposition testimony from 54 witnesses.

Harvard argued in its motion that Shleifer's and Hay's investments in Russia did not violate their agreement with USAID. The Institute for Development's advice to the Russian government garnered rave reviews as late as 1996, Harvard points out, when a government evaluation lauded the institute's "genius and hard work."

"Neither the ensuing years nor the evidence discovered in this case have tarnished HIID's achievements," Harvard's lawyers argue. "After years of investigation, the government has come up with nothing beyond a handful of private Shleifer and Hay investments."

"From the start of the litigation, Harvard has viewed the government's allegations as overreaching and without legal merit," said Harvard spokesman Joe Wrinn.

Led by Assistant US Attorney Sara M. Bloom, prosecutors have detailed hundreds of thousands of dollars in investments made by Shleifer and Hay while they were running the USAID-funded program in Russia. Harvard failed to heed several complaints about the two men's conflicts of interest, the government alleges.

According to federal filings made public yesterday, Shleifer in 1994 invested about $464,000 in Russian oil companies, equities, and government securities. He also held family investments in the Russian gas giant Gazprom.

Hay, meanwhile, allegedly put $20,000 in a mutual find that invested solely in Russian equities, and wrote Shleifer a check for $66,000 for other Russian investments.

While Shleifer was directing the program from the Harvard campus, Hay was in charge of day-to-day management in Russia. He worked closely with the Pallada Mutual Fund Management Co., the first to be registered to sell shares to the Russian public.

Pallada's primary owner was Elizabeth Hebert, who was Hay's girlfriend in 1996 and is now his wife.

Neither Hay nor Shleifer ever disclosed their investments to USAID, and prosecutors insist the investments blatantly violated the conflict of interest policy in the agreement Harvard signed with the US government.

Hay's relationship with his girlfriend's company raised eyebrows, leading several institute employees to report it to Shleifer. One employee, Holly Nielsen, went so far as to travel from Moscow to Cambridge, where she told Shleifer she was concerned that Hay's conflict of interest could damage Harvard's reputation.

Both men were removed from the Russia program in 1997. The institute was disbanded two years ago. Schleifer is still a tenured economics professor at Harvard. Hay was dismissed by the school.
http://www.people.fas.harvard.edu/%7Emackinn/harvardwatch/02_01_bg.html

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