BOSTON—A small army of lawyers representing Harvard, two co-defendants and the U.S. government sweated a Federal District Court judge’s pointed questions yesterday, with the prospect of $102 million in damages hanging over both sides’ heads.

Attorneys representing the University, Economics Professor Andrei Shleifer ’82 and former Harvard employee Jonathan Hay were in court to defend their arguments that the judge should dismiss, on the basis of undisputed facts, a fraud suit brought against them by the U.S. government.

Assistant U.S. Attorney Sara M. Bloom reasserted the government’s claim that these same undisputed facts warranted an award of $102 million without having to resort to a jury trial.

At the end of the nearly four hour-long hearing in South Boston’s Moakley federal courthouse, the case was no closer to resolution five years after the government’s first allegations of wrongdoing and two years after its suit was filed.

Judge Douglas P. Woodlock did not say when he would rule on the parties’ motions for summary judgment submitted in early summer and argued yesterday.

But in his questions to the four sets of lawyers, Woodlock suggested his views on crucial aspects of the case, partially undercutting several of Shleifer and Hay’s primary defenses while also expressing skepticism at the government’s attempts to seek damages under the False Claims Act (FCA).

On a number of points, Woodlock suggested the arguments would have to go before a jury.

The government’s case hinges on allegations Shleifer and Hay broke agreements Harvard made with the U.S. Agency for International Development (USAID) that funded a University-run economic reform program in Russia in the mid-1990s.

Shleifer was project director for the program run out of the now-defunct Harvard Institute for International Development (HIID). Together with Hay, Shleifer advised the Russian government on the privatization of their economy. USAID provided the project with $50 million in funding.

At the same time, Shleifer and Hay directly or indirectly invested hundreds of thousands of dollars of their own money in Russia.

Evidence released this summer details investments made by Shleifer and his father-in-law in Russian equities, Hay’s investment in a mutual fund with holdings entirely in Russia and Hay’s involvement in his girlfriend’s efforts to create the first Russia-based mutual fund.

The government began questioning these investments in 1997, originally as part of a criminal investigation. Harvard removed Shleifer and Hay from the project, but retained Shleifer as an economics professor.

In 2000, the government sued alleging that, while not criminal, Shleifer and Hay’s actions violated the conflict of interest restrictions contained in Harvard’s contract with USAID.

The investments, the government says, also undercut the project’s mission of providing fair and unbiased advice on the privatization of Russia’s economy.

The government says Harvard was responsible for the oversight of Shleifer and Hay and that all three are liable under FCA.

Harvard, Shleifer and Hay each have their own lawyers and defense strategies.

In their motion for summary judgment, Shleifer’s lawyers argue the economics professor was a consultant to, not an employee of, HIID. As a result, they argue, Shleifer was not covered by language in the USAID policy that banned investments by employees in their host countries.

Woodlock said yesterday that he was not inclined to allow Shleifer to make the distinction between being an employee of Harvard and being an employee of its subunit HIID. “That’s all really inside baseball for Harvard,” Woodlock said at one point and called the argument “a shell game” at another.

Woodlock proceeded to go through the undisputed evidence involving Shleifer and Hay’s investments, questioning why each did not constitute a breach of contract.

On several of these he indicated Hay and Shleifer’s arguments were unlikely to pass muster.

Harvard meanwhile continued to maintain yesterday that it had fulfilled its end of the contract with USAID. HIID provided assistance that USAID lauded at its time as historic, and Harvard had provided the oversight that it was responsible for, the University argued.

Woodlock seemed close to agreeing with the government that Harvard had indeed broken its contract.

He was far more skeptical, however, of Bloom’s argument that the transgressions amounted to the more serious and potentially costly violation of FCA.

According to Woodlock, to establish that a FCA violation had occurred, Bloom would have to show Harvard knowingly submitted false information to the government.

Woodlock strenuously questioned both whether Bloom could establish this knowledge and whether billing stubs Harvard submitted to USAID could constitute false claims.

Woodlock said he will study further case law on the former question, but indicated his initial feeling was that it warranted presentation to a jury.

The FCA complaint is crucial to the government’s attempts to inflict substantial monetary punishments on Harvard.

A FCA violation carries a penalty of triple damages. Bloom is asking the court to force Harvard to repay three times the $34 million of which it says it was defrauded.

At the end of the hearing, Woodlock asked both the government and Harvard to prepare additional briefs over the course of the next two months so the case will not get bogged down while he decides on the motions.

Woodlock was animated throughout the hearing, mixing references to a cartoon character and a locally famous Boston School Committee member with quotes from opinions authored by Felix Frankfurter.

Internal Politics

Yesterday’s hearing represents the parties’ first protracted engagement in front of the judge since Woodlock considered Harvard’s motion to dismiss the case in 2001.

Work accelerated on the case last fall with the beginning of the pre-trial discovery. Fifty-four witnesses were deposed over 97 days.

Last spring the University also entered into settlement talks with the U.S. attorney’s office. A previous attempt at mediation had failed, but according to insiders this latest round of settlement talks were more advanced. But these talks also fell through.

This summer the transcripts of the depositions were publicly released, including those sworn by University President Lawrence H. Summers, the director of Harvard’s endowment investment company and HIID’s former Director Jeffrey D. Sachs ’76. With their release came revelations about internal University politics.

Summers is a close friend of Shleifer’s—Shleifer played host when Summers visited Harvard during the University’s presidential search two years ago.

Shleifer’s lawyers tried to establish that, as treasury secretary, Summers had seen no problems with Shleifer’s investments, while the government asked him about warnings he had given Shleifer to carefully check conflict-of-interest policies.

Lawyers from both sides questioned Summers at length about a beachside walk he had with Shleifer at Summers’ house in Truro, Mass.

Summers also testified that after being named Harvard president, he had a discussion about Shleifer with then-Dean of Faculty Jeremy R. Knowles.

Summers said he emphasized the need to retain Shleifer, come what may.

“I expressed to Dean Knowles at some point that I was concerned to make sure that Professor Shleifer remained at Harvard,” Summers testified. “I felt that he made a great contribution to the economics department and that I knew there was a lot swirling. [I] expressed the hope that Dean Knowles would be attentive to that.”

Summers added that he knew there was a perception within the economics department “that Andrei was in some way or another being screwed.”

In an August interview with The Crimson, Summers said he didn’t see anything wrong with his conversations with Knowles.

“I’m not sure what question is raised by my passing on judgments of colleagues in the economics department about the importance of members of the Faculty to the department,” Summers said.

Summers has legally recused himself from the case and questions regarding Shleifer within the University.

Former University President Derek C. Bok has replaced him in dealings related to the HIID case as an informal advisor to the Harvard Corporation. A former Dean of Harvard Law School, Bok is also providing advice on overarching legal strategy.

—Staff writer David H. Gellis can be reached at gellis@fas.harvard.edu