Harvard will pay $26.5 million to the U.S. government to settle a five-year-old lawsuit that implicated two University employees, including its star economics professor, Andrei Shleifer ’82, the Justice Department announced Wednesday.

Shleifer, who is Jones professor of economics, emerged far less scathed in the settlement, agreeing to pay just $2 million. He had faced damages of up to $104 million for conspiring to defraud the government while advising a U.S.-funded program to privatize the Russian economy in the 1990s.

Jonathan Hay, another advisor to the program, will pay between $1 million and $2 million, depending on his future earnings, the government said.

The settlement came more than a year after a judge in U.S. District Court found Shleifer and Hay liable for fraud, after they made personal investments in Russia while advising the program for the now-defunct Harvard Institute for International Development. Conflict-of-interest provisions in their contracts with the government strictly prohibited such investments, which totaled several hundred thousand dollars.

Harvard itself was cleared of the fraud allegations but still faced damages for breaching its contract with the U.S. Agency for International Development (USAID). In the agreement signed Wednesday, the University did not admit any liability but agreed to pay the full $26.5 million by Saturday. A Harvard spokesman said it was the largest settlement the University has ever paid.

All told, defendants in the case will fork over at least $31 million to settle the government’s suit. That includes last year’s $1.5 million settlement with FFIA, a firm owned by Shleifer’s wife, Nancy Zimmerman.

Shleifer, a close friend of University President Lawrence H. Summers, has continued teaching at Harvard since the suit was filed in 2000. The University has not announced any disciplinary action against him. Hay, now a lawyer for Cleary Gottlieb in London, was fired by Harvard after the program disbanded.

As part of the settlement, Shleifer and Hay agreed to a two-year disbarment by USAID, prohibiting them from participating in any of the agency’s programs. But neither Shleifer nor Hay acknowledged any liability.

“An individual can fight the unlimited resources of the government for only so long,” Shleifer said in a statement Wednesday. “After eight long years, I have decided to end this now—without any admission of liability on my part.”

Documents released by the government indicated that Shleifer had mortgaged his home in Newton, Mass. on Tuesday in order to pay a first installment of $600,000 in the settlement.

Harvard is not permitted to pay any part of the settlement owed by Shleifer or Hay, according to the terms of the agreement.

U.S. Attorney Michael J. Sullivan said in a statement that the settlement was fair punishment for the defendants’ breach of contract.

“Protecting the integrity of U.S.-funded international development programs is essential to their success and to ensuring our government’s credibility among other nations,” Sullivan said. “As evidenced by the hard fought five-year litigation of this matter, the U.S. Attorney’s Office is committed to protecting federal funding from misuse and ensuring the adherence to the requirements of government contracts.”

The defendants in the case had argued, to various degrees, that they were not bound by the conflict-of-interest provisions in their contracts. But in a summary judgment in June 2004, U.S. District Court Judge Douglas P. Woodlock disagreed, finding Shleifer and Hay liable under the False Claims Act, a federal law that prescribed heavy damages for violating a contract with the government.

The University, in a lesser judgment by Woodlock, was found liable for up to $34.8 million, the amount paid to Harvard by the government after the first improper investments by Shleifer and Hay.

In a press release that made no mention of Shleifer or Hay, the University said it was glad to put the matter to rest.

“We are pleased that we were able to find a mutually acceptable resolution with the government, and look forward to continuing our long-standing collaboration with USAID and other government agencies on a broad range of important research and related activities,” said Robert W. Iuliano, Harvard’s general counsel, who signed the settlement agreement.

—Staff writer Zachary M. Seward can be reached at seward@fas.harvard.edu.