Ex-employee says she warned Harvard of risky moves

In the letter, dated May 12 of that year, Mack told Summers that she was "deeply troubled and surprised" by things she had seen in her new job as a quantitative analyst at Harvard Management Co.

She would go on to say, in later e-mails and conversations, that she felt the endowment was taking on too much risk in derivatives investments, and that she suspected some of her colleagues were engaging in insider trading, according to a separate letter written by her lawyer that summarized the correspondence.

On July 2 Mack was fired. But six years later, the kinds of investments she allegedly warned about did blow up on Harvard. The endowment plunged 22 percent last summer, in part due to the collapse of the credit markets. As a result, the school is cutting costs and under criticism that it took on too much risk in its investment portfolio.

Mack, who holds a doctorate in mathematics from Harvard, had been with Harvard Management for just four months when she approached Summers. She asked him to keep her communications confidential, or risk making her life "a living hell."

But on July 1, Mack was called into a meeting by her boss, Jack Meyer, then the chief of Harvard Management.

The next day Meyer fired her, according to the letter from her attorney, Jonathan Margolis, a copy of which was obtained by the Globe. Meyer told Mack that she was fired for making "baseless allegations against HMC to individuals outside of HMC," according to the Margolis letter.

Mack's saga surfaced yesterday in a report by the Harvard Crimson in which Mack reportedly said she warned of swaps and other complex instruments that the endowment had recently begun working with. The Crimson reported that Mack said the staff had "no background whatsoever" in some of the investments they were wading into.

Mack, who had been a trader for Enron the year before joining Harvard, worked in the group run by Jeffrey Larson. Larson left Harvard in 2004 to start a hedge fund, Sowood Capital Management, which shut down in 2007 after losing $1.6 billion, more than half of its assets, on highly leveraged investment bets. The firm returned about $1.4 billion to its clients. The Harvard endowment, among Larson's clients, lost $350 million with him.

Larson did not return a call to his home yesterday. Meyer was traveling outside the country and could not be reached.

A Harvard spokesman, John Longbrake, declined to comment on Mack's allegations. He said, "All allegations brought to the attention of the Management Company and its board are taken seriously and investigated thoroughly in order to ensure the integrity of HMC processes."

He said the $37 billion endowment's 13.8 percent average annual return over the past 10 years "during and after the time of the allegations, reflect the strong portfolio management, personnel, and risk management systems employed by the company."

Some of the swaps - like those betting interest rates would fall - made Harvard large profits for a number of years.

But by last year, the endowment's foray into this area proved costly. The endowment has recently been selling off private equity and other investments to raise cash.

Longbrake declined to comment on the problems caused by the swaps.

Mack, who lists on her website that she runs a Miami company called Phat Math Inc., a social networking site for math students, did not respond to requests yesterday for an interview.

Beth Healy can be reached at bhealy@globe.com.