Recently revealed information suggests there may have been a financial motive involved in the Department of Education’s rulemaking.
Seemingly, there is no end to what once started as a relatively straight-forward story. The U.S. Department of Education embarked on an effort to impose new regulations that would severely restrict access to various federal loans and grant programs to students attending career colleges. Unlike state-owned public institutions and private, not-for-profit colleges, career colleges operate on a for-profit basis.
Since last autumn, this Dept of Ed effort to malign career colleges (or for-profit colleges) has been detailed in The American Spectator on several occasions (October 6, 2010; December 1, 2010; December 14, 2010; and January 18, 2011).
Recently revealed information suggests there may have been a financial motive involved in the Department of Education rulemaking.
Emails and related correspondence obtained from a series of Freedom of Information Act requests suggest stock market short-sellers including at least one who was a major donor to the 2008 Obama campaign had unusually strong involvement in the Ed Dept’s process of crafting new regulations impacting career colleges. Advance knowledge of the agency’s intention to write harsh regulations would benefit anyone shorting career college stocks with the expectation stock prices would plunge.
In late 2009, stock short-sellers Antal R. Desai and R. Kent McGaughy, Jr. of Dallas-based CPMG Investments met with Deputy Assistant Secretary of Education David Bergeron and senior Ed Dept official Ann Manheimer. Desai and McGaughy presented the two government officials with a 17-page document that severely criticized the career college sector. The document outlined recommended steps to be taken against career colleges to include actions by specific Congressional committees and an investigation to be conducted by the Government Accountability Office.
Neither Desai nor McGaughy were known for having expertise on the subject of post-secondary education. They brought little to the discussion aside from a game plan that, if implemented, could significantly degrade the value of publicly-traded stocks of for-profit colleges.
By the following year the key objectives outlined in the Desai/McGaughy document were met. The Senate Health, Education, Labor and Pensions Committee chaired by Senator Tom Harkin (D-IA) held hearings that slammed career colleges. Harkin had also become a personal critic of such schools. For its part, the GAO conducted an investigation and issued a blistering report on career college practices.
Beginning in August 2009 and continuing for nearly a year, emails were frequently exchanged between Desai and McGaughy and Bergeron, Manheimer and other senior Ed Dept officials on the topic of career colleges. Even Lee Godwon of Public Strategies, Inc., the lobbyist for CPMG, got into the act by arranging follow-on meetings between the short-sellers and senior Ed Dept officials.
In early 2010 Desai forwarded a nine-page document to Bergeron and Manheimer that addressed specific points Desai would like to see included in new regulations affecting for-profit colleges. Points addressed in the Desai document bear striking similarity to the proposed rule that was eventually released by the Department of Education.
By the spring of 2010, Manheimer had requested Desai provide her with negative “anecdotes or… examples” of practices the Department could use against career colleges. Desai responded with a claim that career college recruiters were frequenting homeless shelters and “systematically and deceptively recruiting the homeless with empty promises [of college degrees].” Desai then emailed ten pages of anecdotes alleging improprieties by career college recruiters.
Adding fuel to the fire was a joint letter signed by directors of several homeless shelters alleging career college recruiters were targeting the homeless. The letter, which was addressed to Education Secretary Arne Duncan, was fodder to further discredit career colleges. After the letter became public, several shelter directors stated they were misled regarding the intention of the letter and expressed regret for having signed it. Some denied having any first-hand knowledge of the alleged recruiting practices. They also did not know that the woman who coordinated the letter was actually working for Desai.
In mid-April, Desai forwarded to Manheimer an investment research report titled “Early Glimpse of Gainful Employment Regulations Ignites Rally” that suggested the rulemaking “will be considerably milder than originally believed.” In other words, the value of career college stocks were on the rise as the sector was viewed as having dodged a bullet. Desai asked Manheimer in his email “Is this reporting correct?”
Only days later articles began appearing in publications claiming career colleges were engaging in unethical recruiting practices. This suggests the Ed Dept may have been reacting to and using the material generated by Desai to publicly discredit for-profit colleges.
It turns out that Desai and McGaughy were not the only short-sellers working with the Department of Education on the new rules for career colleges.
Steven Eisman is the portfolio manager for the FrontPoint Financial Services Fund, a hedge fund. Eisman gained celebrity when his success as a stock short-seller was chronicled in the book The Big Short. He was also a major donor to the 2008 Obama campaign.
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