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Special Report
Selling Career Colleges Short
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.
About the Author
Mark Hyman hosts “Behind the Headlines,” a commentary program for Sinclair Broadcast Group. You can follow him on Twitter at @markhyman.
Letter to the Editor View all comments (20) | Leave a comment
More Articles by Mark Hyman
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Sean| 3.31.11 @ 8:07AM
Simple solution. Get the federal government out of the education business. No federal grants, scholarships or loans. It is not a Constitutional power that the federal government has and Congress should get rid of it.
Len| 3.31.11 @ 9:02AM
What does the US constitution have to do with anything? We got rid of that thing a long time ago, and it was both parties that did so.
Anyway the congress would claim education falls under the so called spending clause, which is really the taxing clause.
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States
Dan Hirsch| 3.31.11 @ 8:14AM
Boy, if I were Martha Stewart, I'd be really pissed off.
But I am not Martha Stewart, and I am still really PO'ed!
How about you?
A. C. Santore| 3.31.11 @ 8:24AM
And how many of these lampreys and leeches will get jail time? Don't answer!
JP| 3.31.11 @ 10:02AM
Sean has the right idea. I would even take it further; get the States out of the business of education. Our attachment to this Prussian ideal (compulsiory education) wrecked what was once something very American (local control of education. By local, I mean at the lowest level). Our 100 year excursion into centralized compulsory education has been a disaster.
Mike| 3.31.11 @ 10:39AM
This is just more spin and divsersion from the issue. The issue is students are being ripped off by the for-profit colleges. Now the for-profit colleges are trying to make the entire case dirty because they know they're going to lose.
big bob| 3.31.11 @ 10:49AM
to MIke,
Just how are they being ripped off? you fail to make that point. With recent colleges grads unemployed at a rate of just around 50%, I'd be careful to be so cocky and self-satisfied about just WHOM is being ripped off. Ivy League schools going for $40-$50K +. Just how many ways are there to teach Calculus? How about Latin or French? Do they teach a higher level than say a "for-profit" college? And what is so noble about the "not-for-profit" colleges where teachers turn off their brains as soon as they get tenure and a grad assis? Is their greed more noble than those working for a stated profit? I'd like to know that. I taught at two Big Ten Universities and a college on the West Coast. I left teaching even after receiving tenure. It's far more greedy and inefficient in your beloved "not-for-profit" schools because nothing is disclosed. Oh, and last I checked, Princeton and Harvard had fairly large foundations accumulated, but those are "not-for-profit". Right....
Eric Damon| 3.31.11 @ 10:51AM
You obviously have not read the other reports on this issue, because if you had you would know how ignorant you sound. No one is spinning anything here, you are just bearing witness to what real journalists should do; find out the real facts of a story by actually doing your own investigating, not just repeating what was said on the AP or NYT wire services.
And of course the career colleges will lose if the government rigs the game and allows stock short sellers to use the power of government to enrich them by unfairly maligning the schools! What the journalist here is doing is not trying to pretend that everyone at every for profit school is as pure as Ceasar's wife, but to show that the government unfairly rigged the game to ensure an outcome that the administration desired.
David W| 3.31.11 @ 11:46AM
Mike obviously did not go to a 4 year college. Or if he did, does he remember the 300+ people in the freshman English/History/Physics/Chemistry class? Did he get his money's worth for that? How about the labs taught by grad students who can barely speak English. I remember, after I had graduated with my Chemical Engineer bachelors degree, that the department had an instructor who didn't even know what a heat exchanger looked like (good grief). Imagine trying to understand Calculus II when you spend more time trying to comprehend his speech patterns instead of the subject matter (sorry if this sounds like an attack on foreign professors). And don't get me started on the ability of freshmen getting 3.5+ GPA for a semester when they don't study, get drunk several nights a week, and apaprently can stay up all night playing Risk (while I'm trying to finish my physical chemistry lab report). I won't even begin to discuss my masters degree in the college of business.
Maybe for-profit colleges ain't perfect, but some of the perfect non-profit colleges sometimes aren't much better.
Dagny Taggert| 3.31.11 @ 1:10PM
Let's see....10-15k for profit schools, 50k+ for non profit. I think the students are getting ripped off in both cases. Instead of cushy tenures for prof's, excess $$ returned to shareholders. As usual however, Obama admin has to stick their nose in it and pick the winners. That's the real issue.
Eric Damon| 3.31.11 @ 10:46AM
JP, it is the states that should be in charge of education and there should be statewide curricula so that students all over the state would be expected to learn the same basic material (reading, writing, math, civics). However, the scheduling and methods used should be left to the local school boards to best serve their particular communities. I see no problem with the states having a say in education, my problem lies with the intervention of the federal government and its use of money to dominate the local school systems in this country.
Len| 3.31.11 @ 11:10AM
Why should the states be in charge of education? Should they be in charge of food, power, fitness? You are okay with socialism at the state level?
Eric Damon| 4.2.11 @ 10:49AM
Having the states decide on the curricula for the states is not in any way socialist, it is in fact the very way the federalist system is supposed to work. We at the state level elect the people who sit on our state boards of ed; they answer to us and only us as do the local school board members. What is remotely socialist about setting up a system of education and electing our own representatives to administer it? Everything that the government does is not socialist, nor is it wrong of me to support state/local educational systems?
Stan Redmond| 3.31.11 @ 11:56AM
The only question I have is who will the "Captain Louis Renault" award go to for the most shocked in the Obama [pbuh] DOJ or DOE?
Central Propaganda Department| 3.31.11 @ 1:28PM
Go ahead -- sue me if you dare. My father is Li Gang.
cicero| 3.31.11 @ 4:12PM
Cicero's first law of economics: Debt expands to meet the money allotted to it." Without government flooding the education system with grants, loans, etc., colleges of any kind would only be able to charge what the students could afford, or were willing to pay. The whole system is turned upside down. Now, students leave thelprogram with hundreds of thousands in debt, and are qualified for jobs topping out at $32 grand. But, I guess I miss the point. We now have all these colleges paying professors hundreds of thousands of dollars per year to teach the kids what they should have learned in high school.
scythe| 4.1.11 @ 5:58AM
People should really LEARN about what it means to be a "non-profit". Because that term has been used over the decades to fool and deceive millions. AARP is a "non profit." So is NPR. So are many entities which somehow manage to rake in gazillions. They have a special tax status. But that does not mean that they don't bestow upon those in their inner circle hundreds of thousands of dollars in extravagant compensation, nor does it mean they live a pinch penny existence. Nowadays those in very well connected "non-profits" are living like potentates overseeing a vast reservoir of riches and investment portfolios, all the while cultivating the illusion of living close to the financial bone. It's a con game. In the latest dust up with NPR we heard the bleating about public dollars being necessary for the entire shebang to continue. Did anyone get a load of the salaries? Not-for-profit means the IRS must treat them a certain way provided they behave according to guidelines. But it certainly does NOT mean those involved can't live like a Wall Street trader, or at least according to the left wing canard of a greedy Wall Streeter. The words "not-for-profit" have automatically conferred upon those with this status a veneer of nobility and virtuousness that many do not deserve. And provide a cover for a multitude of sins.
Dee See| 4.1.11 @ 7:35AM
BTW ----interesting that nowhere on the political
spectrum anywhere during the past half century
has the matter of OUTRAGEOUS college costs,
let alone the politicization of higher education itself, been made a genuine political issue.
-----------------------------VERY INTERESTING
Creative Recreation | 8.10.11 @ 11:07PM
is good