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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.
(Page 2 of 2)
In his prepared text before the 2010 Ira Sohn Conference in New York, Eisman delivered stinging remarks regarding career colleges. Eisman attacked the for-profit college industry and predicted new regulations under consideration at the Department of Education — including one titled “Gainful Employment” — could drive down the stock prices of publicly-traded for-profit colleges by as much as fifty percent.
A precipitous fall in stock prices would occur only two months later.
On July 19, 2010, Eisman sent an email to David Bergeron. The subject line was “I know you cannot respond.” The email read, “But just fyi. Education stocks are running [increasing in value] because people are hearing DOE is backing down on gainful employment.”
The email trail reveals that only minutes later Bergeron forwarded Eisman’s email marked “high” importance to other senior officials in the agency. Moments after that, the email was again forwarded by Deputy Undersecretary James Kvaal to Phil Martin, the confidential assistant to Education Secretary Duncan, with a simple “Let’s discuss.”
The following day (July 20), Kvaal sketched out a plan in which he and Bergeron would call several individuals and entities apparently to inform them of the soon-to-be released Education Department regulations.
In his reply Bergeron wrote, “Also there’s the Eisman/Schluman [sic]/et al but Eisman is a short seller anyway you cut it and anything you tell Schulman gets to Eisman.” Diane Schulman is a partner of the Indago Group. The Indago Group is a research firm that serves clients in several fields including the investment community. Schulman had been working for Eisman and accompanied him on several meetings with Dept of Ed officials in the months leading up to the agency’s proposed regulations.
Documents suggest the people on this list were notified two days before the new rules were publicly released.
The proposed rules were released to the public on July 23, 2010. On August 4, Harkin’s Senate HELP Committee held a hearing that skewered career colleges. The most damning testimony came from Gregory D. Kutz. He was the managing director of the Forensic Audit and Special Investigations team for the Government Accountability Office.
Kutz’s testimony included the submission of a 28-page report detailing an undercover sting of career college recruiting practices in which GAO investigators posed as applicants. Kutz testified that recruiters at all 15 colleges tested made deceptive or otherwise questionable statements to the GAO undercover investigators. Further, Kutz claimed four colleges encouraged fraudulent practices.
The triple whammy of the Harkin hearing, Kutz’s testimony, and the proposed Department of Education rules occurred within days of one another. The result was calamitous for career colleges. For-profit college stock prices plummeted. Many of the publicly-traded companies saw the value of their stocks decline as much as 35-50%. No doubt this would have been deeply disturbing to most investors. On the other hand, short-sellers anticipating such a drop could have made an absolute killing in the market.
Post Script
Close examination of the GAO report submitted by Kutz to the Harkin
hearing and detailed in The American Spectator
(October
6, 2010) resulted in a FOIA request by this columnist. The GAO
was less than forthcoming in the answering all questions. However,
it did quietly revise the original report and replaced it on the
GAO’s website without public notice.
The revised report included changes that were so dramatic that it called into question either the competence or the integrity of the GAO. This development was enough to lead to FOIAs filed with the Department of Education. It also led to further examination of the GAO report.
A coalition of for-profit colleges obtained all available electronic recordings of the GAO undercover investigation and had them analyzed by a third party. The results of the analysis were damning: For the GAO. The analysis found numerous instances in which the GAO fabricated entire conversations. Further, the GAO studiously ignored statements in the exchanges between recruiters and GAO investigators that portrayed career college recruiters as acting professionally and responsibly. The GAO report could be viewed as completely fraudulent.
In March 2011, U.S. Comptroller General Gene Dodaro relieved Kutz of his duties as the head of the GAO’s Forensic Audit and Special Investigations unit. In a written statement, Dodaro said the change will “ensure greater attention to the issues that led to the need to produce the errata to the for-profit schools report and by the subsequent inspection.”
Mark Hyman hosts “Behind the Headlines,” a commentary program for Sinclair Broadcast Group.
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
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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