Recently revealed information suggests there may have been a financial motive involved in the Department of Education’s rulemaking.
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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.
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.”
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