On Tuesday last week, the Santa Barbara News-Press printed a story that quoted a former registrar of Career Education Corporation (NASDAQ: CECO) alleging that company officials forged signatures and altered records to comply with requirements of accrediting organizations. The original story morphed to Wall Street trading desks as an accusation that the company had inflated its business results falsely.
On Wednesday and Thursday, CECO's stock fell from about $56 to $36.24, a loss of just under $20 a share. With 99.2 million shares outstanding, the company shed $1.98 billion in capitalized value. It didn't do so alone. Private universities operating either principally or significantly via the Internet had been among the market's high flyers since the Dow and NASDAQ turned up in mid-March. In the same two-day period, the stock of ITT Educational Services (ESI) fell from $56 to $49, for a $525 million capital loss. Sound-alike COCO, Corinthian Colleges, dropped $10 a share, equal to about $438 million in value. The Apollo Group (APOL) lost $6 a share, for capital loss of about $1.3 billion. The Apollo Group-University of Phoenix (UOPX) also lost $6, or $600 million.
In this game of whisper-whisper, the two principal business news sources, Dow-Jones and Reuters, were equally at fault.
Dow-Jones, Wednesday, 5:42 p.m. ET: "An item in Wednesday's edition of Santa Barbara News Press reported that a former registrar at Brooks Institute alleges the school officials acted illegally and improperly to inflate enrollment and boost the bottom line."
Reuters, Wednesday, 9:18 p.m. ET: "Shares in Career Education, a for-profit college operator, fell sharply on Wednesday despite its denial of claims by a former employee who accused officials at one of its schools of inflating enrollment numbers to boost profits."
To be fair to Wall Street's institutional traders, they can't wait to confirm bad news. They could lose millions. They have to sell, and sell fast. They can always pick up the pieces later if they're wrong. And Career Education had had another "disgruntled employee" complaint in November, at its Brooks Institute school of photography in New Jersey. (Brooks has existed for more than 50 years; the CECO acquisition is recent.) There, a former Brooks employee charged the company with wrongful termination, saying that she was fired for refusing to falsify student records. CECO's stock had taken a hit at that time, but recovered. Plus -- another plus -- the Santa Barbara reporter had apparently gone back looking for more damaging quotes in a Wednesday story.
No mainstream news organizations picked up on the Santa Barbara story; it was left to the business wires. By Friday morning, in accounts summarizing an early-morning conference call put on by CECO executives, Dow-Jones and Reuters had come round to reporting the accusations accurately, if a great deal less excitingly.
By that time, the damage had been done, billions of dollars worth to big investors and small alike. Friday's blow-by-blow account in the real-time postings on briefing.com told the dismal story. Corinthian Colleges fell suddenly by more than $13 at 10:58; in the same minute, trading in COCO was halted. "Hearing that intra-day plunge based on rumor of civil lawsuit," posted briefing.com.
By 11:02, briefing.com's floor reporter, doing yeoman work, had talked to trading desks and heard that there was no civil lawsuit. The drop appeared to be some kind of big trading error.
At noon, COCO execs appeared on CNBC to say there was no material reason for the stock's fall. Shares resumed trading, and almost instantly got bid up by about $11. By 1:12 the NASDAQ had issued a statement saying the share price drop had been caused by the "misuse or malfunction" of an electronic trading system -- this via Bloomberg. (Later in the day, word got out that somebody had tried to sell a million COCO shares way too fast.)
Half an hour later, briefing.com headlined "Education stocks dismantled," noting that "recent volatility in CECO and the co's widespread presence makes it a target for short sellers to 'dig up some dirt' at other locations." The whole education sector fell, and fell hard.
ThinkEquity, a Minneapolis-based research and investment firm, got it right. Disgruntled employees and wrongful termination suits aren't unusual, and statements like those initially reported probably wouldn't have hit Ford or General Electric or even MicroSoft very badly. But Career Education and other for-profit companies have started to take over, buy out, and out-compete traditional non-profit educational institutions, in the process acquiring some former non-profit-type employees -- employees who now do not understand a competitive, entrepreneurial culture. These employees complain, for example, that CECO asks them to interview students for new sales leads. Imagine that.
As summarized by briefing.com on Thursday, December 4, ThinkEquity said, "Any former employee or student with an ax to grind now has a receptive reporter at their local suburban daily…More stories in this vein could surface over the next several weeks or months."
That is, unfortunately, very likely to be true. In the culture clash between old and new education models, reporters will line up with the old. The CECO story broke in a Santa Barbara paper, then spread to the news wires, and no further. But can 20/20 or 60 Minutes be far behind?
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