National Legal and Policy Center: NLPC Calls for SEC Probe of Education Short-Selling Scheme

National Legal and Policy Center

March 29, 2011
By Ken Boehm

Today, I asked the Securities and Exchange Commission (SEC) to investigate the activities of short sellers, including Steven Eisman, who profited from the collapse of share prices of companies that are in the for-profit education field. Evidence continues to emerge that officials of the Education Department cooperated in the shorts’ campaign. The same request was previously made by Citizens for Responsibility and Ethics in Washington (CREW), and other ethics advocates. My letter reads, in part:

Already, voluminous documents obtained through the Freedom of Information Act, related litigation and public records have demonstrated beyond debate the existence of a coordinated effort by short sellers to manipulate the stock prices of for-profit firms. These extensive activities have sought to influence government policy in such a way as to depress the share prices of shorted stocks.

A major feature of the short-seller effort has been to promote Department of Education policies that would result in draconian new standards for education loans applicable to students at for-profit schools. This intended slashing of funds would have the effect sought by the short-sellers: a collapse in the share prices of the listed for-profit trade school companies resulting in a direct monetary benefit to the shorts.

It is also beyond debate that the tactics of the short sellers and their allies appear to have worked insofar as share prices of affected companies have lost billions of dollars.

From the date that short-seller Steven Eisman was asked by the Senate Committee on Health, Education, Labor and Pensions to testify against for-profit colleges at a Senate hearing on June 24, 2010 until December 17, 2010 – a period marking a well-organized effort by short-sellers to manipulate the price of for-profit educational stocks in a downward direction the value of 13 publicly-traded for-profit educational stocks fell by $7.9 billion, or approximately 27%.

It is also beyond debate that the short-sellers and their allies kept in regular communication with senior Department of Education officials as the department promulgated a regulation that appeared tailor-made to undercut the stock price of for-profit education companies. An excellent letter written to you on March 1, 2011 by Anne L. Weismann, Chief Counsel of Citizens for Responsibility and Ethics in Washington, provided you with example after example of emails showing the close communication, if not collaboration, between the Department of Education and the short-sellers.

Those emails show just how blatant the short seller interest in destroying the value of for-profit educational stocks was. In one cited email from Steve Eisman to the Department of Education’s Budget Development Staff Director, the hedge fund operator stated, “Education stocks are running because people are hearing DOE is backing down on gainful employment.” This email was then circulated to other Department officials. These inside communications speak volumes as to the shared agenda of the short sellers and their allies.

It is also beyond debate that other short sellers were doing their level best to manipulate government officials to set forth policies that would cut the share prices of the affected firms and thus enrich those short sellers.
A series of emails obtained through the Freedom of Information Act by the Coalition for Educational Excellence (the Coalition), an organization of for-profit schools, showed a similar pattern of communications from the short sellers to Department of Education officials. Anyone reading those emails, which subsequently have been posted online at the group’s website, cannot fail to see confidential meetings, slide presentations, strategic planning, proposed briefings of Department of Education staff, and a host of other efforts to promote the end objective of the short sellers, which is the destruction of the for-profit industry.

The emails obtained by the Coalition reveal the following:
    The Department of Education has repeatedly followed the guidance of the short sellers in promulgating the gainful employment regulation.

    The Department of Education collaborated with short sellers in providing testimonials against the career college sector.

    The Department of Education communicated with and met regularly with short sellers and used their suggestions in drafting the gainful employment regulation. The emails cited in the accompanying footnote show how the short sellers and their lobbyists were working hand in glove with the department.

    Deputy Assistant Secretary David Bergeron falsely stated that the Department of Education wasn’t aware of the “dubious financial interests” of short seller Antal R. Desai, a Managing Director and principal of short selling firm CPMG, Inc. This statement of “admission” was given in a February 10, 2011 National Journal interview.

Bergeron’s false statement is particularly egregious. Emails obtained by the Coalition appear to flatly contradict his assertion:

    Assistant Secretary Bergeron and another Education official held a meeting with Antal Desai and another CPMG, Inc. principal that was arranged by a lobbyist. The meeting materials identified both men as CPMG, Inc.

    In April 2010, Assistant Secretary Bergeron and Assistant Secretary of Education Robert Shireman met with noted short-seller Steve Eisman, well known at that time for his highly publicized effort to sell stocks of for-profit education firms (short).

    On September 9, 2010, CPMG filed public comments on the Education gainful employment regulation. The cover letter identified CPMG as a firm that “maintains a short position in the securities of some of the publicly-traded for-profit education companies.”

The recent succession of major frauds and scandals that have shaken investor confidence in the stock market and investing in general scarcely needs to be belabored in any letter to the Securities and Exchange Commission. As you are well aware, a combination of short-seller action and insufficient industry oversight led to the collapse of the mortgage industry – an event we surely do not want to see repeated in the for-profit education sector.

The matter outlined herein provides a compelling case for a vigorous investigation by your office, and not just because there is a strong indication that market prices may have been manipulated to result in billions of dollars of losses to investors. The facts also outline what has to be a dubious first: government policy being secretly influenced to serve short sellers’ objectives to profit from the destruction of share values.

The Miami Herald: Don't Target Only Career Colleges for Regulation

The Miami Herald
March 23, 2011

Don’t target only career colleges for regulation

The U.S. House of Representatives recent overwhelming rejection of the so-called gainful employment regulatory scheme is a testimony to lawmakers’ dissatisfaction with more regulations for our country’s career colleges.

The regulation, triggered by rising student defaults on federal loans and aimed at private institutions, begs the question why all education sectors — public, private, nonprofit and for-profit — weren’t being treated equally.

According to The Miami Herald’s March 11 editorial, Better bang for student bucks, student-loan defaults are of concern to private career-oriented schools only. The reality, however, is that they affect all schools — and at the same rate — when analyzed by student income levels. Research by Mark Kantrowitz, founder of, shows low-income students without family and personal financial resources have difficulty repaying loans regardless of where they attend school.

Most career-school students are hardworking adults who hold jobs and support a family. More than 75 percent are defined as independent or “self-supporting.” More than half have an annual family income of less than $20,000.

Average tuition at Florida’s 900 licensed career colleges is higher than that of public schools, but half that at private nonprofit schools. In turn, career colleges receive no direct taxpayer support, but pay $131 million in local, state and federal taxes.

It’s common sense that any business, or public education institution, will have unhappy consumers. It has been our experience at the Florida Association of Postsecondary Schools and Colleges — a statewide organization working on behalf of 370 degree-granting and 550 nondegree-granting career colleges — that most schools have systems in place to address issues such as those reported in the state attorney general investigation. The eight named colleges have worked hard to address complaints, which amount to less than 1 percent of students enrolled.

The job market in Miami-Dade County needs skilled workers trained for Florida’s fastest growing careers, such as information technology and healthcare. In the healthcare field alone, more than 60 percent of the state’s credentialed work force — nurses, technicians, medical assistants — are filled by career-college graduates.

It's time for structural changes to student-loan programs, but let's make sure that the rules are placed evenly across the board.

Kathy Mizereck, executive director, Florida Association of Postsecondary Schools and Colleges, Tallahassee

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BusinessWire: U.S. Department of Education Withholds 37,000 Documents in Response to Coalition FOIA Request

U.S. Department of Education Withholds 37,000 Documents in Response to Coalition FOIA Request

March 24, 2011

By Noah Black
Posted on March 28, 2011 by CAPPS

In response to a routine FOIA request from the Coalition for Educational Success, the Department of Education released 1,900 pages to the Coalition, while denying over 37,000 additional pages. The FOIA request sought documents related to dealings between DOE and investors who may have “shorted” stocks of for-profit colleges and others who are employed by the not-for-profit sector as well as documents related to the creation of the now-discredited Government Accountability Office report critical of career colleges.

“Last week, in the middle of the Administration’s ‘sunshine week’, a week purported to be dedicated to the open functioning of government, the Department of Education chose to hide in the shadows rather than bring anything to light,” said Penny Lee, managing director for the Coalition for Educational Success. “This denial of tens of thousands of pages only exacerbates longstanding concerns that the Department colluded with short-sellers during the formulation of the gainful employment regulation.”

A small percentage of the requested documents that were released by the Department, revealed further collaboration between senior Department officials and known short-sellers:

Ann Manheimer, Director, Workforce Development at the U.S. Department of Education emailed Antal Desai, a known short-seller at CPMG, requesting his views on gainful employment and providing timing for the Department’s Notice of Proposed Rulemaking (NPRM).

David Bergeron, Director of Policy and Budget Development for the Office of Postsecondary Education, met with short seller Desai, of CPMG, on April 19th to discuss the gainful employment proposal. Bergeron previously claimed that gainful employment was not discussed in his meetings with short sellers. The FOIA documents directly contradict his claim.

James Kvaal, Deputy Undersecretary of Education at the U.S. Department of Education, received and circulated to Martha Kanter, Undersecretary of Education, testimony and an interview with a former career college recruiter that was provided to him by a short-seller. Kvaal explicitly states that a “short-seller” sent him the testimony and interview.

On multiple occasions short-seller Desai forwarded negative media coverage of career colleges recruiting from homeless shelters. It was later revealed that his firm, CPMG, hired a researcher, who did not disclose her ties to short-sellers, to gather signatures from homeless shelter directors to sign a letter detailing recruiting abuses at the shelters that was sent to Secretary Duncan. Also included were a copy of his presentation on the abuses as well as names and contact information for individuals referenced in the presentation. Previous documents obtained under FOIA requests show that other proponents of the gainful employment rule could find no evidence of recruiting abuses at homeless shelters.

Notorious short-seller Manuel Asensio communicated with the Department requesting that a letter, which specifically targeted Bridgepoint Education, sent by a representative of his firm, be reviewed by senior Department officials. Department staff forwarded the letter to Alejandra Ceja, Chief of Staff for the Undersecretary of Education, for review.

Short-seller Antal Desai of CPMG, emailed David Bergeron, then Deputy Undersecretary of Education, and Ann Manheimer with specific responses to the talking points of opponents of the gainful employment regulation. Bergeron thanks Desai for his feedback and notes they are making his recommended points.

Robert Shireman, then Deputy Undersecretary of Education, set-up a meeting with Robert MacArthur, an employee of Alternative Research Service, a firm known for providing research to short-sellers. MacArthur requested that a representative of the SEC and/or DOJ attend. He also offers to bring an extensive collection of documents related to career colleges, including: DoE reports, IG reports, OMB/GAO reports, lawsuits against career colleges going back a decade and transcripts of enrollment representatives allegedly making misleading statements.

The Coalition’s FOIA request, originally filed on October 15, 2010, sought documents that would illuminate the influence investors – who “shorted” stocks of for-profit colleges and were known critics of the for-profit college industry — may have had on the creation of the Department’s gainful employment regulation. The FOIA request also sought documents related to the development of a GAO report about the for-profit college sector, a report that has since been substantially discredited.

Again and again, the Department repeatedly failed to comply with the law and produce the documents requested in the Coalition’s FOIA requests. Under the law, the Department has 20 days to respond to a FOIA request. Documents responding to the October 15, 2010, request didn’t start arriving until January 24, 2011, and now, nearly 6 months after the original request, the Department has released only a small fraction of the requested documents.

“Instead of shielding Department officials and Wall Street short-sellers, the Department needs to shine a light on how the Department’s policy making process was heavily influenced by those who ‘bet short’ on career college stocks, brought little to the table, but stood to gain billions of dollars financially from greater regulation of career colleges,” Lee added.

Previous documents released to the Coalition expose multiple contradictions between the Department’s actions and public statements. The documents reveal that high-ranking Department officials involved these short-sellers and critics in crucial discussions prior to the release of the NPRM and point to a compromised rulemaking process due in part to the process being orchestrated and driven by short-sellers who stood to gain billions of dollars financially from greater regulation of career colleges. These documents also wholly contradict statements made on February 10, 2011, by Deputy Assistant Secretary of Education David Bergeron, who said that the agency wasn’t aware of the dubious financial interests of short-seller Antal Desai.

These troubling contradictions only underscore the importance that the Department operate in a fully transparent and open manner. “It’s clear there’s more information being withheld by the Department. The Department of Education needs to adjusts its approach to meet the President’s commitment to transparent government rather than persist in its current course of delay, stonewalling and obfuscation,” said Penny Lee.