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 http://www.ed-success.org/, 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.