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January 25th, 2011 11:41 am
“Collegegate” – Wall Street Journal Details Short Sellers’ Meetings with Education Department Officials
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The festering “Collegegate” saga that CFIF has been following for weeks today reached front-page status in The Wall Street Journal.

We’ve detailed the allegations of insider trading against career colleges, which prompted Senators Tom Coburn (R – Oklahoma) and Richard Burr (R – North Carolina) to ask whether officials within Obama’s Department of Education, “may have leaked the proposed regulations to parties supporting the Administration’s position and investors who stand to benefit from the failure of the proprietary school sector.”  We also detailed how the Government Accountability Office (GAO) withdrew, then revised and republished a defective study originally released last summer involving undercover “students” sent to capture information on for-profit colleges.  The GAO’s revisions all slanted in one direction – the original report inaccurately cast career colleges in an unfavorable light, while the revisions indicate that the GAO’s undercover students may have intended to entrap career college admissions personnel.  According to the GAO’s own estimate, only 1 percent of reports require correction, and the statistical likelihood that all of its flaws skewed in the same direction (unfavorably toward for-profit colleges) was 1 in 65,536.  Tellingly, the stock value of for-profit colleges reportedly fell 14%, or $4.2 billion, following the GAO report.

Now, under the headline “A ‘Short’ Plays Washington,” the Journal exposes how hedge fund operators sold short their stocks in for-profit career colleges, and sought meetings with federal officials at the Department of Education:

‘Hello, my name is Steven Eisman,’ began an email to an Education Department official in May.  ‘I wanted to bring to your attention many of the unsaid or unknown aspects of this industry.’  Mr. Eisman runs a hedge fund called FrontPoint Financial Services, whose hugely profitable 2007 bet that housing would collapse was chronicled in the book ‘The Big Short.’  In the past year, Mr. Eisman has sold short the stocks of for-profit education companies.  He and some other investors betting on these stocks to fall have sought meetings with Education Department officials, and in some cases gotten a hearing.  In emails and presentations, the investors have painted the for-profit industry in a highly critical light.”

The Journal also quotes Citizens for Responsibility and Ethics in Washington (CREW), which wrote Obama’s Education Secretary Arne Duncan that hedge fund managers were able to secure “direct and sustained input into the regulatory process.”  “In what the group called ‘more troubling,'” the article states, “it said Education Department officials sought and received investors’ input despite knowing their financial motives.”

Career colleges have flourished for good reason.  They offer an education focusing on hands-on occupational training, and excel at serving non-traditional students who often have children, are working, are typically older and are more diverse than their peers at traditional schools.  This is particularly important during the current period of job scarcity and worldwide economic competition.  Unfortunately, the Obama Education Department seeks to cripple them by declaring them ineligible for federal aid.  CFIF has formally petitioned House Committee on Oversight and Government Reform Chairman-Elect Darrell Issa (R – California) to investigate the Obama Education Department’s continuing campaign against for-profit colleges, and that investigation is underway.

We at CFIF do not begrudge any citizen’s First Amendment right to petition the federal government for redress of grievances.  It is important, however, that the new 112th Congress ensure that these troubling allegations don’t reveal impropriety within the government itself.

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