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U.S. Department of Education Sued: Alleged Conspiring with Wall Street Hedge Fund Manager

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U.S. Department of Education Sued:

Alleged Conspiring with Wall Street Hedge Fund Manager

By Linda Dobson

WallStreet U.S. Department of Education

Simultaneously, through emails and conference calls, Eisman was advising Education Department officials -- and one White House adviser...

Well, well, well; who would have ever thought writing about the U.S. Department of Education would include needing to read up on Wall Street’s “King of Shorts?”

This story follows on the heels of Parent at the Helm’s reporting that the agency is full-out breaking the law engaging in actions that are specifically forbidden by the law that created it. (Please see “The U.S. Department of Education is Breaking the Law: Pass It On” and “What is the U.S. Department of Education Doing Illegally Today?” for some background on how this Department operates.)

U.S. Department of Education Regulation Proposal

that Has Everyone Angry

The regulation in question is known as the Gainful Employment Rule, described by Inside Higher Education as:

Last July, the U.S. Department of Education (ED) proposed its “Gainful Employment Rule,” which seeks to establish complex measures for determining whether education programs at proprietary postsecondary education institutions (and vocational programs at nonprofit colleges) lead to gainful employment in a recognized occupation. Under the proposed rule, a program’s eligibility for federal student financial aid under Title IV of the Higher Education Act would be based on meeting certain metrics related to student loan debt. ED recently sent a revised version of this regulation to the Office of Management and Budget, the agency in charge of reviewing regulations before they are made final. The revised rule could be out any day.

The Hill’s Congress Blog outlines some of the opposition to the Gainful Employment Rule, as well as the accounting nightmare it would create. There’s also the privacy issue of students’ records and U.S. Department of Education lack of transparency that has many worried about just who besides the Social Security Administration would get their hands and eyes on them.

Against all logic and growing opposition from both sides of the political spectrum, the U.S. Department of Education (ED) seems poised and determined to proceed with the new Gainful Employment regulations, which would serve as a guidepost for their issuance of federal student loans for private sector colleges. The proposed Gainful Employment regulations would require that career education providers and programs provide students for “gainful employment” in recognized occupations.

To determine if these programs are eligible, ED wants to tie its federal loans to students’ debt-to-income ratio as well as the repayment rates of the for-profit institution. While there has been much debate over the origin of this proposal, its impact could not be more clear: for-profit colleges would suffer and, more significantly, low-income and minority college enrollment would drop precipitously…

…But the real answer may be more simple. After reviewing the correspondence between ED officials and parties with a financial interest in increased regulations of for-profit colleges,  Sen. Mike Enzi asked for the U.S. Attorney in New York to investigate. Already, the Department of Education’s Inspector General is looking into conflict of interest charges. Slowly, yet ever so clearly, a cloud is forming around the motives of those crafting the gainful employment rules and short sellers who stand to profit if private-sector education stocks tumble. [Emphasis added.]

Herein lies the rub. Enter stage left, one Steve Eisman.

The U.S. Department of Education Has “Help” Creating the New Regulations

Eisman is a star manager with FrontPoint Partners, “once a multibillion-dollar hedge fund before it was battered by allegations of insider trading,” according to DealBook. “During the financial crisis, the hedge fund was lauded for the insight of one of its most colorful managers, Steve Eisman, who had placed a bet against the subprime mortgage market that earned him hundreds of millions…”

Interesting, then, that Eisman becomes the voice of warning regarding the same shorts occurring with higher education. Mother Jones writes of Eisman’s latest speech titled, “Subprime Goes to College:”

“Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong,” Eisman said. “The for-profit education industry has proven equal to the task.” (All of Eisman’s remarks here come from a copy of his prepared remarks obtained by Mother Jones.)

And Eisman is sounding the warning even as FrontPoint Partners “will shut down most of its funds by the end of the month.”

This “interesting” situation grew even more intriguing upon reading an article dated May 31, 2011 and titled “Education Department Rules on For-Profit Schools Created With Investor’s Help.” Can you guess which investor? Why, it’s none other than the investor who gave a speech to help save us from the social destruction and morally bankruptcy of for-profit and vocational colleges, Steve Eisman.

A proposed regulation from the Education Department threatens to devastate for-profit career or trade schools, but one thing is even more controversial than the regulation — how it was crafted.

Education Department officials were encouraged and advised about the content of the regulation by a man who stood to make millions if it were issued.

“Wall Street investors were manipulating the regulatory process and Department of Education officials were letting them,” charged Melanie Sloan of a liberal-leaning ethics watchdog called Citizens For Responsibility and Ethics in Washington.

Is Eisman setting up his next short windfall? Is this a great way to start a new fund and set up a new job?  Citizens for Responsibility and Ethics thinks it just might be.

Suing the U.S. Department of Education and Requesting Securities and Exchange Commission Investigation

Sloan has sued the Department of Education over the matter and called on the Securities and Exchange Commission to investigate. An inspector general is also investigating whether officials shared sensitive information with officers of a hedge fund that stood to gain from it.

“It is an entirely new thing to actually try and manipulate the regulation in order to change the stock price and make a lot of money,” she said.

Among others, Sloan is referring to Steven Eisman, a hedge fund manager and a figure in the book “The Big Short,” who testified in the Senate against for-profit career or trade schools, attacking them as “fundamentally unsound.”

At the same time, he was betting that the stocks of those companies would fall, a practice known as short selling. “Making sure that they were going to be defamed and that their value was going to be depressed,” said Harry Alford, head of the National Black Chamber of Commerce, who worries about the schools because they serve many minority students.

Simultaneously, through emails and conference calls, Eisman was advising Education Department officials — and one White House adviser — in detail on how best to write the new regulation, which he estimated would reduce the schools’ earnings by as much as 75 percent.

Sloan Not Alone In Smelling Something Fishy

At the same time, he was betting that the stocks of those companies would fall, a practice known as short selling. “Making sure that they were going to be defamed and that their value was going to be depressed,” said Harry Alford, head of the National Black Chamber of Commerce, who worries about the schools because they serve many minority students.

Simultaneously, through emails and conference calls, Eisman was advising Education Department officials — and one White House adviser — in detail on how best to write the new regulation, which he estimated would reduce the schools’ earnings by as much as 75 percent.

The proposed regulation from the administration is aimed at what are known as career or vocational schools. The rule would cut federal aid to programs where student debt levels are deemed to be too high and where students are struggling to repay their loans.

Rep. Rob Andrews, D-N.J., said: “There are some very serious questions about the manipulation of the stock market by some short sellers here, who stand to benefit if the value of the schools drops and who therefore stood to benefit from the rule being put in place.”

On May 26, 2010, Eisman emailed several education department officials, including Secretary Arne Duncan and policy director David Bergeron, sending them a PowerPoint presentation on for-profit schools which he noted was “very negative on the industry.”

And he warned that “if nothing is done, we are on the cusp of a new social disaster” as he argued that student loan defaults could equal the subprime mortgage meltdown that crippled the economy.

But on June 14, 2010, an outside interest group cautioned officials by email about Eisman, saying, “Keep in mind that this guy is a short-seller and as such has a tendency to exaggerate.”

“In some emails you see Department of Education officials caution other officials about how involved they should be with Eisman, given that he has a financial interest in for-profit stocks,” Sloan said.

In one email, Eisman mentioned rumors the Department was going to weaken the regulation and urged officials not to back off.

Though no official from the Education Department would appear on camera, officials did issue this statement to Fox News:

“We went out of our way to speak with as many people as possible, including numerous members of the for-profit college industry and their advocates to ensure that our efforts would do the best job of protecting tax payer dollars against waste, fraud, and abuse.”

But a former Clinton official said if the shoe were on the other foot, Democrats would have a fit, and for good reason. “If it was a Republican administration that were doing this, the Democrats would be on the floor of the Congress in the House and Senate screaming bloody outrage.”

Calls to Eisman’s office for comment were not returned.

No one denies that some for-profit schools have questionable practices that should be curtailed.

But critics say that is no excuse to work with a hedge fund manager who stood to gain from the regulation whose content he was trying to guide.

One might say Eisman, a star Wall Street hedge fund operator, has seen the light and is trying to save a whole generation of Americans from self-inflicted economic demise.

On second thought, how many star Wall Street hedge fund operators ever saw (or created) a short opportunity of which he didn’t take advantage? And U.S. education? It’s all about money anymore.

Follow This Story as It Unfolds and Educate Yourself On

What The U.S. Department of Education is Doing

http://www.observer.com/term/steve-eisman

http://dealbook.nytimes.com/2011/05/19/frontpoint-to-shut-most-funds-after-insider-charges/

http://motherjones.com/mojo/2010/05/steve-eisman-big-short-michael-lewis

http://www.wjitimesobserver.com/stories/fourth-stories/federal-pressures-mount-for-private-universities-1.2579827

http://www.insidehighered.com/views/2011/05/26/solove_essay_on_gainful_employment_rules_putting_student_privacy_at_risk

http://thehill.com/blogs/congress-blog/education/163941-gainful-employment-

http://www.thenewamerican.com/culture/education/7585-does-proposed-regulations-raise-student-privacy-concerns

http://www.usatoday.com/news/washington/2011-05-24-rules-comment-process_n.htm?csp=34news

http://www.foxnews.com/politics/2011/05/31/education-department-rules-profit-schools-created-investors-help/

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