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Secretary of Education Duncan’s Office Under Investigation

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Secretary of Education Duncan’s Office

Under Investigation

By Linda Dobson

DollarSign US Department of EducationThe focus of US Department of Education Inspector General (IG) Kathleen Tighe’s investigation into the behavior of officials reporting to US Secretary of Education Arne Duncan consists of determining whether they “leaked [stock] market-sensitive material to short sellers – including a non-public audit from the Inspector General’s own office,” and whether anyone commenced trading on the confidential information, according to a report at Project on Government Oversight (POGO).

A Very Busy US Department of Education

They sure have been busy little beavers at the US Department of Education, haven’t they? They’re coming up with a national curriculum, breaking the law. Arne made phone calls to sway board members on the appointment of Louisiana’s state school superintendent, breaking the law. A previous report by Parent at the Helm revealed the cozy relationship between the US Department of Education and “short-trading king” Steve Eisman, over which the Department is being sued for…you guessed it…quite possibly breaking the law. Then there’s the story out of Stockton, California where they sent a SWAT team out to find someone suspected of student loan fraud, but I guess if it’s your own team and the US Department of Education went through the proper channels to purchase rifles (I saw the RFP), that’s not illegal (just immoral).

Tighe expresses confidence that she’ll get down to the bottom of this.

One sign of Wall Street’s strong interest in the government’s influence over for-profit education came at an invitation-only, $4,000-per-person investment conference held in Manhattan not long ago, where a pair of well-known stock gurus and short sellers highlighted the sector, one arguing that government regulation would boost its fortunes, the other predicting a crackdown by regulators that could spell financial ruin.

Publication of the new US Department of Education rule granting for-profit education firms lighter regulation immediately drove up the stock price of certain companies, some by more than 25 percent, in one case adding up to $700 million in extra value to the giant Apollo Group, which owns Phoenix University.

That outcome reflected a setback for both short sellers—who profit when the stocks lose value—and for experts inside US Department of Education who had been soliciting their advice in the apparent hope of tightening the rules that govern for-profit institutions.

US Department of Education Documents Made Available via FOIA

As it turns out, the Gainful Employment Rule, which sought 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, and which short sellers were hopeful would destroy many of the colleges, actually passed last week with “looser eligibility standards for students to receive hundreds of millions of dollars in federally guaranteed loans when they apply to for-profit universities.”

More important, last week’s new rule announcement also came after months of increasingly bizarre revelations about the written and personal interaction between some senior DoED officials and Wall Street short sellers. The portrait of that messy relationship began to emerge in recent months following the release of thousands of documents obtained from DoED under the Freedom of Information Act (FOIA)—pursuant to requests from for-profit industry groups, as well as from Citizens for Responsibility and Ethics in Washington (CREW), a non-profit watchdog that has been at the forefront of those seeking documentation. Both have turned over materials to the Securities and Exchange Commission (SEC) and called on the agency to conduct an independent investigation.

“Some people ought to be going to jail…”

While only a small number of the FOIA’d documents have so far been made public, the picture they paint is not a pretty one. Interest groups and Members of Congress have responded, asking for additional scrutiny of the issue. Grover Norquist, president of Americans for Tax Reform, recently called for an SEC investigation. Senators Joseph Lieberman (I-CT) and Michael Enzi (R-WY) have publicly expressed concerns about the role of short sellers, as has Thomas Coburn (R-OK), Ranking Member of the Senate’s Permanent Sub-Committee on Investigations. He called for the SEC to investigate whether Department of Education was “tipping hedge funds,” warning that, if proven, “some people ought to be going to jail in the Department of Education.”

POGO reporter Adam Zagorin had opportunity to interview IG Tighe, as well as share some of the documents he had in his possession.

Asked repeatedly if she would explore the possibility that members of Secretary of Education Arne Duncan’s staff might have been responsible, she offered no comment, saying only hat her broad-ranging inquiry—which also covers guidelines for contact between DoED personnel and outsiders—is expected to conclude over the summer.

“In a general terms, it would cause me a lot of concern if a report were disclosed prior to its final issuance,” she said, declining to address the issue more directly in the midst of her ongoing investigation. But she also made clear that if she finds evidence that confidential, market-sensitive reports or information from DoED did reach short sellers, she would not hesitate to open a separate “investigation” within her own IG office, and, if warranted, refer the matter for to the Securities and Exchange Commission or even to the Justice Department.

As she put it: “If we came to believe that insiders had traded on confidential information, we could refer it.”

Much US Department of Education Correspondence with Wall Street

The article shares information on a wide variety of correspondence, so I highly recommend you use the link above to read it in its entirety. Among the most interesting documents presented to IG Tighe is an e-mail exchange between a US Department of Education employee Ann Manheimer, Director of Workforce Development, and Antal Desai, the head of CPMG, a Houston-based short selling firm. “Apart from the propriety of Manheimer’s communication with a Wall Street speculator, a week later, some of the same information she gave him showed up in a Morgan Stanley investment report” – as a “leak.”

Keep your eye on this story, despite an investigation that will take all summer. At least then we’ll know if the US Department of Education is filled with criminals – or incompetence that should be a crime.

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