Department of Education Meetings with Short-Seller Investors on Gainful Employment Regulation
As highlighted in media coverage, short-sellers have been engaged and interested parties in the development of the Department of Education's gainful employment regulation.
The effort began with meetings with Department of Education officials in 2009 to discuss regulation of the career college sector. FOIA documents obtained by the Coalition for Educational Success clearly demonstrate that senior Department of Education officials met and communicated frequently with known short-sellers, including Steve Eisman, Antal Desai and Kent McGaughy, Jr. of CPMG to discuss the proposed gainful employment regulation.We now know that this was just the beginning…
As highlighted recently in the Wall Street Journal and National Journal, short sellers have been engaged and interested parties in the development of the Department of Education’s proposed gainful employment regulation. The effort began with meetings with Department of Education officials in 2009 to discuss regulation of the career college sector.
FOIA documents newly obtained by the Coalition for Educational Success now clearly demonstrate that senior Department of Education officials met and communicated frequently with known short sellers, including Antal Desai and Kent McGaughy, Jr. of CPMG to discuss the proposed gainful employment regulation.
This clear evidence thoroughly contradicts to the recent statements made on February 10, 2011 by Deputy Assistant Secretary of Education David Bergeron, that the agency wasn’t aware of the dubious financial interests of short-seller Desai.
In a story that appears in National Journal, Bergeron claimed that “because of our lens at that point, he (Desai) wasn’t on my radar.” Bergeron continued “Until we got fairly far along in the process, I didn’t know what a short seller was. I have been at the department for 32 years. We deal with financial aid, registrars, deans, and presidents. No one from Wall Street was following what we were doing.”
Nothing could be further from the truth.
A closer look at communications between Department officials, Desai and other short sellers, now made available through our FOIA requests, reveals that the Department’s policy-making process was being heavily influenced by those who “bet short” on “for profit” stocks, brought little to the table, but stood to gain billions of dollars financially from greater regulation of career colleges.
The Department of Education followed the short sellers' game plan in creating the gainful employment regulation
In August of 2009, Desai and McGaughy, short sellers from CPMG, met with Bergeron and Ann Manheimer, Director, Workforce Development at the Department of Education. Desai presented a document to the Department that attacked career colleges and laid out the game plan for how to attack the sector moving forward. At the end of the presentation he presented a slide titled “What to Do?”. This slide included 4 bullet points:
- Congressional education committees and congressional investigative committees should investigate and increase oversight of the for-profit sector.
- Legislative safeguards should be analyzed and reinstated.
- Regional and national accreditation agencies should be audited to determine effectiveness.
- The GAO should revisit the for-profit sector with a focus on sales and marketing practices, advertising claims, recruiter compensation practices, drop-out/graduation rates, gainful employment claims, default rate management practices, lifetime default rates and total defaults.
It is clear from subsequent email communication that these officials wanted the short-sellers to brief other Department staff.
- Desai e-mails, Bergeron and Manheimer following a meeting, “Per our discussion, we would relish the opportunity to return to DC to participate in a broader discussion and of course, make our research and perspectives available to you and your staff”.
- Lee Godown, CPMG’s lobbyist emails Bergeron and Manheimer in September of 2009, stating, “during our last meeting you mentioned the possibility of having them do a brief to a larger group of interagency folks”.
- In retrospect, we now know that the Department executed every element of the Desai game plan. In 2010, Senator Harkin and the HELP committee began investigating for-profit colleges. In addition, the HELP committee has reviewed the for-profit accreditation, as well as commissioning the GAO to write a report targeting for-profit recruiting and marketing practices. (The circumstances and findings of that report are now the subject of several investigations.) Finally, the Department has focused on legislative safeguards during their NPRM process.
The Department of Education used short-sellers to provide testimonials against the career college sector
- On April 2, 2010, Manheimer responds to an email from Desai, “This request may seem a little odd, but by any chance have you collected anecdotes or data on examples of students taking on debt with nothing to show for it? I am looking esp for particular examples of students enrolling with promises of high earnings only to find out their training did not qualify them for the job they expected to get -- examples I have already, indicate students end up unable to repay their debt because they can only find a minimum wage job, they stay with the job they had before buying the training or they cannot find a job. FYI - I am already doing a literature search on this - just wondered if you had come up with instances during your own work.”
- On April 5, 2010, Desai responds to Manheimer's email, “Hi Ann, Thanks for the email. As you know, we have spent considerable time conducting research at homeless shelters and have found that for-profits are systematically and deceptively recruiting the homeless with empty promises. Sadly, the empty promises do not lead to a better life, just a pile of debt whose repayment is untenable, which makes a student loan default inevitable…Our big takeaway is that excessive debts at for-profits perpetuate joblessness, which eventually perpetuates homelessness. Once a student defaults on their debt, their credit record becomes tarnished beyond repair, making it nearly required for most quality jobs. I have attached a copy of excerpts from conversations with homeless shelter directors and their clients addressing your request. I would be happy to put you in touch with them.
I am also in the process of pulling some additional student interviews that I will send your way once completed. Regarding data analysis, I wonder if pulling data from the income contingent repayment database wouldn't provide solid analytical support for the high debt / low to no income point. Theoretically, one could analyze the database of students in the income contingent repayment program to determine debt levels and income levels, etc. Feel free to reach out if you have any additional questions or need any further help."
- At two different times on April 8 and April 20 Desai forwards testimonials to Manheimer. On April 30 Manheimer sends Desai an email asking if he will be forwarding additional contact information for those in the testimonials. Desai responds, “The presentation attached in the previous email has contact names embedded next to the quotes. If you need telephone numbers, let me know. Also, it would be helpful to provide a name of the person who might be calling so that our researcher can give the homeless shelter directors a heads up.” Manheimer’s response to Desai ’s email was not included in the FOIA documents. Between April 30 and May 5 several articles in prominent newspapers highlighted the issue of for-profit universities recruiting students at homeless shelters. In several cases the names cited in the article came from Desai’s research. It is now clear that the Department orchestrated its campaign targeting for-profit colleges using biased short seller-generated research to generate negative stories.
- On April 9, 2010, Manheimer emails Desai and asks, “Is it okay to forward your contact information and the contacts you have provided below to our Office of Inspector General.” Desai responds, “Absolutely”.
- On July 7, 2010, Desai forwards a letter that homeless shelter executives sent to Secretary Duncan. Desai states, “We have enclosed a copy of the letter, which we facilitated, in case you have not already seen it.” On July 9, 2010 a ProPublica article revealing that several signers of the June 17 letter from administrators of homeless shelters felt they were misled by the person who coordinated the signing of the letter, that she failed to disclose who she was working for, and that several did not have actual knowledge of recruiting occurring at homeless shelters. ProPublica later reports that the coordinator of the letter was paid by Desai.
The Department of Education communicated and met regularly with short-sellers and incorporated their suggestions into the gainful employment regulation
- On October 28, 2009, Desai sent an email to Bergeron, Manheimer and several other ED officials, stating, “Thank you for making time to meet with us last Wednesday and also including Tony and Brian in our discussion. As with our first meeting a couple of months ago, we are encouraged by your deep understanding of the issues at hand and your commitment to reform.”
- On December 8, 2009, Desai emails 10 Senate and House staffers. He copies Manheimer and Bergeron on these emails. The email asks the recipients to actively support ED staffers in their effort to regulate the for-profit sector.
- On December 18, 2009, CPMG’s lobbyist asks Bergeron and Manheimer if it would be possible to obtain a letter sent by OIG to the department regarding an accreditor. This is an unusual request and hints at secret information sharing.
- On January 6, 2010, CPMG sends an email to Bergeron, Manheimer and several other DOE officials . In this email they state, “In light of the upcoming negotiated rulemaking session concerning program integrity, we wanted to share with you a few specific suggestions that address Title IV loopholes currently being exploited by these Title IV recruiting machines.” They end the email by stating, “we hope you will consider our suggestions as the process moves forward.” Based on the presentation it appears the Department incorporated CPMG’s suggestions into the final regulation.
- On January 27, 2010, CPMG sends an email to Bergeron, Manheimer and several other DOE officials. In this email they state that they have been following the NPRM process and “hear that it is progressing well”.
- On February 23, 2010, Desai sends an email to Bergeron, Manheimer and several other DOE officials. Desai commends the department on the progress achieved during the most recent negotiating session. He attaches a memo outlining CPMG’s perspective on the gainful employment and incentive compensation rules that argue for the gainful employment regulation.
- On April 1, 2011, a lobbyist for CPMG receives an email from Kathleen Smith at the Department of Education regarding a meeting. In her email Smith states, “As we discussed David will not be able to attend but members of his staff will be there on his behalf.” Smith copies Bergeron and Manheimer on her email. Manheimer forwards this message to Godown a lobbyist with CPMG with the following message, “Forwarding – looks like progress – not sure I will be there.” Godown responds, “Thanks, Ann! Much appreciated. Have a great weekend. Looks like a goodie…”
- On April 14, 2010, Desai forwards an analyst report discussing the fact that the gainful employment regulations may contain more exemptions than originally thought. In the email Desai asks, “Ann, Is this reporting correct?”
- On April 20, 2010, Manheimer sends an email to Desai after Desai missed a conference call. She states, “Hope all is well with your wife – pls don’t forget about the information on the shelters – Ann.” At no point in the email chain does Desai mention his wife.
- On May 7, 2010, Desai sends an email to Bergeron, Manheimer and Tony Garagano at the Department. He states, "I thought you all might be interested in reading some responses to the Frontline piece, "College, Inc." that were posted on Frontline's webpage. It might be worthwhile to reach out to these former professors if you are still looking for testimonials."
Secretary Bergeron’s statement that the Department wasn’t aware of the “dubious financial interests” of Desai is in and of itself dubious
In a February 10, 2011 interview with National Journal, “Bergeron admitted that the agency wasn't aware of the dubious financial interests of lesser-known short-seller Antal Desia of CPMG in Dallas.” This is simply hard to believe.
- In August of 2009, Bergeron and Manheimer met for the first time with short-sellers from CPMG Investments, Desai and McGaughy. This meeting was arranged by Godown, a lobbyist for Public Strategies. In arranging the meeting, Godown stated, “I have a client (CPMG Investments) who has put together an impressive body of statistics and information on the for-profit education industry…They have quite a database of individuals (students, recruiters, etc.) who have been taken advantage of that they are willing to turn over.” After confirming their meeting, Godown sent the Department a bio for McGaughy and Desai. The bio stated, “R. Kent McGaughy, Jr., is a Managing Director and shareholder of CPMG Inc…Antal R. Desai is a principal of CPMG, Inc.” A Google search of "Kent McGaughy" returns, as its first result, a story titled, “Double whammy in stock fraud case. Short-sellers trash, then sue, Santa Clara tech firm”.
- CPMG was not the only short-seller that Bergeron met with. In April of 2010, Bergeron and Robert Shireman (Undersecretary of Postsecondary Education) met with noted short seller Steve Eisman. Diane Schulman, a Partner with the Indago Group, set-up the meeting by e-mailing Bergeron, “As I mentioned, Steve Eisman [Partner with FrontPoint Partners], Matthew Leahy [Analyst with FrontPoint Partners] and I will be in Washington for meetings on Friday, April 16th. Steve and Matt would love to have a chance to share some of their exhaustive research on the for-profit education industry and get your input.” Bergeron forwarded Schulman’s email to Shireman and Smith at the Department of Education with the message, “I suggest we take this meeting. I have some background to share.”
- On September 9, 2010, CPMG’s attorneys filed public comments to the gainful employment regulation. In the cover letter to this filing CPMG’s attorney states, “My client has studied the industry intensely for the past two years and maintains a short position in the securities of some of the publically traded for-profit education companies.” This short-seller disclosure is repeated on page 2 of CPMG’s comments. Desai forwards this filing to Manheimer, Bergeron and others on September 13, 2010 with the message, “Dear David and Ann, FYI”.
Five months passed between the date of the public filing and a public disclosure from the Department of inappropriate contact with this short seller. i.e “at least one short-seller probably should have been banned from the meetings because of his ties to Wall Street.”
View ED second partial response to Coalition FOIA #1
- Part 1
- Part 2
- Part 3
- Read the Coalition’s press release on the Department’s withholding of 37,000 requested documents.