Domestic, For-Profit, Legislation, Required - Written by Elbert Chu on Friday, July 29, 2011 9:05 - 0 Comments
Grassley Digs Into Dept. of Education Conversations with Hedge Funds
by Elbert Chu
In a case of the hunter becoming the hunted, the Department of Education is now being scrutinized by Senator Charles Grassley (R-Iowa) for how communications were handled or mishandled with hedge fund investors like the infamous Steve Eisman.
This comes on the heels of the other Iowan Senator Tom Harkin‘s pursuit of further legislation to regulate the beleaguered for-profits. But in the meantime, Harkin’s staff is under fire for allowing outside groups with financial interests edit witness testimony.
“These documents include e-mails that suggest that Department of Education officials knew the financial impact the “gainful employment” rule would have on forprofit education corporations and despite this, continued to communicate with hedge fund managers who have taken a position against for-profit education corporations. For example, the documents show contact between Mr. Steve Eisman and several participants in the negotiated rulemaking prior to its public release.
“If it is indeed the case that Department of Education employees were on familiar terms with hedge fund short-sellers, this raises serious questions regarding the internal controls,” Mr. Grassley said in the letter. “My concerns center on the possibility that senior Department of Education staffers may have provided information to short-sellers during the time leading up to the public release” of new regulations.
The New York Times reports:
The Education Department’s internal watchdog is already looking into whether certain traders influenced the for-profit college rules. Senator Joseph I. Lieberman, an independent from Connecticut, wrote to Mr. Duncan in April to request an update on the outcome of that investigation.
Mr. Eisman — the former manager at FrontPoint Partners who made a fortune betting against subprime mortgages — was one of several investors to lobby the agency about the potential regulations. In an e-mail sent to agency officials in May 2010, he pushed for tough new restrictions on the colleges, according to agency documents reviewed by The New York Times.
Barron’s has a good run down on the whole short seller overhang situation on many for-profit colleges:
The industry remains a favorite of hedge fund managers who have been buyers and sellers of for-profit education stocks in recent years. Eisman made a tidy sum betting against sub-prime loans during the financial crisis, and made a very public for-profit education short-selling case last year called “Subprime Goes to College.” He shorted Strayer Education (STRA), highlighting its less-than-stellar loan repayment profile. Strayer stock never recovered from the nosedive that began last summer; investors remained short on 23% of Strayer shares, a high figure, through mid-July. Strayer hosts its second quarter conference call at 10 a.m. Eastern time Thursday.
Short-sellers continue to bet against Corinthian Colleges (COCO), where 32% of the float was short (it already released quarterly results). For ITT Education Services (ESI), the figure is 28%, and UBS downgraded the stock to Sell this week following its earnings report. Short-sellers were all but ignoring Apollo Group(APOL) (it reported too), and DeVry (DV), which releases profit figures in August. DeVry was a stock pick in this week’s Barrons.com Q&A with smallcap fund manager Ford Draper.
Grassley’s letter to Arne Duncan.
Full Barron’s article.
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