Department’s Dishonesty Warrants a Regulatory Do-over

By Kevin Kuzma, Editor

Proving to be true what has already become common knowledge is a much more rigorous process than it might seem.

For the last several months, the Coalition for Educational Success set itself to a task like this in pushing the government for a response to its open records request. The quest began last year when the coalition filed a suit against the Department of Education for not responding to its original request.

As early as last September, Career College Central’s editorial staff obtained open records material that included email exchanged linking Department officials and short sellers. Those communications included messages from the now notorious Steve Eisman of FrontPoint Financial Services, who testified before the Senate Health Education Labor and Pension (HELP) Committee last summer on the shady practices of for-profit schools, and the lesser-known Antal Desai of CPMG, Inc., a Dallas-based investment advising firm.

We all knew from that evidence that the Department was buddy-buddy with the investment community and that officials within the Department were following a playbook, of sorts. What we didn’t know (for sure) was the extent to which the Department worked with short sellers to undermine the for-profit education sector. Many of us thought the plans were being carried out according to the current administration, but now we know the roots were planted elsewhere.

Yesterday, the coalition issued a press release that detailed the extent to which the Department interacted with the short seller community. The coalition’s findings, though confirming what we expected, were still surprising given the high-ranking Department officials involved and the extent to which they followed orders.

According to the coalition, “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.” Desai’s presentation included a summary slide titled ‘What to Do?’. The four bullet points were the game plan or “playbook” that we all watched the Department and the Senate work from in the months to come.

The coalition reported the bullet points read as follows:

  • 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.

In one slide, the entire process for destroying the sector was outlined. Short sellers were guiding the scrutiny of our sector from the get-go. And, it doesn’t appear that the Department had enough time or imagination to differ from the plays as they were originally drawn. They carried out the wishes of a group of investors with every intention to see for-profit education fail.

The most troubling aspect to this (beside the outright corruption) is the Department and the Senate continue to press on with their missions to strip for-profit schools of their reputation and financial aid monies. The new regulations are still set to be implemented July 1, 2011. At that point, for-profit schools everywhere are going to be asked to follow the regulations that prevent them from corruption that were written and instituted by a deeply untrustworthy and corrupt government department.

Given what we know to be true, it seems like starting over with new officials in the Department of Education might be a wise idea. How can the current administration expect an entire sector of education to follow rules that are being implemented by government representatives who drafted the language with the worst possible intentions in mind? Why would the for-profit sector ever consider moving forward when the agency that regulates it cannot fairly apply oversight, whether it’s needed or not?

How the sector can fall into line from requests from the Department is a question that should be posed in another lawsuit. We now know that the Department of Education can’t be trusted. A strong argument could be made that following the rules developed by the Department’s current leadership wouldn’t be a responsible act in the best interest of schools or their students.

The regulatory process needs an overhaul. The rules need rewritten and the authors should have the best of intentions. They should be trustworthy, and, I would argue, the only connection they should have to the investment community should be their 401(k)s.

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