Did Education Department Officials Leak Market-Sensitive Info to Stock Traders?

The Department of Education (DoED) in Washington has never been known as a hotbed for scandal. But now, following the widely-reported announcement of a new DoED rule governing companies in the lucrative for-profit education sector, DoED Inspector General (IG) Kathleen Tighe will be the first and perhaps the only person to look into controversial claims that may implicate the office of Education Secretary Arne Duncan.

"I am confident that the independent audit we are conducting will address the issues that have been raised," Tighe told POGO.

Among other things, Tighe will examine whether confidential DoED information and draft documents, including one produced by her own office, were transferred to Wall Street short-sellers seeking informational advantage in their bets on the future of the $35 billion for-profit education industry. Beyond the propriety of the Education Department’s conduct, the phenomenon raises broader questions about the integrity of government decision-making in the face of relentless Wall Street scrutiny.

The case is also among the latest high-profile examples of Wall Street or individual investors trying to access non-public government information. Another involves a Food and Drug Administration chemist who in March was alleged to have misappropriated confidential agency information about drug tests to make $3.6 million in the stock market.

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 DoED 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 DoED who had been soliciting their advice in the apparent hope of tightening the rules that govern for-profit institutions.

In the end, last week’s rule announcement—the revision of a previous DoED rule deemed too harsh—established looser eligibility standards for students to receive hundreds of millions of dollars in federally guaranteed loans when they apply to for-profit universities. The regulation came at a time when for-profits have come in for criticism from many quarters. Last week, for example, the Senate heard expert testimony arguing that so-called "career colleges" had produced an alarming accumulation of student debt.

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.

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