Inside the Biggest GAO Scandal you Never Heard About

If there is a code for lying, then Rule No. 1 ought to be to make the lie believable. Not adhering to that first rule exposed a fraud perpetrated by the Government Accountability Office and helped uncover suspicious activity at the Department of Education.

Last August, Gregory Kutz, then head of the GAO’s Forensic Audits and Special Investigations unit, gave stinging testimony to the Senate Health, Education, Labor and Pensions Committee.

His target was career colleges. Unlike state-owned institutions and private, not-for-profit colleges, career colleges operate on a for-profit basis. A GAO report accompanied Kutz’s testimony.

At issue was access to federally backed financial aid by students attending career colleges. The Education Department indicated it was considering new regulations that would restrict such aid. The hearing of the Senate Health, Education, Labor and Pensions Committee chaired by Sen Tom Harkin, D-Iowa, portrayed career colleges as rogue operations needing to be reined in.

According to the GAO report, career colleges were guilty of shady recruiting practices. What attracted the attention of this columnist were absolute statements and allegations that did not add up. This led to a Freedom of Information Act request to get answers.

The GAO alleged that representatives at all 15 schools tested in a sting operation made deceptive or otherwise questionable statements to undercover investigators posing as prospective students. The GAO further claimed four colleges encouraged fraudulent behavior.

Really? All 15 schools behaved badly? There wasn’t a single school that followed the rules?

Such hyperbole could be expected from a congressman but, to have the chief federal audit agency make it defied credulity.

One scenario in the GAO report did not pass the smell test. The report alleged college representatives encouraged fraudulent behavior by instructing fake applicants to not disclose $250,000 in savings on federal disclosure forms when applying for financial aid.

It defies belief that on multiple occasions, representatives would decline asking applicants to write a check immediately for tuition and instead take a gamble on the student receiving financial aid.

The response to the FOIA request was unexpected. The GAO quietly reissued its report. The revised report was so dramatically different that it called into question either the competence or the integrity of the GAO. In general, it was GAO investigators who suggested deceptive or fraudulent activity with representatives merely acknowledging the investigators’ schemes.

There is more. A coalition of career colleges obtained audio recordings of the GAO investigation and had them analyzed. The results found numerous instances in which the GAO fabricated entire conversations.

In some cases, investigators appear to have turned off recording devices in midinterview raising questions regarding what investigators did not want recorded. Additionally, conversations portraying college representatives as acting professionally and responsibly were excluded from the report. In sum, the GAO report was a fraud.

Last month, U.S. Comptroller General Gene Dodaro relieved Kutz of his duties as the head of the Forensic Audits and Special Investigations unit. In a written statement, Dodaro said the change will "ensure greater attention to the issues that led to the need to produce the errata to the for-profit schools report and by the subsequent inspection."

Unbelievably, it gets worse. As early as 2009, three stock short-sellers had unusual involvement in the DoEd’s career college rulemaking process. Rule changes suggested by one short-seller in 2009 bear striking similarity to rules proposed by DoEd in 2010. The new rules would restrict financial aid for career college students.

Neither Antal Desai and Kent McGaughan of CPMG Investments nor Steven Eisman of FrontPoint Financial Services Fund were known for expertise in post-secondary education.

These short-sellers brought little to the table aside from a plan that could damage the value of publicly traded stocks of career colleges. Of note, Eisman was a major 2008 Obama campaign donor.

Emails and documents obtained by a FOIA request reveal startling involvement by Desai, McGaughy and Eisman in Education’s internal deliberations. In a July 2010 email to a senior Education official Eisman expressed alarm at an increase in career college stock prices.

In response, DoEd officials crafted a plan to notify various individuals, including Eisman, of harsh new rules at least two days before they were publicly released.

The DoEd announced its rules only days before Harkin’s committee hearing. These two events and the (now-discredited) GAO report caused the publicly traded stock of most career college companies to plunge in value 35 to 50 percent.

This is a curious set of circumstances that begs the attention of the Securities and Exchange Commission.


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