Short Seller Scrutiny

An internal audit has largely exonerated the U.S. Department of Education for its handling of sensitive information in the run-up to the release of “gainful employment” rules last year. But the audit report from the department’s inspector general included a few mild rebukes, and two Republican senators are calling for a deeper inquiry.

The inspector general also said a senior official at the department may have violated a government ethics pledge by having contact with his former employer during the rulemaking process. That official, who was not named in the report, has since left the department.

With an initial goal of reviewing how the department followed its protocol around negotiated rulemaking — the process by which federal agencies craft new regulations — the audit was expanded last year after several Republican members of Congress called on the inspector general to investigate contact between department officials and investors with a stake in publicly traded for-profit colleges.

So-called “short seller” investment firms had bet that for-profit stocks would drop in price, and the lawmakers wanted to know if short sellers improperly received information during the rulemaking process. Such leaks could have been big moneymakers given the anticipated negative effect of gainful employment on for-profits and their share prices. Joining the lawmakers in that call for an inquiry were a for-profit advocacy group and a government watchdog, which also requested and received e-mails and documents relating to the rule-making process.

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