CREW citizens for responsibility and ethics in washington July 14, 2010 Tom Harkin Chairman U.S. Senate Committee on Health, Education, Labor and Pensions 428 Dirksen Senate Office Bui 1 and C Streets, N.E. Washington, D.C. 20510 By Facsimile: (202) 228-5044 Dear Chairman Harkin: ‘Thank you for your July 2% response to Citizens for Responsibility and Ethics in Washington's ("CREW") letter setting forth concerns with the recent testimony of Steven Eisman before the Committee on Health, Education, Labor and Pensions (“HELP”). We understand that you remain comfortable with Mr. s testimony, notwithstanding his private financial interests, because he met the test of advaneing the public interest in the underlying matter of the hearing: for-profit colleges. Further, we agree with you that given the disastrous economic impact of the collapse of the subprime mortgage industry, the federal goverment must be vigilant in protecting Americans and the nation as a whole from future serious economic injury such as may be posed by the for-profit college industry. Nevertheless, separate and apart from the issues pertaining to Mr. Eisman, new information has come to light regarding efforts to manipulate the federal government into increasing the regulation of for-profit colleges. On July 9, 2010, ProPublica reported efforts by Johnette McConnell Early to fuel a groundswell of anger and discontent against the for-profit college industry.’ Ms. Early solicited the unwitting sign-on of 19 executives from homeless shelters and service agencies to a letter to Secretary of Education Ame Duncan expressing concerns that “for-profit trade schools and career colleges are systematically preying upon our clients,” and pledging support for the agency’s efforts to tighten regulation of that industry. While some of those who signed the letter had personal knowledge of aggressive recruiting tactics, others had only heard about them from colleagues and news reports.> ' Sharona Coutts, Investment Funds Stir Controversy Over Recruiting by For-Profit Colleges, ProPublica, July 9, 2010 (attached as Exhibit A). > Id. Letter to Secretary of the Department of Education Arne Duncan, June 17, 2010 (attached as Exhibit B). * Coutts, ProPublica, July 9, 2010. 1400 Eye Street, NW, Suite 450, Washington, D.C, 20005 | 202.408.8565 phone | 202.588.5020 fex | wwcitizensforethics.org —Honorable Tom Harkin July 14, 2010 Page Two Significantly, Ms. Early works for a financial firm she has refused to identify, which is paying her to investigate for-profit schools.* Although Ms. Early claimed not to know whether the firm is betting against the for-profit higher education industry, she did say, “Clearly an investment firm is not going to look into something unless they’re thinking about whether it's a good or bad investment.”* In addition, a non-profit group associated with another high-profile investor, Manuel P, ‘Asensio has written five letters to members of Congress and regulators since April criticizing the for-profit college industry and calling for stricter regulation. Further, according to at least one analyst of short-selling, “{sJhort sellers have shown a steadily increasing interest in for-profit schools.” Taken as a whole, this new evidence suggests a concerted effort by individuals who stand 10 gain financially to drive down the stock price of certain for-profit schools. Not content to simply provide their views on the for-profit school industry, some are taking an active role to shape public views of -- as well as congressional and executive branch reaction to ~- that industry, hoping to reap great financial benefits from the market’s reactions. Again, CREW agrees that the for-profit school industry merits scrutiny by the HELP Committee and other regulators, and we welcome the opportunity to assist in providing greater transparency in that industry. At the same time, however, those advocating greater regulation also must be transparent about their tactics and motives. Otherwise, serious questions arise as to exactly who is engaged in abusive conduct to maximize private financial benefits: the for-profit edueational industry, or those raising the alarm about the industry. Americans need to have confidence that legislative and regulatory processes are not being manipulated for private financial gain. “Jd; 1ma July 12, 2010 conversation with CREW, Steve Eisman denied any connection with Ms. Early. * Coutts, ProPublica, July 9, 2010. “id. "Id.Honorable Tom Harkin July 14,2010 Page Three As the HELP Committee continues its investigation of the for-profit college industry and considers appropriate regulatory reforms, CREW respectfully suggests that you take into account and publicly air the interests of the advocates on all sides of the issue, A good place to start might be by requiring Ms. Early to identify the financial firm that employed her to drum up signatures for the letter to Seeretary Duncan. Please do not hesitate to contact us if we can be of any service as the Committee’s inquiries continue. , 7 Sincerely, 4 4] i Mélanie Sloan Executive Director Enels. ce: Ranking Member Michael B. EnziEXHIBIT AInvestment Funds Stir Controversy Over Recruiting by For-Profit Colleges - ProPublica Page 1 of PRO}PUBLICA For-Profit Schools Investment Funds Stir Controversy Over Recruiting by For-Profit Colleges by Sharona Coutts ProPublica, July 9. 12:02 pam, Nancy Panico runs a large center for homeless and a youth in Tueson, Ariz, About a year ago, a woman, contacted her with some questions about for-profit schools that have tried to recruit homeless youths problem that Panico's shelter had encountered. The woman, Johnette MeConnell Early, visited Panico at the center and, a few months later, asked for her signature on letter [1] alerting the U.S. Department of Education to the issue. a Panico and 19 other executives from homeless shelters and service agencies around the country eventually signed _(iStockPhoto) the letter, addressed to Secretary of Education Arne Dunean, asserting that "for-profit trade schools and career colleges are systematically preying upon our clients." The June 17 letter pledged "unequivocal" support to the department's steps to tighten regulation of the for-profit industry. Some who signed had personal knowledge of aggressive recruiting tactics, but others told ProPublica they had only heard about them secondhand from colleagues and news reports. Early visited with many of the executives, they said, drafted the letter and coordinated the effort to get them to sign. What Farly did not tell Panico or several others who signed: She was working for a financial firm that pays her to investigate for-profit schools. "Had I known, I probably wouldn't have signed on,” Panico said. "I probably would have contacted one of the other people and said, 'Hey, now that we have all this information, let's do this ourselves.’ I think it's sleazy to basically use me and use other executive directors that have a real issue to make a profit for some companies. hitp://www.propublica.org/article/investment-funds-stir-controversy-over-recruiting-by-for.... 7/12/2010Investment Funds Stir Controversy Over Recruiting by For-Profit Colleges - ProPublica Page 2 of 5 For-profit universities have come under increasing serutiny of regulators [2] and congressional committees [3] who have heard complaints about alleged recruiting abuses [4] (PDF). More recently, attention has turned to the behind-the-scenes influence of hedge funds [5] (PDF) that are also critical of the industry and have sold short, betting that the stock of publicly traded universities will drop in price if, for instance, Congress or the Department of Education cracks down. To cover tuition costs, the schools rely heavily on federal grant and loan programs controlled by Duncan's ageney. In an interview, Early confirmed to ProPublica that an “investment firm is paying for my time" but would not disclose the identity of that firm, When asked whether her client was betting against the for-profit higher education industry, Early said she did not know. "Since I'm not part of their firm, I can't say what their position is,” Early said. "But clearly an investment firm is not going to look into something unless they're thinking about whether it's a good or bad investment." Last month, the prominent investment fund manager Steven Eisman testified [6] before a Senate education subcommittee hearing [3] on the "emerging risk" posed by increasing federal subsidies to for-profit schools, Eisman is best known for predicting the crash of the subprime mortgage market [7]. He's become a scathing critic of for-profit colleges and universities, and in his testimony referred to the practice of recruiting at homeless shelters. Fisman predicted that students at these schools will default on $275 billion in government loans over the next 10 years, ‘Less than a week after Eisman’s appearance, Sen. Dick Durbin, D-IIL, called for congressional action to tighten the rules governing for-profits. Referring to Eisman's testimony, Durbin said some schools were enticing "low-income, high-risk students" into "mortgaging their futures -- not on overpriced homes this, time, but on worthless diplomas,” and said Congress must clamp down on the quality of edueation the schools deliver, and the way the government administers financial aid. Eisman's testimony was controversial. Advocates of for-profit schools and a government watchdog group criticized the subcommittee, saying Bisman was allowed to present himself as an expert and make self- serving criticisms of an industry in whose failure they believe he has a vested interest. One group, Citizens for Responsibility and Ethics [8], wrote to Health, Fducation, Labor and Pensions Committee Chairman Sen. ‘Tom Harkin, D-Iowa, to complain that Eisman had a conflict of interest in delivering his testimony. Eisman did not return calls requesting comment. He told the Senate subcommittee he had a stake in the industry, but did not disclose specifics. In an earlier speech [9], Kisman named five particular companies that he said would suffer if the Education Department adopted regulations tying tuition to the employment their graduates obtain -- Apollo Group, the owner of the University of Phoenix; ITT Educational Services; Corinthian Colleges; Education Management Corporation; and The Washington Post Company, which owns Kaplan University. Since April, a nonprofit group associated with another high-profile investor, Manuel P. Asensio, has written five letters [10] criticizing the for-profit education industry and calling for tighter regulation to congressmen and regulators with jurisdiction over the sector. Short sellers have shown a steadily increasing interest in for-profit schools, according to Will Duff Gordon, an analyst at Data Explorers, a company that colleets and analyzes data about short-selling. Since April, his, ‘company has also seen a spike in short positions in the sector, indicating a strengthening view that the stocks http:/;www.propublica.org/article/investment-funds-stir-controversy-over-reeruiting-by-for.... 7/12/2010Investment Funds Stir Controversy Over Recruiting by For-Profit Colleges - ProPublica Page 3 of S will fall. In general, short sellers place bets that a company's stock or some other financial instrument will decline in value. "This is not an opportunistic bit of short selling,” Gordon said of for-profit schools. "People have worked out that these companies are overvalued. ‘They've put on bigger and bigger short positions as the price keeps going down. And they have been right because the price keeps dropping.” For their part, short sellers claim they are merely bringing to light the fundamental problems of an industry that survives in large part on taxpayer largesse. More than 1,600 for-profit colleges, universities and trade schools received $3.3 billion in Pell grants in the year ending last June, according to Department of Education data. About 950 schools shared some $2.5 billion in federal loans in the same period. Proprietary schools are slated to pocket significantly more this, year, thanks to the Obama administration's increased funding for the need-based Pell grants. Short sellers say they provide a public service by exposing fraud or mismanagement of publicly traded companies. Most academic studies that have examined the issue confirm that short sellers are most often correct in their assessment that particular companies or industries are overvalued, according to William N. Goetzmann, director of the International Center for Finance at the Yale School of Management. But some short sellers appear to be moving beyond assessing particular companies and taking a financial position accordingly. Now, says the Career College Association, some are trying to stage-manage the reporting of negative stories to fuel the impression of a groundswell of anger against the schools. "Certainly there are legitimate crities. I may not agree with them, but they're not in it to fatten their wallets," said Harris Miller, president of the CCA, which represents for-profit schools. "But I think that a lot of the activity going on, and with other media reports, is being driven by the short sellers, who are hiring people who are semi-disguising who they are and not being candid with people about their role in trying to drive down the stock price of certain companies." Early terminated the interview with ProPublica when asked whether the hedge fund knew she had drafted the letter and coordinated the effort to have it cosigned by representatives for homeless shelters. But when informed of Early’s connection to an investment firm, several people who signed the letter said they found the episode disquieting. ‘Two who signed told ProPublica they were under the impression that Early was conducting research for a Bloomberg Businessweek reporter working on a story about for-profit schools enrolling homeless people. Early confirmed in the interview that she "connected" the reporter with several people at homeless shelters. Bloomberg Businessweek in May ran an article under the headline, "Homeless high school dropouts lured by for-profit colleges [11]." In a statement, a Bloomberg spokesperson said: "We did not obtain information from anyone working on our behalf. Our story was the product solely of our own reporting,” ‘The PBS investigative news program Frontline posted the letter [12] on its website after it was provided by another short seller, Frontline producer Marrie Campbell told ProPublica. Campbell said she would "absolutely not” have posted the letter had she known the full circumstances of its provenance. hutp://www. propublica.org/article/investment-funds-stir-controversy-over-recruiting-by-for.... 7/12/2010Investment Funds Stir Controversy Over Recruiting by For-Profit Colleges - ProPublica Page 4 of 5 tis not unusual for reporters to follow up on tips from hedge funds, financial firms or other sources with an interest in how a story might shape events. ProPublica has interviewed hedge fund managers and their researchers about for-profit colleges and universities to learn about their concerns and get leads. They disclosed they were short on the sector; any information or sources they provided were independently verified and vetted by a reporter, Others who signed the letter said Barly told them that she worked for a think tank, or that they believed she ‘was working on a book, Like Panico, they supported the substance of the letter. But one of the signers —- Jennifer Brandon, executive director of Community Voicemail in Seattle, Wash. ~ said she had no direct knowledge of for-profits recruiting homeless people. Early told Neil Donovan, executive director and president of the National Coalition for the Homeless [13] in Washington, D.C., that she worked for a Dallas company that offered advice and private research called J.W. ‘MeConnell & Sons, Donovan said. ProPublica contacted state and local officials in Texas who said they could find no record of the firm, Donovan said he was angered to learn of Early's association with an investment firm, “My next letter will be to Arne Duncan saying that I didn’t know that, and I'm going to ask his inspector ‘general to look into the fact that they received a letter where the source of the letter was misrepresenting themselves,” Donovan said. "I think that's completely inappropriate and it's using homeless people as pawns, and that is what our mission is against.” “It makes me feel uncomfortable," added Larry James, president and CEO of Central Dallas Ministries quite certain none of us knew that connection, and that would have given me pause.” Not all those who signed were troubled by Early's conduct. Jane Bureh, CEO of New Beginnings for Women and Children in Tucson, said Early told a staffer that she had "something to do with an investment firm,” and that her organization would never have signed a letter unless they agreed with its contents. "Ihave no evidence that there is any wrongdoing here," Burch said. "Why would I not want to see another avenue to have our clients' rights protected?" Both sides in the debate claim moral ground, The for-profits argue they are performing a social service by making education available to many who have been excluded from traditional four-year colleges; the short sellers claim they are protecting the same groups of people from deceptive marketing techniques and a mountain of debt. A Department of Education spokesperson said the agency remains focused on regulatory matters. Among other things, the department has announced plans to scrap regulations that watered down a ban on schools paying recruiters according to how many new students they brought in. ProPublica intern Joe Kokenge [14] contributed reporting to this story. 1._http://www-propublica.org/documents/item letter-to-doe-saying.for-profit-schools-are-preying-on-the-homeless Intp://www.ed.gov /news/student-aid-rules-proteet-borrowers-and-taxpayers 3. https//help.senate.gov/hearings /heaving/id=464686ba-5056-9502-5d95-e2146409¢059, 4. bttp://www.gao.gov/new.items/dog6oo.paf http://www. propublica.org/article/investment-funds-stir-controversy-over-recruiting-by-for... 7/12/2010Investment Funds Stir Controversy Over Recruiting by For-Profit Colleges - ProPublica_ Page 5 of 5 http:// wore citizensforethies.org/{iles/20100701%20-%20CREW%20Letter%s20t0%20Chairman%20Karkin,pdt hetp://help senate-gov/imo/media/doe/Eisman.paf |attp://www.fool.com investing/general/2008/12/01/michacl-lewis-on-the-hedge-fund-manager-who-saw-it aspx ttp://www.citizensforethies.org/ bitp://www.propublica.org/documents item, presentation-by-steve-eisman-at-the-ira-sobn-conference 10. _ttp://iwww.ealy.org/home/75-congressional-hearings-called-menacing-to-for-profit-edueation 41, http://www-bloomberg.com/news/2010-04-30/homeless-dropouts-from-high-school-lured-by-for-profit-elleges -with-cash html 12. _http://www.pbs.org/wabh/pages/frontline/eollegeine/responses/ 13, _http://www.nationalhomeless.org/ 44. http://www. propublica.org/site/author/joe_kokenge © Copyright 2010 Pro Publica Inc ‘Steal Our Stories Unless otherwise noted, you can republish our articles and graphics (but nol our photographs or our blog) for free. You just hhave fo credit us and ink to us, and you can't edit our material or sell separately. If you're republishing online, you have to include all inks. (We're licensed under Creative Commons, which provides the legal details} http://www. propublica.org/article/investment-funds-stir-controversy-over-recruiting-by-for... 7/12/2010EXHIBIT BJune 17,2010 ‘The Honorable Ame Duncan Secretary US. Deparment Of Education 400 Maryland Avenue, SW Washington, D.C. 20202 DDear Honorable Secretary Arne Duncan: ‘The purpose of this letter is to eal your atention to a growing problem at homeless shelters across the United States. For-profit rado schools and carver colleges afe systematically preying upon our clients. These companies employ predatory recruiting tactis, promising our clients free goverument money, ‘quality education, rosy jab prospects, ané the chance for a beter life. The companies fail to deliver on the promises they make, Quite the opposite, for-profit schools devastate the Finacial stability of our cents by inticing a vicious cycle of over-borrowing and student oan default, We find it difficult to help homeless clients who have defaulted on student loans: with credit rords shatered by student debt default, potential employers are hesitant fo hire our eens, ané potential landlords are hesitant to lease to our cients. To put 't simply, the for-profit education industry in the United States is perpetuating unemployment and homelessness. ‘The exploitation of our clients by the for-profit sector isnot a new phenomenon. In 1990, then Georgia Senator Sam Nunn held a series of hearings that exposed rampant fraud, waste and abuse in the for-profit, ‘education sector. “Unwary Americans are being lared into sole’ educational schools by sophistiated sales pches that offer promises of bright futures, high paying jobs and Federal loans fo financing. I fc the sadets often end yp wit tle or no waning, no job and a large bill w epay the student oun, In some eases the students recognize the rlnng i wseaes and they withéaw midway and end up isle for the entire loan wile the school ‘operators pocket asadsome prof, Asa result the shidet is worse of than ever, afer -Sefals on he loan, and the American axpayer uimately picks up the Ia... As weal know, the Federal shunt lan pogram was orginally designed 1 Relp low and dle income students receive agulty education, specialized ining and evenly a secure nd ell whose main intrest and expeise seems to be procesing of Federal stent loans. {Seow Sam Nuon, Fesracy 1950. Abc in Federal Stet A Programe Herings Before {he Permanent Sabconmites on Imezigatins of the Commitee on Governmental Airs. Unies Sues Senate. Pages? a6] ing Job. 1 was clearly never intended to ensure sowing profits for schools‘and lending tothe homeless is not & new problem in the for-profit education indusuy, it is a substantially larger problem than it was neerly twenty years ago. In 1990, students tending for-profit education companies borrowed less than $5 billion ffom the Title IV program; in 2009, students attending for-profit education companies borrowed $28 billion {rom the Title IV program! ‘The forprofit education industry's seductive marketing messages and well-trained, unethical incemtvized recruiters are outsmaneuvering lower-priced, higher-quality postscoondary alternatives. Fore profit recruiters opportunstcaly target homeless men, women, and youth, luring them into taking on thousands of dollars in excessive debt. Disturbingly, many of those targeted have significant literacy challenges and litle possibility for benefit. Saddled with # mountain of debt that is unsupportable by ‘educational outcomes promised but not delivered, our clients alloo-ften default on their debts and all into a downward spiral of recidivism, Our homeless clients are trapped afer attending for-profit school, ‘These schools not only compromise their job and housing prospect, but also take away thei opportunity for a real education. Sadly, after anending for-profit schools our clients cannot retain or continue their them from receiving further federal financial ai. education because student loan defaults disqu ‘We understand that the Deparment of Education is working o introduce new safeguards that would offer ‘ur homeless clients additional protection from these unscrupulous companies. For many, developing new skills and taining through education is an enduring solution to homelessness. As such, we unequivocally support the Department of Education in its efforts, and we look forward to the day when our eliemts can return to higher edueation without fear. CR Fnac ¢ A bw Carol Fredrich Prosident & CEO Jan Burch, CEO ‘Lutheran Metropolitan Ministry [New Beginnings for Women and Children, Tussoa, AZ Cleveland, Ohio Lanyyfamll, President & CEO Jennifer D. Brandon, Executive Director Cental Dallas Ministries ere Dallas, Texas eee cereal Seattle, WAey Michael P. Mecha, PhD. Epworth Children & Parnily Services St.Louis, Missouri WS ‘ell Donovan “executive Directive and President "Nationa Coaiton forthe Homaless Washington, DC FLEA fran tne Bla Nimes, Exeftve Distr ‘Our House, Inc, Monsoe, LA, = cabin A —— Tacoma, WA ee SM CFO toy ‘Alma Oslo bara Incr President & CEO Costin For Tae Homeless, Houston, Tear Dade ulao- (floarra., + CEO Tria.im Babfrs LO Richard Teckel, CEO ‘The City Mission Cleveland, OF “My [Naxky L Paniedf SBA, Executive Director (Open Tn, Tucson Arizona Cea Mlinl Program Ditector "Noe! House Programs Seattle, WA ddeAhdk Kurt Schmidt, Community Services/Selter Supervisor [North Cental WY Contmunity Action Assocition, In. ‘Scott Place Honaless Shelter Roy E, Tuller Mit Executive Director - Pastor Gospel Rescue Mission ‘Tueson, AZ:LOE Sora Cohen, Case Manager Shelter NOW, Meriden, Connecticut Dennis H. Pamell, MSW, LOSW, LCAS, CCS. President/CEO ‘The Healing Place of Wake County Raleigh, NC ‘Shaclene Plank, Director of Community Services ‘Youth Emergeney Services, a programm of Epworth Children & Family Services 16816 Washington Avenue St.Louis, MO 63130 ea Affe MA, MSW, LISW ‘Associate Diector, Men's Shelter Services MHS, ine, 1580 Superior Ave, Cleveland, OH 44114 fess We OE on Cares aie yg ee are bernie thrge hol ol @ ues! obey ne rae yoo comm Alp add ng ws. * Student Loans Overviews Fiscal Year 2011 Budget Request, Deparment of Education, page 7-25.