Letter: Dept. of Education Should Be Investigated for Loan Practices

Robert Khuzami:
Director
Division of Enforcement
Securities and Exchange Commission
100 F Street, N.E
Washington, D.C. 20549

Dear Mr. Khuzami

On behalf of Americans for Tax Reform (ATR) and millions of taxpayers nationwide, I urge you to investigate the Department of Education and the rulemaking process surrounding the “gainful employment” regulation. Such an investigation is necessary to determine whether or not Department of Education officials were complicit with short-sellers during the drafting of the gainful employment rule.

Beginning in 2009, the DOE began considering rules that would  reduce the amount of federal aid available to students seeking degrees at for-profit institutions. In order to achieve this end, DOE officials looked to amend the definition of gainful employment—current federal aid is predicated on an institution’s ability to prepare its graduates for “gainful employment in a recognized occupation.”

This reinterpretation of the gainful employment rule will likely cause many for-profit colleges to close their doors, greatly diminishing these institutions value. As many of these for-profit colleges are publically traded companies, a dramatic change in their worth garnered substantial attention from stakeholders and speculators who saw an opportunity to make an easy buck.

Knowing this, Steve Eisman—a hedge fund manager for  FrontPoint Financial Services and esteemed short-seller—and other financial executives may have worked hand in glove with Department of Education officials and non-profit education  groups to write the gainful employment rule. There is reason to believe that this afforded Mr. Eisman and other investors intimate, inappropriate knowledge about the forthcoming gainful  employment rule. Traders were then able to monetize this  information by short-selling for-profit institutions’ stocks.

This combination of discordant policy, insider politics, and huge financial gain has left a dark cloud over the Department of  Education and its rulemaking process. Although the Department of Education’s Office of Inspector General has launched a probe
into possible nefarious short-selling, Americans and those  affected by the gainful employment rule deserve a parallel investigation from your office.

Thank you for your consideration.

Grover Norquist