‘Gainful Employment’ Contacts Prompt SEC, IG Probes

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Charges of possible insider trading involving planned Department of Education rules on “gainful employment” standards for career colleges broke out into the open today during a House subcommittee hearing dealing with two other “burdensome” regulations set to go into effect this summer.

Rep. Virginia Foxx (R-N.C.), new chairwoman of the Subcommittee on Higher Education and Workforce Training, scheduled the hearing to discuss rules that will require standardization of what constitutes a “credit hour” and state approval to operate various distance learning programs. The American Council on Education, which represents presidents and chancellors of 1,600 public, private and for-profit schools, has asked the Education Department to rescind the state authorization rule and other groups have called for at least a year’s delay in implementation of the two new rules.

The groups claim that the costs to comply could run into the hundreds of millions and, in the case of the credit hour rule, infringe on what traditionally has been a purely academic matter.

Kathleen Tighe, Education’s inspector general, was among witnesses at today’s hearing, in part because it was her office that suggested a standardized credit hour after discovering examples last year of institutions “padding” the number of credit hours awarded for a course. Federal financial aid is based on credit hours, and artificially inflating the number of credit hours earned not only raises prices but also means students are stuck with more debt.

Tighe described seeking uniformity in credit hours as a way to determine if “students are getting what they are paying for.”

But Rep. Glenn Thompson (R-Pa.) turned the discussion to allegations that the Education Department worked too closely with known stock market “short sellers” in fashioning the so-called gainful employment rule, and that two department officials helping to fashion the rule either planned to or leaked information about the department’s rule to the short sellers before it was announced to the public.

Among the known “short sellers” dealing with department officials was Steven Eisman, a hedge fund operator who has predicted that the burgeoning debt of students attending for-profit schools could implode with effects similar to the subprime house loan market’s collapse. Eisman last year testified at a Senate hearing on student loans and for-profit colleges.

Several for-profit college groups, including the Coalition for Education Success, have focused on the contacts between Eisman and the department for several months. Last week the independent group Citizens for Responsibility and Ethics in Washington (CREW) sent letters to Education Secretary Arne Duncan and Robert Khuzami, director of enforcement for the Securities and Exchange Commission, asking them to investigate the contacts.

Thompson asked Tighe if she was investigating the allegations.  She replied that her office had been looking at the allegations before the latest requests and that she had forwarded the information to the staff members performing that audit.  Asked if the IG’s office planned to confer with the SEC, Tighe said, “that makes sense to me.”

Almost immediately, the Coalition for Education Success, whose leader runs his own private firm that owns a for-profit education company, asked the Education Department to terminate all rulemaking concerning the gainful employment regulations, pending the completion of the SEC and IG investigations.

A spokeswoman for the Education Department said late Friday that the department was not making any comment on the request. The department has said that a revised final rule on “gainful employment’ would be released during the first part of the year but has not set a specific timetable.

Coalition executive director Penny Lee said, “It is inconceivable that the Department can proceed while the IG is investigating and speaking with the SEC and the storm cloud of this investigation hangs over the rule-making.”

Rep. John Kline (R-Minn.), chairman of the House Education and Workforce Committee, spoke briefly at the hearing, saying the contacts between the department and Wall Street traders were “very, very troubling.” He said that releasing information to traders in advance of public disclosure raised the possibility of “real mischief and felony activity” involving the stock markets.

According to documents released after requests under the Freedom of Information Act, there were contact between Eisman and federal officials including Deputy Undersecretary James Kvall and Budget Development Staff Director David Bergeron, both of whom were working on the gainful employment rule.

Under the planned rule, career colleges – public, private and for-profit – would have to be able to show that students completing the course would be able to earn sufficient money to pay for it, using either repayment rates for students or a discretionary income guide.  If the career college did not meet the standard, its ability to participate fully in federal financial aid programs could be limited.