Investor Shorted For-Profits, Advised on their Regulations

During the time that the U.S. Department of Education was considering new regulations on for-profit education providers, Education Deputy Undersecretary Robert Shireman and Acting Deputy Assistant Secretary for Policy and Budget David Bergeron listened to a presentation called "Subprime Goes to College," which said that the entire industry was under threat of collapse from mismanagement and bad fiscal decisions. Both Shireman and Bergeron must have found the presentation convincing — merely two days later, Shireman used "subprime" to describe the entire industry to state regulators.

The problem was that the author of the presentation, Steve Eisman – a manager of a New York-based hedge fund – wasn't a disinterested third party. Eisman made much of his money betting against subprime during the 2008 fiscal crisis, and was now an owner of a large short position on for-profit education companies.

It wouldn't seem that someone as influential as Eisman would need to get involved in the regulations process. Only a few months prior, he spoke about the industry at the Ira Sohn Investment Research Conference, once again saying that the industry was not financially sound and specifically pointing a finger at companies like the Apollo Group and Corinthian Colleges. As a result of his remarks, the share prices for these and other companies he named tumbled – making Eisman a lot of money.

On June 24, 2010, Mr. Eisman stepped up his efforts to manipulate the for-profit education market by making similar remarks before the Senate Health, Education, Labor and Pensions Committee. Mr. Eisman was invited to testify after he reached out to the committee. Mr. Eisman used the occasion to describe the for-profit education industry as "fundamentally unsound," and predicted that over the next decade, students at for-profit colleges would default on roughly $275 billion in student loans. Mr. Eisman acknowledged his fund had shorted a number of stocks in the for-profit education industry. Although he did not specify any companies by name, stocks in the sector nevertheless declined soon afterwards. Shares of the Apollo Group, which Mr. Eisman had previously bashed, slid from $46.33 the day before his congressional testimony to $43.75 on the day after — a decline of 5.57%. Overall, stocks in the for-profit industry took a hit in the next 24 hours of trading.

The extent of Eisman's efforts came to light thanks to the work of Citizens for Responsibility and Ethics in Washington, who pieced together the story based on publicly available market and financial data as well as via materials obtained from Freedom of Information Act requests.

It turned out the meeting with DOE brass wasn't the only contact Eisman had with the agency during the regulation draft and review process. He frequently authored letters supporting stricter regulations, sometimes in his name, and sometimes in the name of a small research company that acted as a front. In addition, there are some suspicious that Eisman obtained a preliminary version of the regulations prior to them being made publicly available.

Although CREW made several lawmakers aware both of Mr. Eisman's actions and his vested interest, there hasn't yet been a movement made to investigate his involvement in the process. The details of how Eisman and other shortsellers attempt to use their influence and access to government officials to manipulate markets can be found in CREW report "Selling America Short."

12 20, 2012
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