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Are Student Loans an Impending Bubble? Is Higher Education a Scam?: Part II

Posted by Larry Doyle on June 22, 2011 7:52 AM |

Few commentaries here at Sense on Cents have received as much attention as that which I wrote a few months ago highlighting issues within the student loan market and questioning the value and integrity of higher education. That commentary, Are Student Loans an Impending Bubble? Is Higher Education a Scam? hit a nerve on many fronts.

Today, our focus on this segment takes a new twist and we get a “behind the scenes” look at the intrigue and innuendo encompassing a hedge fund which would seem to believe that the student loan market may be a bubble and higher education for profit may just be a scam.

Potential of insider trading, investigative hedge fund research, prospects for increased regulation of the for profit education industry. This story would seem to have it all. 

Let’s navigate as the Project on Government Oversight released just yesterday a scathing commentary entitled POGO Investigation Provokes Probe from Private Dick, (interesting choice of words!!),

If only I’d seen it coming. With barely a “hello” after I picked up the phone last week, Diane Schulman launched into a slew of questions about an item I’d just written for POGO’s blog, an item about arguably inappropriate, possibly illegal information-passing between the Department of Education (DoED) and Wall Street short sellers.

Never having spoken to Schulman before in my life, I asked her who she was working for. She told me that she did “research” for some outfit called The Indago Group on behalf of investment companies and law firms.

I didn’t realize that Diane Schulman was actually a licensed private investigator in league with a troubled New York hedge fund.

Specifically, Schulman has been helping out one of Wall Street’s biggest short sellers, a guy named Steve Eisman. But she didn’t mention that.

Eisman won fame and especially fortune betting on the collapse of the housing market. I’d cited him in my piece last week because of his latest target: the for-profit education sector, which includes firms like giant Phoenix University, that the Dept. of Education is trying to regulate. Harsher regulation, which Eisman had been lobbying the DoED to endorse, would have meant bigger profits for him and other short sellers.

According to emails obtained under the Freedom of Information Act, Schulman personally assisted Eisman in his many contacts with only-too-willing top officials at the Department eager for the dirt he (and Schulman) had dug up on for-profit companies.

And, for some of those companies, there was a lot to dig, especially dirt on how firms reaped tens of millions of dollars in federally guaranteed student loans, leaving many of their graduates in debt and unable to find jobs.

Eisman and Schulman are not credentialed education experts, and neither seems to have shown any particular prior commitment to working in the field. Yet emails show Schulman personally importuning DoED on behalf of Eisman and others connected to his FrontPoint Financial Services fund (owned by Morgan Stanley).

Some of the officials she targeted were in the process of formulating rules from which short sellers stood to profit. At least one such meeting actually took place last year. (FrontPoint is currently in reorganization amid charges of insider trading—none of which involve Eisman specifically. He recently indicated he is leaving the fund.)

In her phone call to me, Schulman labeled the widespread criticism of short sellers “a red herring.” Then she got down to business, repeatedly asking me to provide evidence I might be aware of that short sellers (presumably like her client, and possibly herself) could have received leaks of confidential, market-sensitive information from the DoED, a central point of my article.

If short sellers had gone on to buy and sell stocks based on confidential information from DoED, it could amount to insider trading, subject to civil and criminal penalties.

Not grasping that she might have a distinctly personal stake in the matter, I told Schulman that Morgan Stanley—owner of Eisman’s fund, FrontPoint Financial Services—had issued a report to investors in the spring of 2010 that specifically refers to a “leak” about the timing and substance of the Education Department’s impending actions.

That provoked a strong objection from Shulman. I thanked her for being in touch, ending the increasingly weird phone call.

Schulman’s bio mentions that some 20 years ago she worked as an “investigative producer” for CBS and ABC affiliates in Boston. Helping out a New York hedge fund probably pays better.

While the POGO writer clearly takes serious exception to the manner in which Ms. “Dick” Schulman engages him, I welcome bringing attention to this story for a number of reasons including:

1. To highlight an investigative practice of a high profile Wall Street hedge fund manager.

2. The potential for insider trading activity as alleged by the writer.

3. Perhaps most importantly, further confirmation of the fact that the student loan market likely is a bubble and for profit education likely has elements of being a scam.

You can not make this stuff up.

Navigate accordingly.

Larry Doyle

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