Why are Short-Sellers Talking to the Department of Education?

On October 16, Fortune published an article about short-sellers in the for-profit education debate. The article discusses the roles that all parties – short-sellers, community college officials and third parties – have played in the lawsuit between Keiser University and Florida State College. With access to private emails, Fortune summarized the issues:

In the litigation, filed earlier this month, a privately held for-profit school called Keiser University sued a competing nonprofit public institution, Florida State College, for spreading “injurious falsehoods” about Keiser. In its formal complaint, Keiser — which is based in Fort Lauderdale and has 21,000 students seeking degrees ranging up to doctorates — claims FSC and two of its administrators aimed to “derail” the for-profit education sector through a “false and misleading campaign.” That campaign, according to the complaint, was executed in part through a “conspiracy” with both advocacy groups and short-sellers like Eisman, who famously made a hedge-fund fortune by anticipating the housing-market crash in 2008 and betting against subprime mortgages. Along with FSC, the two administrators — CEO Steven Wallace and vice president Susan Lehr — are named as defendants in the suit. Eisman and two other institutional investors, Gilchrist Berg and Antal Desai, are cited only as “co-conspirators.”

One of the more interesting aspects of this case – and the Fortune article – is this – Why are short-sellers and representatives of the Department of Education talking with one another?

The Department of Education wrote the Gainful Employment rule as an attempt to decrease student debt.  Since its was released, there has been significant debate over whether the Gainful Employment rule is in fact a path to addressing the issue of student debt.  But whatever the rule’s merits, discussions between short-sellers and representatives of the Department of Education give an appearance of impropriety.  There is the appearance that information is being preemptively shared with short-sellers and some others who have vested interests in opposition to for-profit schools.  Addressing student debt constructively while assuring access to higher education are laudable goals; the appearance of impropriety tarnishes those efforts.  We should really be focusing on the future of our students – and their access to higher education along with their successful graduation.

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