DealBook: Grassley Questions Education Agency's Ties to Wall Street By Ben Protess BUSINESS DAY | July 28, 2011
Senator Charles
E. Grassley is examining whether Education Department officials disclosed
confidential government information to hedge fund managers, including the
well-known stock picker Steve Eisman.
The inquiry
stems from the agency’s recent efforts to overhaul the for-profit college industry, which has been accused of
saddling students with huge piles of debt. Expecting tough new rules in the
wake of the controversy, Mr. Eisman and other hedge
fund traders placed huge bets against the industry. In a letter this week, Mr. Grassley questioned
the education secretary, Arne Duncan,
about the agency’s ties to the hedge fund world and the lack of policies
restricting contact with Wall Street players.
“If it is
indeed the case that Department of Education employees were on familiar terms
with hedge fund short-sellers, this raises serious questions regarding the
internal controls,” Mr. Grassley, Republican of Iowa, said in the letter. “My concerns
center on the possibility that senior Department of Education staffers may have
provided information to short-sellers during the time leading up to the public
release” of new regulations.
An agency
spokesman said officials never shared private information with outsiders.
“We’re very
proud of the integrity of our process and feel we produced a regulation that
gives students and taxpayers the protection they deserve,” the spokesman,
Justin Hamilton, said in a statement. “We talked to as many people as possible
when developing the regulations including several officials from publicly
traded for-profit colleges.”
There is no
indication that Mr. Eisman or any other hedge fund
manager traded on — or received — inside information. A spokesman for Mr. Eisman, who has not been accused of wrongdoing, declined to
comment.
Over the
last several months, Mr. Grassley has been focused on the nexus of Washington
and Wall Street. His office is looking into the Securities and Exchange Commission’s handling of
a series of stock trades by the hedge fund firm SAC Capital Advisors.
The senator
also scrutinized the Federal Communications Commission’s decision to
grant a crucial waiver to LightSquared, the wireless
telecommunications venture backed by the billionaire hedge fund manager Philip
A. Falcone.
Now Mr.
Grassley is joining the broader inquiry into the Education Department’s
relationship with Wall Street. Senator Tom Coburn,
Republican of Oklahoma, has called for a government investigation into
potential insider leaks.
Rodney White/The Des Moines Register, via Associated PressEducation
Secretary Arne Duncan in Des Moines.
The
Education Department’s internal watchdog is already looking into whether
certain traders influenced the for-profit college rules. Senator Joseph
I. Lieberman, an independent from Connecticut, wrote to Mr. Duncan
in April to request an update on the outcome of that investigation.
Mr. Eisman — the former manager at FrontPoint
Partners who made a fortune betting against subprime
mortgages — was one of several investors to lobby the agency about the
potential regulations. In an e-mail sent to agency officials in May 2010, he
pushed for tough new restrictions on the colleges, according to agency
documents reviewed by The New York Times.
Last month,
a report by the Project on Government Oversight, a nonprofit watchdog group,
raised questions about Wall Street’s influence over the agency. The group
obtained several e-mail chains between agency officials and hedge fund traders
who discussed the for-profit college rules.
In April
2010, an agency official alerted a hedge fund manager based in Texas that he should
submit comments on the rules soon because “the latest on the timing” of the
proposal’s due date was May. A couple of weeks later, the official helped
organize a conference call for the trader and some department officials.
Mr.
Grassley’s letter also cited an e-mail that Mr. Eisman
sent to an agency official on July 19, 2010, titled “i
know you cannot respond.”
“But just fyi,” the message continued, “Education stocks are running
because people are hearing D.O.E. is backing down on” the regulation. Roughly
20 minutes later, the official forwarded the e-mail to a fellow agency
employee, James Kvaal, according to the letter. Mr. Kvaal promptly passed on the message to another education
official with a note saying, “Let’s discuss.”
While Mr.
Grassley acknowledged that government officials “cannot prevent investors such
as Mr. Eisman from contacting them, it is extremely
concerning” that the e-mail was “forwarded to high-level Department of
Education employees within 24 minutes.”
Mr. Grassley
added that “it seems surprising that Mr. Eisman was
on such familiar terms” with the agency official.