letter to robert khuzami - crew: sec: new information about short-sellers' efforts to shape...

8/7/2019 Letter to Robert Khuzami - CREW: SEC: New Information About Short-Sellers' Efforts to Shape Education Regulation

1/13

CREW I citizens for responsibilityand ethics in washingtonMarch 1,2011

By Facsimile (202-772-9279)Robert KhuzamiDirectorDivision of EnforcementSecurities and Exchange Commission100 F Street, N.E.Washington, D.C. 20549Dear Mr. Khuzami:

I write to provide you with documents Citizens for Responsibility and Ethics inWashington (CREW) acquired recently that bear directly on our letter of February 9, 2011,requesting that the Securities and Exchange Commission (SEC) investigate whether certainhedge fund managers have been illegally manipulating the market price of stock in the for-profiteducation industry.

Last week, the U.S. Department of Education provided CREW with 188 newlydiscovered pages of documents from the email account of Deputy Undersecretary of EducationJames Kvaal. Those documents include an email dated July 19,2010 - just days beforeEducation was to release its proposed gainful employment regulations - from short-seller StevenEisman to Education's Budget Development Staff Director David Bergeron, who was activelyinvolved in the agency's regulatory process. The subject line of Mr. Eisman's email reads "Iknow you cannot respond," and the text states as follows:

But just fyi. Education stocks are running because people arehearing DOE is backing down on gainful employment. 1

The email thread of which this is a part shows this email was forwarded to a number ofEducation officials, landing eventually in the email box of Phil Martin, confidential assistant toSecretary Arne Duncan, with the statement "Let's discuss."

1 A copy of this email is attached as Exhibit A.2 See id.

1 40 0 E ye S tr ee t, NW, S u ite 4 50 , W a sh in gto n, D .C . 2 00 05 I 2 02 .4 08.5 565 p ho ne I 2 02 .58 8.5 02 0 fa x I www.ci t izensforethic
http://www.citizensforethics.org/http://www.citizensforethics.org/


2/13

Robert KhuzamiMarch 1,2011Page Two

According to these newly released documents, the following day Mr. Kvaal initiated aplan to call various outside groups and individuals in advance of Education's July 23,2010issuance of the proposed regulations, for the apparent purpose of giving them a heads up on theupcoming regulations. This advance notice would have reassured Mr. Eisman and others thatDOE was not backing down on gainful employment. A follow-up email from Mr. Bergeron onJuly 21 discussing who both he and Mr. Kvaal would call states: "Also, there's theEismaniSchlumaniet al [sic] but Eisman is a short seller anyway you cut it and anything you tellSchulman gets to Eisman."? Diane Schulman is with The Indago Group, a small researchcompany used by Mr. Eisman's hedge fund, FrontPoint Services Fund, to obtain information andentree to Washington lawmakers for Mr. Eisman." As the email notes, providing Ms. Schulmanwith notice of the regulations effectively would provide notice to Mr. Eisman as well.

The email chain does not indicate whether either Mr. Eisman or Ms. Schulman were infact given advance notice of the proposed gainful employment regulations directly from eitherMr. Kvaal or Mr. Bergeron. Other documents reveal that some non-profit groups with whichboth Mr. Eisman and Ms. Schulman were in contact received advance copies of the regulationsand at least some of them spoke with Mr. Eisman at the same time. For example, a July 21,2010email from Susan Lehr, Vice President of Government Relations at Florida State College, toPauline Abernathy, Vice President of The Institute for College Access and Success (TICAS),conveys Ms. Lehr's understanding that the gainful employment regulation was coming out atmidnight the following evening. Of note, TICAS is listed in Mr. Kvaal's email as a group heplanned to call in advance ofthe regulations' issuance.' A later email that day from Ms. Lehrconveys her expectation she would receive an embargoed copy before its official release andnotes "Jim [an apparent reference to her boss] met by phone with Eisman yesterday for a veryinteresting conversation." Another email sent the following morning, July 22, 2010, states "Weexpect lots of market churn" from the issuance of the gainful employment regulations. And onthat same morning Ms. Lehr told Ms. Abernathy in an email, "Eisman had questions for Jim onWednesday ... they spoke for about an hour ... ,,6 Taken as a whole, these emails suggest that,

3 This email chain is attached as Exhibit B.4 This relationship is spelled out in CREW's letter of January 19, 2011 to Secretary

Duncan, Exhibit B to our letter to you of February 9,2011.5 See Email fromJamesKvaaltoDavidBergeron.July221.2010.re: "group calls."

(Exhibit B).6 Email from Susan Lehr to Pauline Abernathy entitled "GE out Tomorrow," July 21,

2010; email from Susan Lehr to CEO entitled "Gainful Employment," July 21,2010; email fromCEO to Gilchrist Berg entitled "Gainful Employment," July 22, 1020; email from Susan Lehr toPauline Abernathy entitled "GE-ED briefing hill staff at 6pm tonight!, "July 22, 2010 (all


3/13

Robert KhuzamiMarch 1,2011Page Threeat a minimum, Mr. Eisman knew Education was about to issue the long-awaited regulations as aresult of communications originating with Education officials, and likely was told at leastsomething about the substantive content of those regulations.

These documents reinforce the other evidence CREW provided you in our earlier letter ofapparent collusion between Mr. Eisman and Education in an effort to manipulate the price ofstocks in for-profit education companies. CREW has no assurance the Department of Educationhas fully satisfied its obligations under the FOrA and produced all documents bearing on thisissue. The SEC, with its full panoply of investigative powers, continues to be the only agencywith the power to determine whether hedge fund short sellers have engaged in marketmanipulation.

Please let us know if CREW can be of further assistance.Very truly yours,

c

Anne L. WeismannChief Counsel

Enclosures

attached as Exhibit C).


4/13

EXHIBIT A


5/13

Case 1:10-cv-01712-RMC Document 8-1 Filed 02/17/11 Page 22 of 36Kvaal, JamesFrom:Sent:To:Subject:

Kvaal, JamesMonday, July 19, 2010 10:09 AMMartin, PhilFW: i know you cannot respondImportance: High

Let's discuss

From: Bergeron, DavidSent: Monday, July 19, 2010 10:06 AMTo: Kvaal, James; Yuan, GeorgiaSubject: FW: i know you cannot respondImportance: Highfyi

from: Eisman, Steven J:mgjJ!:Q;sel~m_[l@fJ2QiIrtn~rs.comJSent: Monday, July 19, 2010 9:45 AMTo: Bergeron, DavidSubject: iknow you cannot respondBut just fyi. Education stocks are running because people are hearing DOE is backing down on gainful employment.Steven EismanFrontPoint Financial Services Fundseisman@fppartners,cQ!]1917-934-1770

1


6/13

EXHIBITB


7/13

Case 1:10-cv-01712-RMC Document 8-4 Filed 02/17 /11 Page 29 of 53Kvaal, JamesFrom:Sent:To:Subject:

Bergeron, DavidWednesday, July 21, 20102:47 PMKvaal, JamesRE: group calls

Looks good. Hartle called me today from the road and asked what was going on. I said to expect a call from one of ustomorrow or Friday. He said he'll be in the office and that we should ask to have him interrupted to take the call.

from: Kvaal, JamesSent: Wednesday, July 21, 20102:45 PMTo: Bergeron, DavidSubject: RE: group callsHow's this for a division of labor?

Today/Tomorrow morning:David:BairneAASCUJames:TICASBar rnakTerryKantrowitz

Friday;David:Angela Peoples, USSAJason DeUsle and Steve Burd, New AmericaDeanne Loonin, NClCJames:Chris Lindstrom, PIRG.David Halperin, Campus ProgressJamie Studley, Public Allies

From: Bergeron, DavidSent: Wednesday, July 21, 2010 8:02 AMTo: Kvaal, JamesSubject: RE: group calls


8/13

Case 1:10-cv-01712-RMC Document 8-4 Filed 02/17/11 Page 30 of 53I'd suggest we add David Baime, ACCU& Pat Smith or Robert Moran at AASCU. Also, should probably call NASFAAonDay 2 or 3. I can make any calls you'd like. I'd prefer not to call Mark but Danny could do that one. He gets the guy.When I talk Mark, the conversation goes more like Bob & Tony.Also, there's the Eisman/Scbluman/et al but Eisman is a short seller anyway you cut it and anything you tell Schulmangets to Eisman.From: Kvaal, JamesSent: Tuesday, July 20, 2010 11:13 PMTo: Bergeron, DavidSubject: group callsWhile I'm on a roil ... here is my list of people who need calls. What am !missing? Do you want to sign up for a few orhow should we split up?Day 1(most likely to be called by reporters)Q Pauline Abernathy and Lauren Asher, TICAS., Barmak Nassarian, AACRAO.. Terry Hartle, ACE(0 Mark Kantowltz, FinaldDay 2:" Deanne Loonin, NCLC" Jason Delisle and Steve Burd, New America Chris Lindstrom, PIRG., Angela Peoples, USSA...Jamie Studley, Public Allies., David Halperin, Campus Progress

2


9/13

EXHIBIT C


10/13

: : : : : Glv 0 Vt - < (I;I(')-;(/)'11!l) m :J ft> ft> coo ( t ) 2'< H :::l V1 c : r : : : Iu r+ ...... .....3(1) ..c .- n 0 o .I-' -h 0-; "j rtN 0 O' Q~ :3 0'- ri'IV ~ r+< S : > 0I-" }oJ.< S : > i? V1'" ru OJ0- '-0 c::T(IJ::rOJ G) :::::~.... g . . " " 1VI m1S(j')(t)(j)VI o~g_~: 0 S,c.rWCllCllr ::I -!\!i :: l:


11/13

Vi -1 Vi ."c: 0 r o iC T ' :;! 0u.. rt :3r o ( " " ) IIi rn 0;tO~ I )r o r o f-I'C) Q. zr O 'Q:;:, . , f-I.Q, l r o . . :;:J1- " Vl 0.1:;:J o.Vlf-I"'h Q, l Cc '


12/13

0-J CDCDf-J 0-CD J!;\J 1-"V> (1 )CD -'hrPill 0..ro t

:r:U S '::r


13/13

ri'o \

letter to robert khuzami - crew: sec: new information about short-sellers' efforts to shape...

Documents