Grassley Wants To Know If DOE Officials Leaked To Hedgies

Jul 29 2011 | 9:23am ET

Senator Charles Grassley (R-Iowa) wants to know if Education Department officials shared confidential government information about the looming regulation of the for-profit college industry with hedge fund managers.

In a letter to U.S. Education Secretary Arne Duncan, Grassley asks whether any of the Secretary’s staffers might have leaked information about negotiations to regulate the for-profit college industry to hedge fund managers including Steve Eisman, the former FrontPoint Partners manager. Several investors (including Eisman) both lobbied for stricter rules governing the for-profit college industry and, anticipating such rules, placed huge bets against the industry.

The DOE is already conducting an internal investigation to see whether certain investors influenced the for-profit rules.

Grassley’s letter, made public by Dealbook, says in part:

“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. 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.

Department of Education spokesman Justin Hamilton denied the suggestion that department officials had leaked to hedge fund managers:

“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,” said Hamilton in a statement reported by Dealbook. “We talked to as many people as possible when developing the regulations including several officials from publicly traded for-profit colleges.”

Grassley’s letter cites an e-mail from Eisman to an agency official on July 19, 2010 with the title, ‘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. Grassley focuses on the speed with which that message reached higher-ups: “…it is extremely concerning” that the e-mail was “forwarded to high-level Department of Education employees within 24 minutes.”

Grassley also expressed surprise that Eisman was “on such familiar terms” with the agency official.

Grassley has been poking and prodding at relationships between government and Wall Street for several months now, looking into how the SEC investigated trades by SAC Capital Advisors and considering the Federal Communications Commission’s handling of the hedge fund-backed LightSquared wireless broadband network. The Education Department is the latest focus of his scrutiny. He’s added his voice to that of Senator Tom Coburn (R-Oklahoma) who wants a government investigation into possible leaks.


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