Audit to determine whether college reg was leaked to Wall Street

The Department of Education (DOE) will perform an audit to determine whether employees provided information to Wall Street investors who were looking to gain an edge in trading on for-profit colleges.

Kathleen Tighe, the department's inspector general, will explore whether investors were tipped off in advance about the regulations drafted on the for-profit education industry. She said the matter could be referred to the Securities and Exchange Commission.

"In a general terms, it would cause me a lot of concern if a report were disclosed prior to its final issuance,” she told the Project on Government Oversight (POGO), a nonpartisan watchdog group. “If we came to believe that insiders had traded on confidential information, we could refer it.”

At issue is whether short sellers on Wall Street, looking to gain an upper hand, might have contacted DOE employees for tips about the federal government's efforts to regulate for-profit colleges.

Those institutions have come under heavy scrutiny from Congress in the last year amidst charges that they saddle students with huge amounts of student loan debt while offering little in terms of improved job prospects.

The department has looked to rein in the sector. Under the rule, for-profit schools would have to show that their students are finding “gainful employment” in order to pay back government loans. If the schools fail that standard, they could be cut off from federal aid, which came to $30 billion for the industry last year.

Industry pressure led to some changes in the rule. For example, if a school failed to meet the new criteria, it would lose federal funding beginning in 2015, not next year as originally drafted.

Watchdogs have pushed for investigations into Wall Street's role in the rulemaking after emails appeared to indicate traders tapped DOE employees for information about the rules before they were made public.

The release of documents made public by a Freedom of Information Act request indicate that several short sellers reached out to the DOE on the proposed regulations.

One email exchange shows a DOE employee informing a short seller of the expected date the rules would be proposed, a piece of information that then appeared in a Morgan Stanley investment report one week later.

“Allegations that sources inside the Department of Education may have passed along sensitive information to Wall Street strike at they [sic] very integrity of our financial markets,” said POGO Executive Director Danielle Brian in a statement. “The American public must have faith that their government officials aren’t short selling their interests.”

Tighe told POGO she expects to wrap up the audit this summer, and that she does not suspect any members of the IG staff are involved. The audit will also look into current guidelines for interaction of DOE employees and outside parties and whether any changes should be made.

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