Review & Outlook
Obama's Corinthian Kill
How regulators used accusations to ruin a for-profit educator.
July 25, 2014 6:34 p.m. ET
For five years the White House has been
tightening the screws on for-profit colleges. So it's curious that the
Obama Administration is now denying that it deliberately drove
Corinthian Colleges out of business, all evidence to the contrary.
Shouldn't it be declaring mission accomplished?
Last
month the Department of Education triggered a liquidity crisis at the
Santa Ana-based Corinthian by cutting off federal student aid.
Regulators then coerced the for-profit into an agreement to wind down 12
of its U.S. campuses and sell 85 others over the next six months. Last
week, DOE appointed Chicago lawyer
Patrick Fitzgerald,
notorious for prosecutorial bullying, to oversee the liquidation.
Corinthian's 72,000 students will be allowed to transfer, finish their
degrees or withdraw with a full refund, but 12,000 jobs are in jeopardy.
The
White House is putatively trying to avert a chaotic Chapter 7
bankruptcy like the one that transpired in 2001 after regulators
abruptly yanked federal aid from the for-profit Computer Learning
Centers. Congress lashed department officials for their heavy-handed
response that threw 10,000 students out of school. Yet the drive-by
shooting of Corinthian may be even more vicious.
California Attorney General Kamala Harris during a news
conference in 2013 in San Francisco announcing the filing of a lawsuit
against the for-profit Corinthian Colleges.
Getty Images
Department officials claimed on a
call with reporters this month that "we did not know their cash
situation" when they blocked federal aid and "had no foreknowledge that
this would be the reaction." Regulators are often caught flat-footed,
but every sign suggests the Obama Administration targeted Corinthian
with the intent to kill.
In April 2012
the Consumer Financial Protection Bureau launched a fishing expedition
into Corinthian's shareholder-backed loans to determine whether the
for-profit was "engaging in unlawful acts or practices relating to the
advertising, marketing, or origination of private student loans."
Corinthian turned over 85,000 pages of documents on the lending program,
which helped low-income students finance education costs not covered by
government aid and personal resources.
Last
September the agency issued a more expansive "civil investigative
demand" for all emails, reports, presentations, meeting minutes,
agendas, training manuals, policies and analyses related to the program
without alleging specific legal violations. The company explained that
it would have to employ an e-discovery vendor to process the documents
at an estimated cost of $9 million because it lacks a central document
system.
The Securities and Exchange
Commission initiated an even more sweeping probe in June 2013 of, inter
alia, Corinthian's recruitment practices, student rates of completion,
job placement and defaults. And earlier this year the for-profit
notified investors that the Department of Justice "is investigating
allegations that the Company violated the False Claims Act by, among
other things, manipulating attendance records" as well as "alleged
violations of the False Claims Act relating to recruiting and financial
aid practices." Note that these are all merely allegations.
In
January the Department of Education subpoenaed job-placement, grade and
attendance records for 175,000 Corinthian graduates. Over the past six
months DOE has expanded its document requests though all of Corinthian's
schools remain in good-standing with accreditors that monitor financial
and academic compliance.
None of the
federal agencies has brought legal charges, but they have collectively
destroyed Corinthian's bottom line. The company's compliance costs have
spiked while its share price plunged. In the third quarter of fiscal
2014, Corinthian recorded a net operating loss of $79.6 million.
On
May 6 Corinthian warned investors that DOE might assign it a low
"financial responsibility" score (an amalgam of a company's income,
equity value and cash reserves), which would require "additional
monitoring and reporting procedures" to draw down federal student aid.
The company also said it was exploring "strategic alternatives." In a
June 9 memo to Corinthian shareholders, Wells Fargo's equity research
arm outlined means by which Corinthian could increase liquidity such as
selling schools.
Three days later, DOE
placed Corinthian on "heightened cash monitoring" status, which requires
schools to submit additional documentation for federal aid. Here's the
kicker: DOE also imposed a 21-day funding freeze. Typically, a school
under heightened monitoring must wait only a day or two before accessing
federal cash.
The department also asked
Corinthian to inform it of any adverse business actions or plans to
close or sell locations. So regulators were well aware of the company's
dire financial condition. In a June 19 press release, DOE even stated it
was taking action "after careful consideration" and posted a link to a
Corinthian SEC filing that warned about its dangerously low liquidity.
***
Yet
department officials now purport to be wondering "what we missed" and
have vowed to re-examine their financial monitoring mechanisms, as if
Corinthian's collapse was the product of mere regulatory negligence.
This was a contract hit, not accidental homicide.
Meantime, Education Secretary
Arne Duncan
is floating above this travesty as if it's someone else's job.
This Administration dislikes so many industries and individual companies
that putting one more out of business is barely news.
Oringally posted here: http://online.wsj.com/articles/obamas-corinthian-kill-1406327662?KEYWORDS=corinthian+kill
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