Inside the biggest GAO scandal you never heard about 

If there is a code for lying, then Rule No. 1 ought to be to make the lie believable. Not adhering to that first rule exposed a fraud perpetrated by the Government Accountability Office and helped uncover suspicious activity at the Department of Education.

Last August, Gregory Kutz, then head of the GAO’s Forensic Audits and Special Investigations unit, gave stinging testimony to the Senate Health, Education, Labor and Pensions Committee.

His target was career colleges. Unlike state-owned institutions and private, not-for-profit colleges, career colleges operate on a for-profit basis. A GAO report accompanied Kutz’s testimony. At issue was access to federally backed financial aid by students attending career colleges. The Department of Education indicated it was considering new regulations that would restrict such aid. The hearing of the Senate Help, Education, Labor and Pensions Committee chaired by Sen. Tom Harkin, D-Iowa, portrayed career colleges as rogue operations needing to be reined-in.

According to the GAO report, career colleges were guilty of shady recruiting practices. Representatives at all 15 schools tested in a sting operation allegedly made deceptive or otherwise questionable statements to undercover investigators posing as prospective students. The GAO further claimed four colleges encouraged fraudulent behavior.

What attracted the attention of this columnist were absolute statements and allegations that did not add up. This led to a FOIA request to get answers. The response to the FOIA request was unexpected. The GAO quietly reissued its report.

The revised report included changes that were so dramatic that it called into question either the competence or the integrity of the GAO. In general, it was GAO investigators who suggested deceptive or fraudulent activity with representatives merely acknowledging the investigators’ schemes.

There is more. A coalition of career colleges obtained audio recordings of the GAO investigation and had them analyzed. The results found numerous instances in which the GAO fabricated entire conversations.

In some cases, investigators appear to have turned off recording devices in mid-interview, raising questions regarding what investigators did not want recorded. Additionally, conversations portraying college representatives as acting professionally and responsibly were excluded from the report.

In sum, the GAO report was a fraud. And last month, U.S. Comptroller General Gene Dodaro relieved Kutz of his duties as the head of the Forensic Audits and Special Investigations unit.

It gets worse. As early as 2009, three stock short-sellers had unusual involvement in the Department of Education’s career college rulemaking process. Rule changes suggested by one short-seller in 2009 bear striking similarity to rules proposed by the Department of Education in 2010. The new rules would restrict financial aid for career college students.

Neither Antal Desai and Kent McGaughy of CPMG Investments or Steven Eisman of FrontPoint Financial Services Fund were known for expertise in post-secondary education.

These short-sellers brought little to the table aside from a plan that could damage the value of publicly traded stocks of career colleges. Of note, Eisman was a major 2008 Obama campaign donor.

Emails and documents obtained by a FOIA reveal startling involvement by Desai, McGaughy and Eisman in Education’s internal deliberations. In a July 2010 email to a senior Education official Eisman expressed alarm at an increase in career college stock prices.

In response, Department of Education officials crafted a plan to notify various individuals, including Eisman, of harsh new rules at least two days before they were publicly released.

The Department of Education announced its rules only days before Harkin’s committee hearing. These two events and the (now-discredited) GAO report caused the publicly traded stock of most career college companies to plunge in value 35-50 percent.

This is a curious set of circumstances that begs the attention of the Securities and Exchange Commission.

Mark Hyman hosts “Behind the Headlines” for Sinclair Broadcast Group.

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Mark Hyman

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