CREW citizens for responsibility and ethics in washington March 1, 2011 By Facsimile (202-772-9279) Robert Khuzami Director Division of Enforcement Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549 ‘Dear Mr. Khuzami: I write to provide you with documents Citizens for Responsibility and Ethies in ‘Washington (CREW) acquired recently that bear directly on our letter of February 9, 2011, requesting that the Securities and Exchange Commission (SEC) investigate whether certain hedge fund managers have been illegally manipulating the market price of stock in the for-profit, ‘education industry, Last week, the U.S. Department of Education provided CREW with 188 newly discovered pages of documents from the email account of Deputy Undersecretary of Education James Kvaal. Those documents include an email dated July 19, 2010 — just days before Education was to release its proposed gainful employment regulations ~ from short-seller Steven Eisman to Education’s Budget Development Staff Director David Bergeron, who was actively involved in the agency’s regulatory process. The subject line of Mr. Eisman’s email reads “I know you cannot respond,” and the text states as follows: But just fyi. Education stocks are running because people are hearing DOE is backing down on gainful employment.’ ‘The email thread of which this is a part shows this email was forwarded to a number of Education officials, landing eventually in the email box of Phil Martin, confidential assistant to Secretary Arne Duncan, with the statement “Let’s discuss.’ "A copy of this email is attached as Exhibit A. * See id. 1400 Eye Street, NW, Sute 450, Washington, D.C. 20005 | 202.408.5565 phone | 202.588.5020 fax | wmw.itzensorttics.org .Robert Khuzami March 1, 2011 Page Two According to these newly released documents, the following day Mr. Kvaal initiated a plan to call various outside groups and individuals in advance of Education’s July 23, 2010 issuance of the proposed regulations, for the apparent purpose of giving them a heads up on the upcoming regulations. This advance notice would have reassured Mr. Eisman and others that DOE was not backing down on gainful employment. A follow-up email from Mr. Bergeron on July 21 discussing who both he and Mr. Kvaal would call states: “Also, there's the Eisman/Schluman/et al [sic] but Eisman is a short seller anyway you cut it and anything you tell Schulman gets to Eisman.”* Diane Schulman is with The Indago Group, a small research company used by Mr. Eisman’s hedge fund, FrontPoint Services Fund, to obtain information and entree to Washington lawmakers for Mr. Eisman.* As the email notes, providing Ms. Schulman with 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 in fact given advance notice of the proposed gainful employment regulations directly from either Mr. Kvaal or Mr. Bergeron. Other documents reveal that some non-profit groups with which both Mr. Eisman and Ms. Schulman were in contact received advance copies of the regulations and at least some of them spoke with Mr. Eisman at the same time. For example, a July 21, 2010 ‘email from Susan Lehr, Vice President of Government Relations at Florida State College, to Pauline Abernathy, Vice President of The Institute for College Access and Success (TICAS), conveys Ms. Lebr’s understanding that the gainful employment regulation was coming out at midnight the following evening. Of note, TICAS is listed in Mr. Kvaal’s email as a group he planned to call in advance of the regulations” issuance.* A later email that day from Ms. Lehr conveys her expectation she would receive an embargoed copy before its official release and notes “Jim [an apparent reference to her boss] met by phone with Eisman yesterday for a very interesting conversation.” Another email sent the following morning, July 22, 2010, states “We expect lots of market chum” from the issuance of the gainful employment regulations. And on that same morning Ms. Lehr told Ms. Abernathy in an email, “Eisman had questions for Jim on, Wednesday... . they spoke for about an hour...” Taken as a whole, these emails suggest that, * This email chain is attached as Exhibit B. * 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. + See Email from James Kvaal to David Bergeron, July 221, 2010, re: “group calls.” (Exhibit B) © 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 from CEO to Gilchrist Berg entitled “Gainful Employment,” July 22, 1020; email from Susan Lehr to Pauline Abernathy entitled “GE-ED briefing hill staff at 6pm tonight!, “July 22, 2010 (allRobert Khuzami March 1, 2011 Page Three at a minimum, Mr. Eisman knew Education was about to issue the long-awaited regulations as a result of communications originating with Education officials, and likely was told at least something about the substantive content of those regulations. These documents reinforce the other evidence CREW provided you in our earlier letter of apparent collusion between Mr. Eisman and Education in an effort to manipulate the price of stocks in for-profit education companies. CREW has no assurance the Department of Education has fully satisfied its obligations under the FOIA and produced all documents bearing on this issue. The SEC, with its full panoply of investigative powers, continues to be the only agency with the power to determine whether hedge fund short sellers have engaged in market manipulation, Please let us know if CREW can be of further assistance. Very truly yours, -—” Afne L, Weismann Chief Counsel Enclosures attached as Exhibit C).EXHIBIT ACase 1:10-cv-01712-RMC Document 8-1 Filed 02/17/11 Page 22 of 36 Kvaal, James From: Kvaal, James Sent: Monday, July 19, 2010 10:09 AM To: Martin, Phil Subject: FW: i know you cannot respond Importance: High Let's discuss From: Bergeron, David Sent: Monday, July 19, 2010 10:06 AM To: Kvaal, James; Yuan, Georgia ‘Subject: FW: i know you cannot respond Importance: High fyi From: Eisman, Steven (mailto:selsman@fppartners.com} Sent: Monday, July 19, 2010 9:45 AM To: Bergeron, David Subject: | know you cannot respond But just fyi. Education stocks are running because people are hearing DOE is backing down on gainful employment. Steven Eisman FrontPoint Financial Services Fund seisman@fppartners com 917-934-1770EXHIBIT BCase 1:10-cv-01712-RMC_ Document 8-4 Filed 02/17/11 Page 29 of 53 Kyvaal, James Bergeron, David Wednesday, July 21, 2010 2:47 PM Kvaal, James RE: group calls, Looks good. Hartle called me today from the road and asked what was going on. | said to expect a call from ane of us tomorrow 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, James Sent: Wednesday, July 21, 2010 2:45 PM To: Bergeron, David ‘Subject: RE: group calls How's this for a division of labor? Today/Tomorrow morning: David: Baime AASCU James: Ticas Barmak Terry kantrowitz Friday: David: ‘Angela Peoples, USSA Jason DeLisle and Steve Burd, New America Deanne Loonin, NCLC James: Chris Lindstrom, PIRG David Halperin, Campus Progress Jamie Studley, Public Allies From: Bergeron, David Sent: Wednesday, July 21, 2010 8:02 AM To: Kvaal, James Subject: RE: group calls,Case 1:10-cv-01712-RMC Document 8-4 Filed 02/17/11 Page 30 of 53. I'd suggest we add David Baime, ACCU & Pat Smith or Robert Moran at AASCU. Also, should probably call NASFAA on Day 2 or 3. I can make any calls you'd like, 1d prefer not to call Mark but Danny could do that one. He gets the guy. When | talk Mark, the conversation goes more like Bob & Tony. Also, there’s the Eisman/Schluman/et al but Eisman is a short seller anyway you cut it and anything you tell Schulman gets to Eisman, From: Kvaal, James ‘Sent: Tuesday, July 20, 2010 11:13 PM To: Bergeron, David Subject: group calls While I'm on a roll. here is my list of people who need calls. What am | missing? Do you want to sign up for a few or how should we split up? Day 2 (most likely to be called by reporters) » Pauline Abernathy and Lauren Asher, TICAS ¢ Barmak Nassarian, AACRAO Terry Hartle, ACE © Mark Kantowitz, Finaid Day 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EXHIBIT CLehr, Susan M, Wednesday, July 21, 2010 6:13 PM Lehr, Susan M. Pauline Abernathy; GainfulEmploymentGroup Re: GE out Tomorrow On Jul 21, 2010, ft 8 Pa) “Lehr, Susan M.” wrot. 2c rgiust heard from 2 reliable source that reporters on the hill will be briefed tomorrow on GE and Feleaseis GEanighe tomorrow. 1 have confirmed w another source that this is accurate: jaybe we needs SCUSS_on Frid: FS Will ask comments.-----Original Message-- From: Lehr, Susan M. Sent: Wednesday, July 21, 2010 9:52 Pm To: ceo Subject: Gainful Employment Steve, it will come out tomorrow after the mi Reporters on the Hill will be briefed after closing and it will be public midnight tomorrow night. I expect an embargoed copy early evening. Jim met by phone with Eisenman yesterday for @ very interesting conversation. Fill you in tomorrow. arkets close and I think it will be good,From: ceo Seat: Thursday, Jury 22, 2010 11:02 AM To: Berg, Gilchrist Subject FW: Gainful Employme Importance: High Breaking news, Gilchrist. Reporters will be briefed by USDOE on the proposed gainful employment regs at 6pm tonight with public release at midnight. We expect lots of market churn. Susan Lehr will be able to share interpretations and insights tomorrow.From: Lehr, Susan M, [maito:SLEHR@Fscjedu] Sent: Thursday, July 22, 2010 11:17 AM ‘To: Pauline Abernathy _ Eiseman had questions for Jim oh Wednesday. they spoke for about an hour... was so happy for him to "ove having found such friends as allof you to help wage this barre ee