Short-seller demonization watch, ProPublica edition

By Felix Salmon
July 12, 2010
Remember when left-wing inside-the-Beltway pressure-group person Tom Matzzie started demonizing Steve Eisman for being a short seller, without actually engaging with any of his arguments about how for-profit colleges are causing a huge amount of damage and very little benefit? Well, it wasn't long before another inside-the-Beltway pressure group joined in: this time it was Melanie Sloan, of something called Citizens for Responsibility and Ethics in Washington.

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Remember when left-wing inside-the-Beltway pressure-group person Tom Matzzie started demonizing Steve Eisman for being a short seller, without actually engaging with any of his arguments about how for-profit colleges are causing a huge amount of damage and very little benefit? Well, it wasn’t long before another inside-the-Beltway pressure group joined in: this time it was Melanie Sloan, of something called Citizens for Responsibility and Ethics in Washington.

Sloan’s letter to Tom Harkin, of the Senate Committee on Health, Labor, Education, and Pensions, received a great reply, pointing out that Sloan had no problem with people invested in the for-profit college’s success testifying in front of Harkin’s committee:

Mr. Eisman is not the only person to testify before a Senate Committee this year who has a stake in federal policy. Indeed, the same panel had another witness with a financial stake in the regulatory treatment of for-profit colleges: Ms. Sharon Thomas Parrott of DeVry University. In the case of both Mr. Eisman and Ms. Parrott, their financial interests did not preclude them from having valuable information that benefited our discussion of the for-profit educational industry…

We welcome your observations and invite you to further explore the actual matter of our hearing. I have attached a report released at the hearing that outlines in greater detail how the for-profit colleges receive $23 billion in taxpayer dollars, but offer little transparency regarding the outcomes of that investment. Your assistance in seeking greater transparency in the for-profit higher education industry, for example, on behalf of its students, as well as taxpayers, would be a great service.

Good for Senator Harkin. But of course there’s clearly a fishy organized campaign going on here: why exactly are people like Matzzie and Sloan suddenly getting terribly exercised about Evil Hedge Fund Short Sellers in general, and Steve Eisman in particular? Eisman’s testimony is very compelling, and so the only possible grounds to attack him are ad hominem ones, essentially saying that he can’t be allowed to testify just because of who he is and how he makes his money.

Now Matzzie and Sloan have a most unlikely new bedfellow in their campaign against the short sellers: Sharona Coutts of ProPublica. Last year, ProPublica launched what it calls an “ongoing investigation” into for-profit schools, especially their graduation and loan-default rates. She’s naturally on the side of the angels here, which is to say, the short-sellers. But nothing was published in 2010, until now, when Coutts filed a story headlined “Investment Funds Stir Controversy Over Recruiting by For-Profit Colleges.”

You might remember Coutts from a dreadful story she filed in 2008, attacking Goldman Sachs for putting out credit research. This story isn’t half as bad as that one, but at heart it’s similar, assuming that anything done by anybody on Wall Street must be suspect:

Some short sellers appear to be moving beyond assessing particular companies and taking a financial position accordingly. Now, says the Career College Association, some are trying to stage-manage the reporting of negative stories to fuel the impression of a groundswell of anger against the schools.

“Certainly there are legitimate critics. I may not agree with them, but they’re not in it to fatten their wallets,” said Harris Miller, president of the CCA, which represents for-profit schools. “But I think that a lot of the activity going on, and with other media reports, is being driven by the short sellers, who are hiring people who are semi-disguising who they are and not being candid with people about their role in trying to drive down the stock price of certain companies.”

The only remotely scandalous thing in Coutts’s story is the tale of a single researcher, Johnette McConnell Early, who helped to organize a letter signed by the representatives of 19 different homeless shelters, complaining about how “for-profit trade schools and career colleges are systematically preying upon our clients.” Early’s mistake was that she didn’t tell the signatories that she was employed by an investment firm. She could and should have done so, because now some of the signatories feel that they were duped:

“Had I known, I probably wouldn’t have signed on,” Panico said. “I probably would have contacted one of the other people and said, ‘Hey, now that we have all this information, let’s do this ourselves.’ I think it’s sleazy to basically use me and use other executive directors that have a real issue to make a profit for some companies.”

The irony here, of course, is that the letter would have had even more force if Panico and the other signatories had simply taken the information from Early and put together the letter themselves: that way no one could discount the real moral force behind the letter on the grounds that there was any kind of hidden agenda.

But instead, Coutts is now writing a silly exposé of a non-issue, quoting the paid representative of the for-profit schools uncritically, and training her sights instead on exactly the people who are willing to invest a lot of time, effort, and money into uncovering the gruesome truth.

Coutts doesn’t know who paid Early: it may or may not have been Eisman. I hope it wasn’t: it would be an ethical blunder on Eisman’s part to be anything but fully transparent about his efforts to get the government to crack down on this sordid industry. On the other hand, she’s not being entirely transparent herself about where she got the information that Early was working for a hedge fund; in fact, she never says in the article who fed her that particular nugget. If I had to guess, I’d say that it was Harris Miller, and I’d also be very interested in finding out what his connections might be with Matzzie and Sloan.

As for the headline on Coutts’s piece, it’s clearly Coutts herself, rather than “investment funds,” who’s stirring controversy here. (Incidentally, it’s pretty hard to justify the plural in the headline: even if Coutts Early was hired by an investment fund, it’s pretty safe to assume that there was only one fund involved.) Unless and until Coutts started phoning up the signatories to the letter and asking them how they felt about being duped by Evil Hedge Fund Short Sellers, there was no controversy here at all: in fact, it looks to me that the entire controversy, insofar as it exists, has been manufactured by Coutts and the anti-Eisman brigade. Certainly there’s no indication, anywhere in Coutts’s story, that the likes of Miller and Sloan look pretty desperate if the biggest gun they have to train on Eisman’s arguments is that a single researcher, who might not have anything to do with Eisman at all, made a stupid mistake regarding her personal disclosure. Especially since full disclosure would have made no real difference to anything.

The lesson here, I think, is that short sellers have to be very, very careful to be whiter than white in anything they do or say: the companies they’re campaigning against will happily just start shouting “short sellers!” in an attempt to drown out rational argument — and those shouts, sadly, can be very effective. Happily, Tom Harkin, at least, seems to be quite good at ignoring them.

Update: ProPublica’s Dick Tofel leaves a comment, saying that “ProPublica found out who wrote the letter by asking some of the people who signed it”. Which makes the whole thing seem even less scandalous.

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