Published

6/23/10
  • Part Six: Billion Dollar Babies: University of California invests $53 million in two diploma mills owned by a regent

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    “Berkeley is a microcosm of the intrusion of corporations into education. … While public schools crumble, while public universities are slashed and diminished, while for-profit universities rise as our newest vocational schools, elite institutions become unaffordable even for the middle class.” -- Chris Hedges (Empire of Illusion, 2009)

    Richard Blum

    In 2009, Richard C. Blum, then the chairman of the UC regents, spoke at the Milken Institute’s Global Conference, held at the Beverly Hilton in Los Angeles. The corporate confab was hosted by Michael Milken, the “junk bond king” who went to prison in the aftermath of the savings and loan fiasco of the 1980s.
             
    Barred from securities trading for life by federal regulators, Milken has since recreated himself as a proponent of investing in for-profit educational corporations, an industry which regularly comes under government and media scrutiny following allegations of fraud made by dissatisfied students.
             
    At the conference, Mr. Blum, who is a financier by trade, sat on a panel called “The New University and Its Role in the Economy,” alongside the presidents of the Massachusetts Institute of Technology and Arizona State University. The panel focused on how universities can best serve the corporate demand for tech-savvy employees by recruiting smart freshmen with scientific talent. One panel member urged treating universities as “laboratories of business ideas and products.”
             
    As someone who oversees investment policy decisions for UC’s $63 billion portfolio, and as the largest shareholder in two for-profit corporate-run universities (in which UC invests), Mr. Blum had a unique perspective to share. He advised public universities to attract business-oriented students with clever advertisements, just as vocational schools do. “It’s like anything else,” he told the crowd. “It’s how you market it.”

    Marketing strategy aside, Mr. Blum has taken on two seemingly disparate roles— one as an advocate for a nonprofit university, and the other as an owner of two for-profit educational corporations. As a regent, Mr. Blum has approved cost-cutting policies for UC that appear to have enhanced the profitability of his vocational schools. And in 2007, Mr. Blum’s spouse, Sen. Dianne Feinstein (D-CA), wrote federal legislation that benefited the for-profit college industry.

    For several years, Mr. Blum’s firm, Blum Capital Partners, has been the dominant shareholder in two of the nation’s largest for-profit universities, Career Education Corporation and ITT Educational Services. As of May, firm’s combined holdings in the two chain schools was $923 million—nearly $1 billion. As Blum Capital Partners’ ownership stake has enlarged over time, so have those made by UC investment managers, who have invested a total of $53 million in public funds into the two educational corporations.
             
    Government ethics advocates are displeased by the relationship betwen UC and Regent Blum’s educational interests. “It is hugely inappropriate for the University of California to invest in for-profit colleges when it should be promoting public education,” said John M. Simpson of Consumer Watchdog, a Southern California nonprofit education and advocacy organization. “And something stinks when university investments end up in companies largely controlled by a regent. To the average fellow on the street, this would seem to be a conflict of interest. It is up to Mr. Blum and the UC treasurer to explain how it could not be a conflict of interest.”

    (image from http://www.jasoncrosbyillustration.com)
    UC Regent Construction Company

    Recession capitalism
    Due to cost-cutting polices sanctioned by the UC Regents, including serial tuition hikes, class cuts, and reduced enrollment for in-state students, the gateway to higher learning in California has seriously narrowed. As a regent, Mr. Blum voted in favor of all of these measures—actions which have indirectly benefited the corporate colleges he owns. But Career Education Corporation and ITT Educational Services are not the only chain schools profiting from the financial disaster that besets so many public universities.

             
    On March 13, The New York Times summed up the situation when it reported that many for-profit schools “have exploited the recession as a lucrative recruiting device while tapping a larger pool of federal aid … selling young people on dreams of middle-class wages while setting them up for default on untenable debts, low-wage work and a struggle to avoid poverty.” The Times noted that for-profit schools are directly benefiting from cuts in education, especially in California where state-funded universities and community colleges have been “forced to cut classes just when demand is greatest.”

    In marked contrast to UC and other public universities that have turned students away due to budget cuts, ITT’s revenues have rocketed skyward in tandem with new enrollments. ITT recently reported to its shareholders that due to “higher unemployment rates among unskilled workers” company revenue increased to $1.3 billion, a doubling of its profit since 2005. Responding to a recession-induced increase in demand for vocational training, ITT has raised tuition by 5 percent; 70 percent of ITT’s revenue comes from federal tuition aid programs.

    Chain schools get the third degreeRichard Blum

    Nationwide, vocational school students are paying billions of dollars in tuition to stockholder-owned education corporations, primarily using federal grants and loans guaranteed by taxpayers. In the United States, the dominant vocational education corporations are the University of Phoenix, Corinthian Colleges, Strayer University, Kaplan (owned by The Washington Post Company), Career Education Corporation and ITT Educational Services. Collectively, these companies operate hundreds of schools and teach hundreds of thousands of low-income students, most of them eligible for public and private financial aid. The chains offer training for such technical professions as radiological technician, beautician, automotive mechanic, medical billing clerk, Web designer and massage therapist. But they also offer degrees in engineering, computer science and business.

    Increasingly, they are promoting online education, which limits the education corporations’ operational costs, even though virtual courses are often not suitable for teaching nursing, cooking, massage, or car repair. As a result of delivering substandard education, some for-profit schools suffer from accreditation problems, according to recent news reports.
             
    On a fairly regular basis, government regulators, including the U.S. Department of Justice, have accused chain schools of preying upon low-income individuals and active military service members. Typically, state and federal agency investigators report, chain school recruiters have loaded students down with loan packages averaging $30,000 that are attached to high interest rates. But fewer than 70 percent of enrollees graduate. Such a high dropout rate requires the corporations to continuously wage television, radio, Internet and print media marketing campaigns aimed at enticing students who want to better themselves—and who are, not incidentally, eligible for government-guaranteed loans.
             
    Unfortunately, those who do graduate with two-year associates degrees from the chain schools often discover that the curriculum did not prepare them for the technical requirements of the jobs they seek. When graduates do find work, their wages often do not match the inflated salaries promised by school recruiters, according to government reports. And when dropouts and underpaid graduates inevitably default on their student loans, it’s the taxpayers who remain on the hook.

    Every few years, mainstream media re-discovers these so-called “diploma mills,” publishing investigative stories to show that despite the marketing materials that tout their educational and career benefits, the chain schools are primarily focused on cashing in on taxpayer-backed grants and loans. Since last fall, The New York Times, Washington Monthly, ProPublica, Bloomberg, Frontline and The Associated Press have published exposés of the $26 billion vocational college industry.
             
    In particular, the two schools in which Mr. Blum’s firm has controlling stakes have been targets of these investigations, although press reports do not mention him by name, nor do they reveal that UC invests in his for-profit schools while cutting back on public education.

    Students as cash machines
    Blum Capital Partners, Mr. Blum’s investment firm, entered the for-profit education business in 1987, when he purchased a large block of shares in National Education Corporation, an Irvine-based vocational school that specialized in awarding mail-order diplomas. He joined the company’s board of directors, and took a seat alongside former U.S. Senator Barry Goldwater and David C. Jones, a former chairman of the Joint Chiefs of Staff.          

    Two years later, Mr. Blum got in hot water when angry shareholders filed a lawsuit claiming “the company issued rosy financial statements while Mr. Blum and other directors were selling their shares,” according to the Los Angeles Times. The shareholders argued in court documents that Mr. Blum sold $2.7 million worth of shares at about $24 per share after he learned—a day before the public announcement—that the company president planned to resign. When National Education Coropration’s share price bottomed out at $3.50 a share following the leadership change, Mr. Blum then re-invested in the troubled company. According to a 1997 The New York Times report, National Education Corporation was then “battered by accusations that its vocational schools were riddled with fraud.” Fraudulent or not, investing in the corporation’s stock remained a profitable pursuit.

    By 1995, Mr. Blum had gained control of 11.5 percent of National Education Corporation stock. He  did so by combining his firm’s capital with that of a nonprofit investment fund, Commonfund, for which Mr. Blum worked as an investment advisor. (Commonfund manages investments for more than 1,400 universities, including UC.) In 1997, Harcourt, the textbook publisher, bought National Education Corporation for about $750 million, or $21 a share. Mr. Blum and his private partners appear to have profited handsomely—there was money to be made in education!
             
    After his appointment to the UC Board of Regents in 2002, Mr. Blum continued to grow his investment in for-profit education. In June 2005, Blum Capital Partners invested $24 million to buy 5 percent of the stock of Lincoln Education Services Corp., a $300 million operation with 32 campuses. But most notably, Mr. Blum also acquired large blocks of shares in ITT Educational Services and Career Education Corporation following dips in stock prices after government regulators began investigating corrupt practices at the schools.
             
    In the case of ITT Educational Services, federal and state regulators investigated the company in 2004 after shareholders and students alleged that it was falsifying student attendance, grades, and job placement records in order to keep federal financial aid flowing. When the news broke, the price of ITT shares halved.
             
    Blum Capital Partners pounced, purchasing reams of devalued ITT stock. It soon owned the largest block of stock in the company—a 10 percent ownership stake in 2006. Not long afterward, the investigations were closed with no findings of wrongdoing. By May 2010, ITT’s revenue exceeded $1.3 billion, and Blum Capital Partners’ stake was valued at $415 million.
             
    Similarly, Blum Capital Partners bought shares of Career Education Corporation following a corruption controversy in 2004. A $1.8 billion operation that serves 90,000 students, Career Education Corporation was being investigated by multiple federal agencies after whistleblower lawsuits alleged that the school had allowed failing students to remain enrolled to maintain its pipeline to federal grants and loans.                  
             
    In 2005, after “60 Minutes” televised an unfavorable story about the chain school, the value of the school’s stock dropped by more than half. Blum Capital Partners bought in for $33 million. As of May 2010, Blum Capital Partners’ stake had grown to $508 million, making Mr. Blum’s firm by far the largest and most powerful shareholder of the chain school. A partner with Blum Capital Partners, Greg L. Jackson, sits on the board of Career Education Corporation. And even as Mr. Blum sat on the regents’ investment committee, UC invested in both ITT Educational Services and Career Education Corporation.

    The UC connection
    Even as Mr. Blum was buying stock in Career Education Corporation and ITT Educational Services, UC financial records show that the university’s investment managers were actively buying and selling these same stocks—to the tune of $53 million. But UC was not just holding onto these stocks to accrue value over time (as a prudent manager would do). In fact, UC’s external investment managers were day trading them in large amounts, as much as $2 million a trade, thereby affecting the daily price of these stocks.

             
    To recap: UC was investing in two for-profit schools that were largely owned by a company run by Mr. Blum, a regent who oversees the management of the university’s stock portfolio as a member of the university’s investment committee. Does this situation pose at least the appearance of a conflict of interest?

    Not to UC officials. In response to queries about the propriety of UC’s investments in the for-profit colleges that are heavily associated with Mr. Blum, a spokesperson for UC Treasurer Marie Berggren responded by saying that, “The Treasurer’s Office doesn’t track regents’ holdings in making decisions about security selections, though regents’ holdings are disclosed as a matter of policy.”

    In other words, the treasurer does not review the regents’ financial disclosure statements, which are public records, for potential conflicts. On the other hand, UC’s investments are also a matter of public record, and a regent could easily avoid conflicts— should he or she choose to—by not taking substantial positions in companies in which UC invests.
             
    Mr. Blum did not respond to repeated requests for comment about his investments in for-profit education. But UC spokeswoman Lynn Tierney called on his behalf, saying that the university recruits its students from the intellectual elite, and only those with high grade-point averages and SAT scores are accepted. Therefore, she says, “UC is not losing students to Blum’s vocational schools, and there is no conflict of interest.” Ms. Tierney declined to discuss how UC’s cost-cutting measures could result in channeling UC-eligible students toward for-profit colleges largely controlled by Mr. Blum.

    Noah Stern, president of Associated Students at the University of California, says he’s troubled by Mr. Blum’s dueling loyalties to UC and for-profit education: “Student trust in the regents was already shaky. In light of these revelations of investment abuse, we need a structural overhaul of the university governance system.”

    Note: CalPERS, the state public pension fund, had invested $6 million in Career Education Corporation, and $10 million invested in ITT Educational Services through its public equities investment program as of the end of 2009. And CalPERS held more than $100 million in shares of both companies as part of a $500 million investment with Blum Capital Partners, which is an investment adviser to CalPERS.

    Spot.Us Note: This story was first published earlier this year by The Berkeley Daily Planet, SN&R, North Bay Bohemian, Santa Cruz Weekly and the SF Public Press. Also published by UC Santa Cruz Faculty Association and the Daily Casserole.

    Posted by Peter Byrne on 06/23/10
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