By ADAM ZAGORIN
If only I'd seen it coming. With barely a "hello" after I picked up the phone last week, Diane Schulman launched into a slew of questions about an item I'd just written for POGO's blog, an item about arguably inappropriate, possibly illegal information-passing between the Department of Education (DoED) and Wall Street short sellers.
Never having spoken to Schulman before in my life, I asked her who she was working for. She told me that she did "research" for some outfit called The Indago Group on behalf of investment companies and law firms.
Specifically, Schulman has been helping out one of Wall Street's biggest short sellers, a guy named Steve Eisman. But she didn't mention that.
Eisman won fame and especially fortune betting on the collapse of the housing market. I'd cited him in my piece last week because of his latest target: the for-profit education sector, which includes firms like giant Phoenix University, that the Dept. of Education is trying to regulate. Harsher regulation, which Eisman had been lobbying the DoED to endorse, would have meant bigger profits for him and other short sellers.
According to emails obtained under the Freedom of Information Act, Schulman personally assisted Eisman in his many contacts with only-too-willing top officials at the Department eager for the dirt he (and Schulman) had dug up on for-profit companies.
And, for some of those companies, there was a lot to dig, especially dirt on how firms reaped tens of millions of dollars in federally guaranteed student loans, leaving many of their graduates in debt and unable to find jobs.
Eisman and Schulman are not credentialed education experts, and neither seems to have shown any particular prior commitment to working in the field. Yet emails show Schulman personally importuning DoED on behalf of Eisman and others connected to his FrontPoint Financial Services fund (owned by Morgan Stanley).
Some of the officials she targeted were in the process of formulating rules from which short sellers stood to profit. At least one such meeting actually took place last year. (FrontPoint is currently in reorganization amid charges of insider trading—none of which involve Eisman specifically. He recently indicated he is leaving the fund.)
In her phone call to me, Schulman labeled the widespread criticism of short sellers "a red herring." Then she got down to business, repeatedly asking me to provide evidence I might be aware of that short sellers (presumably like her client, and possibly herself) could have received leaks of confidential, market-sensitive information from the DoED, a central point of my article.
If short sellers had gone on to buy and sell stocks based on confidential information from DoED, it could amount to insider trading, subject to civil and criminal penalties.
Not grasping that she might have a distinctly personal stake in the matter, I told Schulman that Morgan Stanley—owner of Eisman's fund, FrontPoint Financial Services—had issued a report to investors in the spring of 2010 that specifically refers to a "leak" about the timing and substance of the Education Department's impending actions.
That provoked a strong objection from Shulman. I thanked her for being in touch, ending the increasingly weird phone call.
Schulman's bio mentions that some 20 years ago she worked as an "investigative producer" for CBS and ABC affiliates in Boston. Helping out a New York hedge fund probably pays better.
Adam Zagorin is POGO's Journalist in Residence.
Image by Flickr user unloveablesteve, used under Creative Commons License.