Billion-dollar baby

The University of California invests $53 million in private ‘diploma mills’ owned by UC Regent Richard C. Blum. Are his loyalties conflicted?

University of California Regent Richard C. Blum is a dominant shareholder in two for-profit colleges or “diploma mills” that seem to be directly benefiting from cuts to not-for-profit higher education, especially in California. Can you say “conflict of interest”?

University of California Regent Richard C. Blum is a dominant shareholder in two for-profit colleges or “diploma mills” that seem to be directly benefiting from cuts to not-for-profit higher education, especially in California. Can you say “conflict of interest”?

Illustration by jason crosby

This story is part of an ongoing series of investigative stories on the UC Regents sponsored by the journalism microfunding website, in partnership with SN&R and other California newsweeklies.
CalPERS, the pension fund for state government workers, also had, as of the end of 2009, $6 million invested in Career Education Corporation, and $10 million invested in ITT Educational Services, Inc. through its public equities investment program. 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.

A year ago, Richard C. Blum, then the chairman of the Regents of the University of California, spoke at the Milken Institute’s Global Conference 2009, held at the Beverly Hilton in Los Angeles. A Wall Street speculator, Blum sat on a panel called “The New University and Its Role in the Economy.” The panel focused on how universities can best serve the corporate desire 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 sits on a committee that oversees investment policy decisions for the University of California’s $63 billion portfolio, and as the largest shareholder in two for-profit corporate-run universities in which UC invests, Blum had a unique perspective to share at the conference. He advised public universities to attract business-oriented students with clever advertisements (as vocational schools do).

“It’s like anything else,” he said. “It’s how you market it.”

Marketing strategy aside, Blum, husband of U.S. Sen. Dianne Feinstein, 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. However, as a regent, Blum has taken actions that, intentionally or not, have enhanced the value of his vocational schools.

Are his loyalties conflicted?

For several years, 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, Inc. The San Francisco-based firm’s combined holdings in the two chain schools is currently $923 million—nearly a billion dollars. As Blum’s ownership stake enlarged, UC investment managers shadowed him, ultimately investing $53 million of public funds into the two educational corporations.

The regents’ conflict-of-interest policy requires them to “avoid the potential for and the appearance of conflicts of interest with respect to the selection of individual investments … public officials shall not make, participate in making, or influence a governmental decision in which the official has a conflict of interest.” And the California Political Reform Act of 1974 provides civil and criminal penalties for officials who ignore conflicts of interest—as UC makes clear in ethics training presentations specifically created for university officials. The Board of Regents, however, is self-policing and it tolerates situations that cause others concern.

John M. Simpson of Consumer Watchdog, a nonprofit education and advocacy organization in Santa Monica, Calif., comments: “It is hugely inappropriate for the University of California to invest in for-profit colleges when it should be promoting public education. 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.”

Profiting from disaster

Due to serial tuition hikes by the UC Regents, their gutting of many classes and educational programs, and the imposition of a 15 percent reduction of in-state admissions to the university, the gateway to higher learning in California has seriously narrowed. As a UC regent, Blum voted in favor of all these measures—and such actions have indirectly benefited his corporate colleges. But his schools are not the only ones profiting from the financial disaster that besets many public universities.

On March 13, The New York Times reported that many chain schools, including ITT Educational Services and Career Education Corporation, “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.”

In an article by Peter S. Goodman, 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.”

Indeed, ITT Educational Services recently reported to its shareholders that due in large part to “higher unemployment rates among unskilled workers,” company revenue increased by $300 million, to $1.3 billion (double its take in 2005). Responding to a recession-induced increase in demand for vocational training, ITT increased its tuition by 5 percent, (70 percent of ITT’s revenue comes from federal tuition aid programs). And ITT’s profits rocketed in tandem with new enrollments, even as UC and other public universities were turning away students for lack of programs.

Chain schools get the third degree

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 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 their operational costs, even though virtual courses are often not suitable for teaching nursing, cooking 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 many chain schools of preying upon low-income individuals and active military service members. Typically, state and federal agencies report, chain-school recruiters have loaded students down with high-interest-rate loan packages that, on average, amount to $30,000. As a result, 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 state-guaranteed loans.

Unfortunately, those who do graduate with two-year associates degrees often find out that the curriculum did not prepare them for the technical requirements of the jobs they seek. And often, when they do find work, their wages do not match the inflated salaries promised by school recruiters, government reports note. And when dropouts and underpaid graduates default on their student loans, the taxpayers remain on the hook.

Every few years, the corporate media discovers the so-called “diploma mill” scandal anew and publishes reams of investigative stories showing that despite marketing materials touting their educational and career benefits, the chain schools are primarily focused on cashing in on taxpayer-backed grants and loans. In the last six months alone, The New York Times, Washington Monthly, ProPublica, Bloomberg, Frontline and The Associated Press published exposés of the $26 billion vocational college industry.

Blum’s schools have been prime targets of these investigations, although the reports do not mention him by name, nor do they reveal that the UC invests in his for-profit schools while cutting back on public education.

Students as cash machines

Blum’s investment bank 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, sitting alongside former U.S. Sen. Barry Goldwater and David C. Jones, a former chairman of the Joint Chiefs of Staff.

Two years later, according to a report in the Los Angeles Times, Blum got in hot water when angry shareholders filed a lawsuit contending that “the company issued rosy financial statements while Blum and other directors were selling their shares.” The shareholders claimed in court documents that 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 the share price bottomed out at $3.50 a share after the announcement, Blum reinvested in the troubled company, booking a profit.

By the late ’80s and early ’90s, National Education Corporation was “battered by accusations that its vocational schools were riddled with fraud,” The New York Times reported in March 1997. A new president was hired in 1994 to reform the school and to bring it into the age of computerized learning. By 1995, Blum had gained control of 11.5 percent of National Education Corporation stock after combining his firm’s holdings with that of a nonprofit investment fund, Commonfund, for which 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. Blum and his private partners profited handsomely—there was money to be made in education.

After he became a regent in 2002, Blum greatly increased his investment in for-profit education. In June 2005, Blum Capital Partners bought 5 percent of the stock (worth $24 million) in Lincoln Educational Services Corporation, a $300 million operation with 32 campuses. Blum also acquired large blocks of shares in ITT Educational Services and Career Education Corporation. These two purchases followed dips in the companies’ stock prices brought about by allegations of corrupt practices made against them by government agencies.

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 afterwards, 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, a $1.8 billion operation that serves 90,000 students, following a corruption controversy. In 2004, Career Education Corporation was investigated by multiple federal agencies after whistle-blower lawsuits alleged that the school had allowed failing students to remain enrolled in order to keep its pipeline to federal grants and loans tapped. In 2005, after 60 Minutes televised an unfavorable story about the chain school, the value of its stock dropped by more than half. Blum Capital Partners bought in for $33 million. By May 2010, its stake had grown to $508 million, making Blum’s firm by far the largest and most powerful shareholder of the chain school.

UC is an investor in both educational corporations.

The UC connection

Even as Blum was buying stock in Career Education 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. The university was not just holding onto these stocks to accrue value over time, it was day-trading them in large amounts, as much as $2 million a trade, thereby affecting the daily price of these stocks. And these two companies were largely owned by a regent, a Wall Street speculator who sat on the university’s investment committee, which oversaw the management of the university’s stock portfolio. Does not this situation pose at least the appearance of a conflict?

Not to UC officials. When UC Treasurer Marie Berggren was questioned about the propriety of UC investing in Blum’s for-profit college chains, her spokesman, Steve Montiel, replied by e-mail, “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. Of course, UC’s investments are also public records available to the regents, so a regent could easily avoid conflicts, should he or she choose to do so, by not taking controlling positions in companies in which the university invests.

Blum did not respond to repeated requests for comment. UC spokeswoman Lynn Tierney called on his behalf, saying that the university recruits its students from the intellectual elite of applicants. Only those with very high grade averages and SAT scores get in, she said. Therefore, “UC is not losing students to Blum’s vocational schools, and there is no conflict of interest,” she claimed.

Regardless, the bottom line is that UC is investing tens of millions of public dollars in two for-profit school chains largely controlled by a regent and Wall Street arbitrager who sits on UC’s investment committee. Noah Stern, president of Associated Students of the University of California, said, “Student trust in the regents was already shaky. In light of the revelations of investment abuse, we need a structural overhaul of the university governance system.”