Distance Education Short Selling Investment Club

In response to Lee Fang’s feature in The Nation, How Online Learning Companies Bought America’s Schools, several DC wonks have criticized Fang’s article, from Bill Tucker’s note that the Florida Virtual School is public (something Fang never mentions) to Tyson Eberhardt’s argument that “private vendors” in virtual schooling will bring competition (presumably improving it).

Since I previously pointed out the sloppiness in Stephanie Mencimer’s November/December Mother Jones piece, which Larry Cuban has echoed, I’ll state that Tucker is right in the more literal criticism of Fang and Eberhardt not even wrong, but both they and Fang (and Mencimer, for that matter) are ignoring a key feature of distance-learning business: it’s incredibly hard to define, which changes the risks of being involved for large businesses. In the last few decades, the outsourcing of public-school management focused on a few vendors, which could fail absurdly without affecting anything other than the immediate failures (and limiting credit opportunities for future entrants in that particular service).1 But distance-learning is big business and involves big businesses, and that’s a very different story.

Mencimer, Fang, and others see the potential size of distance learning as an opportunity for large vendors such as Pearson to rake in big bucks from states and districts, and that opportunity is certainly there. But something funny happens when you’re a big business in a field where you get money for providing public services and where there are inevitably going to be fly-by-night operators. In distance learning, I think one can safely predict some amount of fraud. I don’t know if a large business is going to be involved, but at the least in states without significant regulation (i.e., those diving deeply into the Digital Learning Now proposals), some small operators are going to be.

So how does this affect Pearson and others betting on distance-learning by building up (or buying) corporate units in distance education? In a phrase, reputational risk from predictable jerks.

Let me spin out one example of how that could affect innocent-bystander outfits.2 In a number of states, including Florida, there are state qui tam statutes, which allow whistleblowers with knowledge of fraud to sue entities that defraud the public.3 Suppose I’m a teacher at SparklyStar Distance Learning, living in Tampa and teaching 17 distance-education courses, and I discover in the course of my work that my employer is failing to report when students stop having any contact with courses they’re enrolled in, including those dropouts in completion statistics, and so forth. Depending on the nature of the evidence, I could go to a friendly trial attorney–say, one with a former state attorney general on the payroll, one who is familiar with business-crime investigations and has an incentive to smell a new line for the firm–and ask if they’d represent me in a qui tam lawsuit for SparklyStar’s fraud. Depending on whether the state (or federal government) decides to get involved, the law firm and I could receive a nice collective reward for having blown the whistle.4

So what happens if there are a number of legal claims of fraud, as a consequence for the companies that are entirely innocent and not alleged to have been involved? Public entities (such as Florida Virtual School) get the political fallout, primarily. Large privately-owned might have a bit of a harder time finding capital for those units, but for large-enough firms with cash on hand (and in this weird post-recession-non-recovery period that’s a lot of them), that’s not going to be a serious problem. Publicly-owned companies have a different problem: they get traded publicly, and bad news becomes factored into prices both directly and indirectly. If you’re an aggressive investor with spare cash and you think that the direct pricing of a large company insufficiently reflects the downside risk of lawsuits and other problems in a major unit, you might just get in early on short-selling. And push the bad news, as Steve Eisman did in 2010 with for-profit universities.5

The major risk for a large business (such as Pearson) entering and maintaining a unit devoted to distance learning is not captured by the fact that distance education has a poor track record of effectiveness (so do textbooks, and they’re profitable!) or even that it might turn out not to be profitable. You have to factor in the reputational risk if distance learning in Idaho, Florida, or other states turns out to be rife with fraud. The spillover effects of distance-learning fraud on large public companies is not part of the picture, but it needs to be.

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  1. and ruining education for the students… []
  2. For the purposes of discussion, I am assuming Pearson would be an innocent bystander. You could substitute any name here, though. []
  3. That means that a whistleblower with information unknown to the general public not only has standing to sue on behalf of a government but can take some of the damages. Any pass-through federal dollars also involves the federal qui tam statute. []
  4. My understanding is that qui tam lawsuits are much more complicated than this simple story, but this is just one way that fraud in distance-learning could get exposed. []
  5. Seeking Alpha’s Adam Ballantyne maintained a short-sell recommendation on for-profit universities just last month. []

3 responses to “Distance Education Short Selling Investment Club”

  1. Glen S. McGhee

    Unfortunately, Sherman, you have forgotten something very important in your hypothetical depiction of False Claims Act: accreditation.

    In your hypothetical, and many others that are similar, all the business operation has to do is refer to its accreditation status and accrediting standards, and, whosh!, the judge throws out the case. This is exactly what happened in Chapman/WASC.

    I know how difficult whistleblowing can be — it is next to impossible. Nothing at all like you describe here. There is the matter of getting the DoJ involved. Then you have to prove that your evidence is a clear violation of the PPA (something else that you neglect to talk about). Then there are the Federal Rules that you have to follow, where 12(j) is especially troublesome. Any one of these will derail your case.

    FCA is far, far more difficult than you describe. Even when the evidence is your favor, you rarely, if ever, get triple-damages.

  2. CCPhysicist

    You seem to be conflating several different arguments here. I don’t see the connection between fly-by-night operators, a huge and very competent e-learning company, and a public school that (I gather from your remarks) uses the latter to their mutual benefit.

    The advantage a company like Pearson has over small startup is the massive amount of data they have access to as a result of past investments in the software. I know what I can learn from the data I can see for my own students, so I can only imagine what they can glean from classes across the nation. Those data can be used to inform future developments of the software, and even to tailor the e-learning software to the specific outcomes of exit exams for courses or graduation.

    I’m not sure even a crooks can compete with that.

  3. Glen S. McGhee

    Following CC, re: secondary schools and Mega-Ed companies, there are other situational factors as well.

    Take bid rigging, for example.

    Secondary schools, especially small, rural, schools without expertise in writing the specifications for distance ed courses will get trampled in the stampede to get online. The result is that the vendors end up writing the specifications themselves. The kinds of quality controls that larger, more experienced districts might have in place are a luxury for tiny school districts without the resources.

    Even the larger districts can face these same problems, if they are new to the game. Who knows what kinds of conflicts of interest exist in the field. Salesmen of all kinds have the leverage and means to incentivize these kinds of purchases.

    The political economy of the larger districts effects the behavior of those lower in the hierarchy, and consequently, the moral distribution of responsibility is not even. That is, whistleblowers are not equally distributed across organizations, and there are good sociological reasons why this is the case. The hypothetical case, I think, makes this assumption.

    Worse yet, the institutional field (secondary and post secondary) has not yet established “online quality.” There are no objective measures for what constitutes quality, how to determine whether or not that standard is met, who makes that determination, and what happens when that determination is made. None of this has been figured out yet.