11, a group of 42 debt collection agencies awaited word on which ones had won contracts from the U. Department of Education. The federal government has been the main lender to student borrowers since 2010, and the deal to collect on unpaid student loans could be worth hundreds of millions of dollars.
Shortly after 1:30 p., an Education Department employee sent emails to 40 of the companies to let them know they weren’t among them. The agency publicly announced the winners in a court filing at 3:47 p. During the time in between, investors bought up shares of one of the winning bidders, Performant Financial Corp., a Livermore, Calif., company that once had financial ties to Secretary of Education Betsy DeVos. The company’s stock jumped almost 20 percent from the time the department started notifying bidders about the contract to when the news was made public.
Fewer than 900 of Performant’s 51 million shares had traded during the first four hours of that day, Bloomberg data show., the company’s stock was in high demand. Over the next minute and 11 seconds, some 37,000 shares traded hands, seven times more than the previous two days combined.
An additional 142,000 shares would trade before the government announced that Performant had won the contract. The investors couldn’t be identified. The other winning bidder, Windham Professionals Inc., is privately held.
If under-the-radar government information was being traded on for profit, it wouldn’t be the first time. Over the past two years, executives at two hedge funds have pleaded guilty to trading on information from government insiders relating to health-care companies. In a separate incident in August, a series of trades was made in shares of student loan giant Navient Corp. just before the Education Department made public the news that it would no longer provide student loan data to the Consumer Financial Protection Bureau, which is suing Navient for allegedly causing some borrowers to overpay. (Navient is contesting the suit and denies wrongdoing.) The AFL-CIO and Massachusetts Senator Elizabeth Warren, a Democrat, asked the U. Securities and Exchange Commission to investigate the trades. Navient has said the company welcomes any investigation into trading of the stock and that it didn’t know about the Education Department’s move until it was made public.
Investors who purchased Performant’s shares probably didn’t violate any insider trading laws—as long as they weren’t illicitly tipped off by Education Department employees or employed by Performant, experts say. In its email to the losing bidders, the department identified the two winning firms but didn’t mandate that the information remain confidential. “If you have information that you know is nonpublic and material, but you have no duty to keep quiet, it’s in the category of information you overhear in a taxi,” says Stephen Crimmins, a former SEC enforcement lawyer who now works for Murphy & McGonigle. “You can trade on it.”
John Coffee, a professor of corporate law at Columbia University who’s advised members of Congress on insider trading, questioned why the Education Department didn’t wait to notify bidders until after the trading day ended. “It’s quite clumsy and negligent, but I don’t think it’s criminal,” he says.
David Bergeron, who retired from the department in 2013 as head of postsecondary education, says his bosses stressed the need to be guarded about matters that could affect publicly traded companies. “It’s extraordinarily troubling,” Bergeron says of the Performant trades. Chris Greene, a department spokesman, says the government complied with federal rules in communicating its contracting decision. He declined to respond to other questions.
Lisa Im, Performant’s chief executive officer, says no one at her company purchased shares that day in advance of the court filing. She says three people at Performant, including her, knew about the contract award and it wasn’t announced internally and to investors until the next morning. She exercised options the day of the contract award to dispose of stock worth $23,683, but the filing lists the transaction as being part of a scheduled trading plan set in August. The options were exercised because they’re due to expire this month, Im says. “We definitely saw it moving,” she says about the company’s share price in the hours before the Education Department made the contract award public. “But at that point, until we press release something, we don’t let anyone know.”
Performant has ties to DeVos. The education secretary was an investor in a fund that owned a portion of a $148 million loan made to Performant in 2012; she said she’d divest shortly after becoming secretary. The loan was paid off in August. In addition, a former DeVos adviser at the Education Department, Taylor Hansen, is the son of a Performant board member, William Hansen, a top Education Department official in the George W. “I’m sure the company handled everything appropriately as did the department,” says William Hansen. student debt totals $1.5 trillion, and more than 92 percent of that is either backed or owned by the federal government, records show. The Education Department’s debt collection and loan servicing contracts pay almost $2 billion in annual commissions, and competition for the work is fierce. Performant had been a student loan collector for the Education Department for more than 20 years before its contract expired in April 2015, according to regulatory filings. The agency picked new debt collection firms in December 2016, but several losing bidders, including Performant, sued the department to overturn its decision.
The cases dragged on for a year until a federal court judge ordered the department to wrap it up by Jan. On that day, Mark Benson, an Education Department employee based in Atlanta, started to notify each of the 42 bidders for the contract of the government’s decision, according to copies of his correspondence. His emails went out, starting around 1:35 p. Benson declined to comment. in Washington, lawyers for the Department of Justice told the judge in a court filing that the Education Department had complied with his order and that Performant and Windham Professionals had won the contract. The document, filed electronically, was instantaneously available to anyone checking the docket.
The award, valued at as much as $400 million, was a big deal for Performant, which had lost money for more than two years. The company warned investors in November that failing to win the contract would have a “material adverse effect on our financial condition and results of operations in 2018 and beyond.” That evening, Michael Tarkan, an analyst who follows Performant at Compass Point Research & Trading LLC, upgraded the company’s stock to a “buy.” The price of its shares hit $3.52 early the next day, a 52-week high and 116 percent above where it began the day on Jan.
— With assistance by Steven Church.
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