Todd Nelson, the chairman of Perdoceo Education Corp., one of America’s largest for-profit university corporations, has sold a huge volume of his shares in the company in recent weeks – even as Perdoceo told investors that things were fine.
Nelson has often been featured on this website because of his outsized role in running predatory colleges. Before serving as chairman and, previously, CEO of Perdoceo, he led two other giant operations – the University of Phoenix and the now defunct Education Management Corp. All three chains encountered major law enforcement problems due to deceptive and illegal recruitment practices and other abuses that occurred under Nelson’s watch.
Now, Bradley Safalow, CEO of research firm PAA Associates, has produced a report asking why Nelson, along with other top Perdoceo executives, recently sold so many shares of Perdoceo, which operates two top online schools, American Intercontinental University and Colorado Technical University. Safalow concludes that Perdoceo “faces huge secular headwinds which we expect will manifest in the form of higher marketing costs and lower new student departures over the next 12-24 months.” , as well as “numerous extreme regulatory risks that could change the company’s earnings profile almost overnight.
Safalow acknowledges in the report that he has a short position in Perdoceo, which means he is betting the stock price will fall. But the information he documents and analyzes is compelling.
Perdoceo (formerly Career Education Corp.), in 2019 reached a $494 million settlement with 48 state attorneys general, as well as the District of Columbia, over allegations that the company engaged in deceptive practices generalized against students. Later that same year, the company agreed to pay $30 million to settle Federal Trade Commission charges that its schools recruited students through deceptive third-party lead generation schemes.
Recent Perdoceo employees told the media USA today and Capitol Forumas good as Republic Reportthat corporate recruiters continue to feel pressured into making misleading sales pitches and enrolling low-income people in programs that aren’t strong enough to help them succeed.
Some of these former employees also spoke with federal investigators.
USA today reported in February that she had obtained an internal email from the United States Department of Education indicating that the department, in December 2021, had requested information from Perdoceo. The Department also asked Perdoceo to maintain records regarding student recruitment, marketing, financial aid practices, etc.
When Perdoceo finally informed investors of this request from the Department, in a SEC 10-K filed on February 24, she downplayed the significance: “The Department has broad powers to request information and review records of an institution participating in Title IV programs. These requests are not necessarily related to specific allegations of wrongdoing or even compliance failures of any kind. But elsewhere in the filing, Perdoceo wrote, “The company is in the process of responding to a broad request for information received from the Department in December 2021 regarding CTU and AIUS. Substantial resources are required to respond to this request, and the Department’s review of the information provided could result in requests for additional information or claims of non-compliance with extensive regulatory requirements relating to the administration of Title IV programs.
Perdoceo also faces a new investigation from the Department of Justice, according to a May filing with the SEC by the company: Department of Justice (“DOJ”). . CID is requesting information and documentation from CTU regarding meeting federal financial aid credit hour requirements for five of its entry-level courses as well as information regarding the CTU’s management system. learning from CTU. The information sought covers the period from January 1, 2017 to the present. This CID could potentially relate to one or more complaints filed by whistleblowers under the Federal Misrepresentation Act, or it could refer to investigations initiated at the Department of Education or the Department of Justice.
In recent weeks, Nelson has sold over 170,000 Perdoceo shares. Nelson is selling despite the stock currently trading at what Safalow calls “an absurdly low valuation multiple”, and the company is fetching over $520 million in cash; although the company reported an increase in enrollment and retention; and although he claims regulatory risks have been reduced.
Nelson is also selling, despite the company’s recent decision to ensure compliance with the federal 90-10 rule by acquiring California Southern University. The rule prohibits for-profit colleges from taking more than 90% of their revenue from federal aid, and California Southern, conveniently, does not take federal aid. (A similar 2020 acquisition by Perdoceo of Trident University, focused on military students, backfired when Congress amended Law 90-10 to shift VA and Pentagon education benefits to the 90 side of the ledger.)
And Nelson, 62, is selling although he’s made, Safalow estimates, more than $130 million over 25 years, which should have made him “an incredibly rich man” who didn’t need the cash. emergency to fix it.
Nelson sold more than $1.7 million worth of Perdoceo stock last month and about $5.8 million worth of stock over the past two years.
Whether Nelson might be trading improperly, based on nonpublic information, is perhaps something the Securities and Exchange Commission could consider.
Safalow focuses on the information he has gathered that might make someone want to sell.
Safalow concludes that Perdoceo’s IAU enrollment trends “are a shipwreck.” Seeking to contain costs, Perdoceo says it is spending less on marketing but, as Safalow notes, recruits don’t just show up at schools like Perdoceo’s without aggressive marketing, so cutting marketing spend creates a spiral downward, and possibly fatal.
Perdoceo and other predatory companies also seemed to believe they neededmisleading marketers to sell their shoddy programs, but it’s harder to engage in such deception when you’re being watched by federal and state law enforcement agencies to comply with regulations. During an earnings call earlier this year, Perdoceo referred to “adjustments to our marketing strategies to further improve our focus on identifying prospective students who are more likely to succeed at one of our universities. “, which seemed like a response to these compliance issues.
My own web research seems to confirm that Perdoceo schools advertise less than before on deceptive third-party lead generation sites, the kind of sites that got the company in trouble with the FTC.
Safalow also notes that, despite management’s promises to ensure the quality of education, Perdoceo continues to cut “already meager” spending on education, which has been steadily declining for the past five to seven years. years. Perdoceo generates about $16,000 in tuition revenue per student, but only invests $2,500 to $2,700 in tuition delivery, which lowers costs but, over time, hurts retention rates and student graduation.
For decades, these types of performance failures have not interfered too much with the ability of predatory schools to enroll new students in expensive programs because students, many of whom have no college experience or financial expertise, are no match for sophisticated, deceptive schools, and coercive school recruitment efforts. But public awareness of college scams has grown as Obama and Biden officials, state attorneys general and others have spread the word.
Unfortunately for Perdoceo shareholders, Nelson and his other executives may not have the ability to return the company to profitability without engaging in predatory practices. Predatory practices, it seems, are what Perdoceo and Nelson know how to do.
Safalow believes the regulatory environment is getting tougher for Perdoceo. He notes that many people hired for key positions in the Biden administration have demonstrated their commitment to fighting predatory practices. He also cites new regulations and increased efforts by the Department of Education to provide debt relief for former students ripped off by their colleges, including Perdoceo schools — and potentially to recover payments from those schools.
As Perdoceo acknowledges in SEC filings, in May 2021, the Department informed Perdoceo that it had several thousand “borrower defense” requests from former students who make claims about the schools. of the company. Perdoceo states in his documents that he has already spent millions in legal fees related to this process, and, while insisting that these former students’ claims that they were deceived are baseless, he admits that the claims “may expose us to significant repayment liability to the department for discharged federal student loans and the posting of substantial letters of credit which may limit our ability to make investments in our business, which could adversely impact our future growth.
In an August 2021 earnings call, Todd Nelson, when asked about borrower claims, said they were old claims associated with school marks that the company has withdrawn. When asked if there were also claims related to the current Perdoceo, AIU and CTU schools, Nelson admitted he didn’t know.
If the Department succeeds in suing Perdoceo to recover borrower defense claims, as it recently announced it would against another for-profit giant, DeVry, it could create a major financial challenge for Perdoceo. .
“We believe,” Safalow writes, “there is a strong likelihood that PRDO will be subject to further regulatory scrutiny in the weeks and months to come.” I think so too.
Safalow believes that Perdoceo will face “HUGE capital needs” over the next two years to ensure compliance with the 90-10 rule and to combat requests for debt relief from former students, so its cash reserves might not last long. And that, he says, may explain what he calls Todd Nelson’s “aggressive” stock selling.
If company president Todd Nelson quickly pulls his money out of Perdoceo, shouldn’t the Department of Education consider a letter of credit or financial controls to help protect students and taxpayers in the event of a failure of business schools?