Why Is Perdoceo’s Chairman Selling So Much Company Stock?
Todd Nelson, the executive chairman of Perdoceo Education Corp., one of America’s largest for-profit college companies, has sold a huge volume of his shares in the company in recent weeks — even as Perdoceo has been telling investors that things are going well.
Nelson has frequently been featured on this website because of his outsized role in running predatory colleges. Before serving as executive chairman and, previously, CEO, of Perdoceo, he ran two other giant operations — the University of Phoenix and now-demised Education Management Corp. All three chains ran into major law enforcement issues because of deceptive and illegal recruiting practices and other abuses that occurred on Nelson’s watch.
Now, Bradley Safalow, CEO of research firm PAA Associates, has produced a report asking why Nelson, as well as other senior Perdoceo executives, have recently sold so many shares of Perdoceo, which operates two big online schools, American Intercontinental University and Colorado Technical University. Safalow concludes that Perdoceo “faces enormous secular headwinds which we expect to manifest themselves in the form of higher marketing costs and declining new student starts over the next 12-24 months,” as well as “a great deal of regulatory tail risk which could change the earnings profile of the company almost overnight.”
Safalow acknowledges in the report that he has a short position in Perdoceo, meaning he is betting the share price will come down. But the information he documents and analyzes is compelling.
Perdoceo (previously called Career Education Corp.), in 2019 entered into a $494 million settlement with 48 state attorneys general, plus the District of Columbia, over allegations that the company engaged in widespread deceptive practices against students. Later that same year, the company agreed to pay $30 million to settle charges brought by the Federal Trade Commission that its schools have recruited students through deceptive third-party lead generation operations.
Recent Perdoceo employees have told media outlets USA Today and Capitol Forum, as well as Republic Report, that company recruiters continue to feel pressure to make misleading sales pitches and to enroll low-income people into programs that aren’t strong enough to help them succeed.
Some of those former employees also have spoken with federal investigators.
USA Today reported in February that it had obtained an internal U.S. Department of Education email indicating that the Department, in December 2021, requested information from Perdoceo. The Department also asked Perdoceo to retain records regarding student recruiting, marketing, financial aid practices, and more.
When Perdoceo finally informed investors of this Department request, in an SEC 10-K filed on February 24, it minimized the significance: “the Department has broad powers to request information and review records of an institution participating in Title IV Programs. These requests do not necessarily relate to any specific allegations of wrong-doing or even assert any compliance failures of any kind.” But elsewhere in the filing, Perdoceo wrote, “The Company is in the process of responding to an extensive request for information received from the Department in December 2021 relating to CTU and AIUS. Significant resources are required to respond to this request and the Department’s review of the information provided could lead to additional requests for information or claims of noncompliance with the extensive regulatory requirements relating to the administration of Title IV Programs.”
Perdoceo also faces a new investigation from the Justice Department, according to a May SEC filing by the company: “On April 8, 2022, the Company received a Civil Investigative Demand (“CID”) from the Department of Justice (“DOJ”). The CID requests information and documentation from CTU regarding compliance with federal financial aid credit hour requirements for five of its entry-level courses as well as information regarding CTU’s learning management system. The information sought covers the time period from January 1, 2017 to the present.” This CID could potentially relate to one or more complaints filed by whistleblowers under the federal False Claims Act, or it could refer to probes initiated at the Department of Education or Department of Justice.
In recent weeks, Nelson has sold more than 170,000 shares of Perdoceo stock. Nelson is selling despite the stock now trading at what Safalow calls “an absurdly low valuation multiple,” and the company reporting more than $520 million cash on hand; despite the company pointing to increased enrollment and retention; and despite it claiming that regulatory risks have been reduced.
Nelson is selling, also, despite the recent move by the company to ensure compliance with the federal 90-10 rule by acquiring California Southern University. The rule prohibits for-profit colleges from getting more than 90 percent of revenues from federal aid, and California Southern, conveniently, doesn’t take federal aid. (A similarly-aimed 2020 acquisition by Perdoceo of military student-focused Trident University backfired when Congress changed the 90-10 law to move VA and Pentagon education benefits to the 90 side of the ledger.)
And Nelson, 62 years old, is selling despite having earned, Safalow estimates, more than $130 million over 25 years, which should have made him “an incredibly rich man” not in need of emergency cash to tide him over.
Nelson sold more than $1.7 million worth of Perdoceo stock last month, and about $5.8 million in shares over the past two years.
Whether Nelson might be trading improperly, based on non-public information, is perhaps something the Securities and Exchange Commission might review.
Safalow is focused on information he has gathered that might make someone want to sell.
Safalow concludes that enrollment trends at Perdoceo’s AIU “are a trainwreck.” Seeking to contain costs, Perdoceo says it’s 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 spending creates a downward, and perhaps fatal, spiral.
Perdoceo and other predatory companies have also seemed to believe they need deceptive marketing to sell their poor-quality programs, but it’s harder to engage in such trickery when you are being monitored by federal and state law enforcement agencies for compliance with settlements. On an earnings call earlier this year, Perdoceo referenced “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 sounded like a response to these compliance concerns.
My own web searches appear to confirm that Perdoceo schools have been advertising 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 pledges by management to ensure educational quality, Perdoceo continues to cut “already meager” spending on instruction, which has been declining consistently for the past five to seven years. Perdoceo generates about $16,000 in tuition revenue per student but invests only $2,500-$2,700 for educational delivery, which keeps costs down but, over time, harms student retention and graduation rates.
For decades, those kinds of performance failures have not interfered too much with the ability of predatory schools to enroll new students into high-priced programs, because the students, many without college experience or financial expertise, are no match for the sophisticated, deceptive, and coercive recruiting efforts of schools. 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’s shareholders, Nelson and its other leaders may lack the capacity to lead the company back 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 individuals hired for key jobs in the Biden administration have demonstrated a commitment to curbing predatory practices. He also cites the new regulations and increased effort by the Department of Education to provide debt relief for ex-students scammed by their colleges, including Perdoceo schools — and potentially to recoup payments from those schools.
As Perdoceo acknowledges in SEC filings, in May 2021 the Department notified Perdoceo that the Department has several thousand “borrower defense” applications from former students that make claims regarding the company’s schools. Perdoceo says in filings that it already has spent millions on legal expenses related to this process, and, while it insists these former students’ claims that they were deceived are without merit, it admits that the claims “may subject us to significant repayment liability to the Department for discharged federal student loans and posting of substantial letters of credit that may limit our ability to make investments in our business which could negatively impact our future growth.”
On an August 2021 earnings call, Todd Nelson, asked about the borrower claims, said they were old claims associated with school brands the company has retired. Asked if there were also claims related to the current Perdoceo schools, AIU and CTU, Nelson admitted he didn’t know.
If the Department did successfully pursue Perdoceo for recoupment with respect to borrower defense claims, as it recently announced it will do with respect to another for-profit giant, DeVry, it could create a major financial challenge for Perdoceo.
“We think,” Safalow writes, “it is highly likely that PRDO could be come subject to greater regulatory scrutiny in the coming weeks and months.” I think so, too.
Safalow believes Perdoceo faces “ENORMOUS capital needs” over the next two years to ensure compliance with the 90-10 rule and to fight against the debt relief claims of former students, so its cash reserves may not last long. And that, he says, may explain what he terms Todd Nelson’s “aggressive” stock sales.
If company executive chairman Todd Nelson is quickly pulling 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 the company’s schools falter?