stock ticker: WRLD

The State of Denial at World Acceptance Corp….Citron Keeps Target at 0.

To say we are entering into a new phase of consumer protection regulation is an understatement.  Just last week the US Senate, in a rare bi-partisan landslide (90 to 5), passed a credit card reform bill  — by a margin so wide that one can say the country now has a mandate to protect borrowers from lending abuses.  President Obama has even gone so far as to call for a new financial watchdog agency just to protect consumers.

In early 2009, Citron warned about future regulation in the for-profit education space, in a series of reports on Apollo Group.  Subsequently, the stock has been down over 35% and just yesterday the government announced some proposed regulatory changes regarding marketing and recruiting expenses.  As investors, we must not focus on what is status quo but rather what will be status quo.

It is the opinion of Citron that the World Acceptance Corp. will now unavoidably become a target of new regulation that will limit operations of their core installment loan business.

It can be painted with any brush but Citron believes that the facts support the conclusion that World Acceptance is the “sub-prime” wedge of the short term or payday loan business.

WRLD operates in just 11 states.  While details vary from state to state, it is indisputable that WRLD’s net yield on its loans outstanding is in excess of 85%, a rate that traps the majority of its customers in an inescapable cycle of debt.  Meanwhile, the company remains unwilling, and its analysts unable, to state the percentage of its customers who actually sign up for a loan, then pay it off as scheduled, without flipping.

According to WRLD’s 2008 10-K:

“Consumer finance companies are affected by changes in state and federal statutes and regulations. The Company actively participates in trade associations and in lobbying efforts in the states in which it operates. Although the Company is not aware of any pending or proposed legislation that would have a material adverse effect on the Company’s business, there can be no assurance that future regulatory changes will not adversely affect the Company’s lending practices, operations, profitability or prospects.”

While we await their current 10-K, we can only assume that this disclosure has to change.  As previously quoted by their own trade association (after all, WRLD’s CEO is one of its three board members), three bills on a national level “could well force the installment loan industry out of business altogether.”  http://www.nilaonline.org/

1. S. 500, introduced in the U.S. Senate by Senator Richard Durbin (D-IL), the Senate Majority Whip;
2. H.R. 1608, introduced in the U.S. House by Representative Jackie Speier (D-12-CA); and
3. H.R. 1640, also introduced in the U.S. House by Representative Maurice Hinchey (D-22-NY).

It is true that, to date, none of these have passed (otherwise, the stock could already be a 0), but these risks do exist.  Many of these bills have widespread support and no one knows what will eventually get passed, let alone what action the new Federal agency will take.

http://www.consumersunion.org/pub/core_financial_services/009581.html

http://www.opencongress.org/bill/111-h1608/show

This is not Payday Lending … Yet

This is where the story gets interesting.  Citron has pointed out that while payday lending has been regulated in many states, installment lending has flown under the radar.  This has forced many payday lenders to alter their terms, in fact slipping into the installment lending business.

http://www.cleveland.com/consumeraffairs/index.ssf/2009/02/payday_loans_are_back_in_a_new.html

http://www.localdailynews.org/opinion/story.php?story_id=116683537337844600

http://www.wbez.org/Content.aspx?audioID=34360

The question now begs to be asked:  How much longer will it take to close the loophole?  We are talking about a business practice that is only legal in a handful of states.  For anyone to state there is no legislative risk, they obviously do not have CNN or read a newspaper.  Just two weeks ago, four bills in WRLD’s largest state were stranded in the committee that restricts short term lenders, while other states are passing legislation weekly. http://www.mywesttexas.com/articles/2009/05/08/news/top_stories/senate_payday_lending_bills.txt

While inaction in Texas news might be perceived as a short-term positive, it shows how this entire business model hangs loosely by a string.  Citron cannot predict what state or federal bill will be the silver bullet … unlike any other stock we have ever covered, just one legal change will expose WRLD’s entire model.  Remember, It is never a problem … until it’s a problem.

Beyond usury laws, any state that simply limits consumers to one such loan at a time damages WRLD’s business as they will no longer be able to ping pong their customers, which is the obvious intention in this picture (Note: this is not a one-off — many WRLD sites seem to be located next door to another installment loan company)

Sterne Agee Report

On May 26, 2009, Sterne Agee released an analyst recommendation on World Finance which gave a $23.50 price target on the stock.  In the report, the analyst makes a few assumptions:

1. Increased Credit Quality in upcoming quarters
2. Little or no earnings growth from the company
3. “Regulatory issues are not viewed as an issue at this time”

So as investors, we are to believe that with improving credit quality and no regulatory issues the stock could trade at $23.50 a share.  Even their cheerleading analyst admits that the company has no real earnings growth (as the company was hoping to gain from opening operations in Mexico).  This call from Sterne Agee seemed to be based solely on the argument that the company trades below tangible book value.

Book Review Anyone?

But when a company trades below book value, it isn’t a guaranteed buy.  Smart investors will first ask themselves “Why does this company trade at a discount to book ?”

There is a salient reason why stocks trade below book:  the market is pricing in the risk of asset impairment.  If one wrench is thrown into WRLD’s gears, its stock could go to zero.

WRLD tangible book value is supposedly $275 million, but its main asset is $460 million in net loans receivable.  In order for the common shareholder to get anything at all from WRLD’s “book” value, over 40% of those loans would need to be repaid in full.  It is the opinion of Citron that in runoff or with any regulation that forces changes to WRLD’s loan offerings, it would be impossible for this company to collect even 20 cents on the dollar.  As its own financials clearly show, the only reason a huge portion of these folks enter the store and make payments is the hope that they can get another loan.

If payday is sub-prime that is collateralized by a paycheck, then this is the sub-prime of sub-prime … with no collateral.  Not a good loan book to own in the face of regulation.

Just a few months ago, Henry Coffey, the Sterne Agee analyst whose work on WRLD is referenced above, wrote that the incoming administration’s intent to regulate payday lenders “is clearly unambiguous.”  At the time, WRLD was trading around $16, and he had a “neutral” recommendation on it.  Citron asks: “What has fundamentally changed?”
http://www.cashadvancepaydayloansusa.com/news/sector_snap_payday_lenders_fall_on_obama_proposal.html

Conclusion

Citron strives to present stories detailing business risks, which are, to date, being ignored or denied by the subject company and its analysts, always backing up its opinion with factual links.  It believes caricaturizing critical opinion as “fear mongering” is foolish, and savvy investors ignore risks at their own peril.

Investing is a two-way street, and the strength underlying our markets is that investors are free to choose potential risks and potential rewards as they assess them.  Ultimately, it’s an exercise in separating appearance from reality.  Reality has a way of taking care of itself.

Citron stands by its opinion that in the case of WRLD, undisclosed risks to its business model may be catastrophic, and are not priced into the stock as currently evaluated by its cheerleader analysts.

Cautious investing to all.

stock ticker: WRLD

“Americans know that they have a responsibility to live within their means and pay what they owe. But they also have a right to not get ripped off by the sudden rate hikes, unfair penalties, and hidden fees …”  President Barack Obama   (May 10, 2009)

While President Obama was referring specifically to usurious credit card practices, those are tame and civil compared to how World Acceptance does business.  Citron believes in the New America, it is only time before either legislatures, the courts, or its own debt/receivables collapse the “shady” business of World Acceptance.  This report clarifies the pivotal difference that makes World’s business model much more vulnerable than the payday lending industry.

In this report, Citron will first expose an accounting artifice used by World Acceptance and then will address the judicial risk the company and its shareholders bear.  Citron still believes that the headwinds this company faces are too great, and will eventually force exposure of the farce that its book of receivables and business model really is.

Financials at WRLD are worse than they appear 

Citron wishes to draw particular attention to World’s reliance upon the arcane “Rule of 78’s” in its revenue stream.   To our knowledge, it is the only publicly traded company whose main revenue stream is derived directly from the rule of 78s.  Simply put, the rule of 78’s allows the lender to frontload the bulk of the interest in the beginning of the loan payment schedule.  And for customers of WRLD and investors who want to understand the income statement, it is a lesson in subterfuge, because WRLD’s loans so rarely go to maturity.
http://www.bankrate.com/brm/news/auto/20010827a.asp

This method is well known to be grossly unfair to borrowers, however — so much so that it is illegal in at least 16 states, and illegal for longer term loans in many others.

Note these effects of the Rule of 78’s, both of which are central to WRLD’s business:

“1. The higher the interest rate, the greater the penalty amount to the borrower.”
“2. The earlier the prepayment in relation to the term, the greater the penalty amount for the borrower.”     http://www.pine-grove.com/reading%20room/rule-of-78s.htm

Note how the Rule of 78s works hand in glove to extort money from borrowers caught in serial loan flipping schemes exemplified by WRLD.  These consumers are always paying the first and second month payments of a new amortization schedule - which have the highest front-loaded interest - compared to amortization schedules calculated actuarially.  The company thereby continues to collect a higher effective interest rate than it discloses to its borrowers.

But much of this money is not real; it just accumulates as a near half-billion receivable of dubious collectability on its books.

WRLD’s $460.4 million net loan book is the least collectible, lowest quality asset of any public company we know.  It is our opinion that the book is worth not even 10 cents on the dollar if put into runoff, while new legislative initiatives and judicial challenges bring that risk much closer to reality.

When a borrower fails to make scheduled loan payments to a normal bank, the bank is required by regulations to categorize the loan as impaired.  With World, it just gets flipped to a new loan with a higher principal.   According to the company’s own disclosures, the average loan has been flipped 4 to 5 times.  Presumptively, the main reason for flipping a loan is the borrower couldn’t pay it off.

Consider as an example a recent lawsuit in Texas by Mrs. Subrina Parker.  This case was brought after fell behind on her payments and was harassed by WRLD employees.  She was paying $50 a month on a $250 loan, on terms which the suit alleges violate the Texas Finance Code.  After WRLD called her co- workers, supervisor, and children, the she filed suit.  The suit eventually went to arbitration; it is the company’s main defense tactic.

Texas and WRLD (PDF)

A landmark ruling just issued by the New Mexico Supreme Court this month, however, held that World’s arbitration clause, which is a part of every single one of its loan documents, is unenforceable due to being “unconscionable” (so one-sidedly unfair that it isn’t a legal agreement).  This opens the door to a borrower’s suit challenging World’s business practices being granted class action status in the courts.

When the first of these cases is in fact granted class action status, very important consequences begin to fall on World.  For one, every current and recent borrower in the state receives official notice that a legal challenge is in progress, which will itself impair their collections.  Second, class action status provides substantial economic incentive which levels the legal playing field.  A loss in such a case could impair World’s operations in at least the state where it is located, and potentially expose it to a large adverse judgment.

In addition to the suits mentioned above, a newly filed Illinois suit (Dean vs World Finance) alleges that all of World’s loans violate the Federal Truth in Lending law as well as Illinois consumer lending laws.  Because of the recent New Mexico ruling, there is greatly increased risk that this suit will be litigated as a Federal class action case.

Dean Complaint Illinois (PDF)

Finally, World’s litigation risk disclosure states:

“From time to time the Company is involved in routine litigation relating to claims arising out of its operations in the normal course of business.  The Company believes that it is not presently a party to any such pending legal proceedings that would have a material adverse effect on its financial condition.”

In light of the claims in the abovementioned lawsuits, Citron believes this language is so inadequate it is a joke, except as an invitation to a future shareholder class action suit against management.

Imagine you had a maxed out credit card with Capital One.  You notify them that you cannot not pay your minimum - and the next thing you know, they increase your limit, give you a cash advance on your new credit to make your minimum payment, and charge you a fat fee to extend your credit, taking up most of the new higher credit line.  Is this even remotely sustainable business practice in the current economic climate?  Is this a book of receivables that you want to own?

This explains how installment loan borrowers such as John Gilbert in Oklahoma, Subrina Parker in Texas, Mr. Webb in Illinois and Ms. Cordova in New Mexico wind up paying “$2,000 just to borrow $250″, or “well over 100%” and get trapped in debt by their installment loans extended by WRLD.
http://progressillinois.com/2009/5/6/columns/delarogue-wild-west-payday-lending

They’re not exceptions, they’re representative examples.   Citron is confident that real court tests of these practices will be ominous for World as the get shut out of the loophole of arbitration.

World Acceptance vs. Payday Lenders - Apples and Oranges

After reading part I, some of Citron’s readers confused WRLD with a payday lender.  The business models are starkly different.  When you compare financials, you will understand that World Acceptance makes any payday lender look like Goldman Sachs.  For this we take as an example the largest publicly traded payday lender : Advance America, and also EZ Corp, the largest pawnbroker.

	Advance America (largest publicly traded payday lender)	EZ Corp (largest publicly traded pawn shop operator	World Finance (largest publicly traded installment lender)
Offices / locations	2800	893	900
Revenues last quarter	$156.4 million	$156 million	$113.9 million
Total receivables	$173 million	$86 million	Over $450 million

Citron believes that a half-billion dollar book of unsecured loans, flipped multiple times, has a huge undisclosed risk of collection.  This asset just doesn’t pass the reasonable man test.  While a payday loan is essentially secured by a known upcoming payroll check expected within the next two weeks, WRLD’s loans are for terms stretching months, and are secured by nothing

Right out of the Guilty Playbook

Just yesterday, WRLD filed an 8-K, announcing their plan to increase a current $10 million stock buyback plan (which is currently unexecuted) to $15 million stock buyback — all of this with only $6.2 million in the bank.   (Maybe they can get an installment loan…).  Why a stock buyback now?  Is it because Citron has exposed the company for what it is and this is a way to respond?  The stock is still currently trading above its 50 day moving average.  What is the urgency to burn its scant cash to buy its own stock?  This reminds us of the last two companies over the past two years who have tried the same tactic in response to skeptical questions raised by Citron.

Bidz.com - Citron Report- Company announced stock buyback- SEC Investigation, Stock 80% lower

Arthrocare- Citron Report- Stock Buyback - SEC Investigation, Stock 80% lower

World Acceptance- Citron Report- Stock Buyback -  …… ???????

Conclusion

As a business model, WRLD has been the master of loopholes.  Loan flipping, tacked-on renewal fees, single-premium “credit insurance” plus Rule of 78-calculated interest, all exist only because of loopholes in states’ various usury laws, and specifically the 11 states that haven’t closed them.  The financial effect of this crazy business is unsustainable revenues flowing to current income, while the toxic impairments are swept into the loan portfolio, where the company can shield the hidden risk to investors ….. for a while.

In Part 3, Citron will explore how likely government reform of consumer lending could soon restrict or totally halt the company from indulging in these predatory lending practices.  If WRLD’s operations in even a single state are shut down, it will be forced to put that state’s portfolio into runoff, exposing its uncollectability.  That is why Citron believes the potential risk of drastically interrupted operations has to be priced into WRLD’s stock.

stock ticker: WRLD

Over the past almost 8 years Citron has put together an unparalleled track record of uncovering scams.  It is our opinion that as this story unfolds, it will rank right up there with the best of them. 

Citron exposes the only publicly traded “Installment Loan” Company as a potential ZERO!!

Citron uncovers appalling consumer loan practices, at least two ominous and previously-undisclosed consumer class action lawsuits, potentially catastrophic regulatory risk, and the worst portfolio loan risk we have ever seen in a publicly traded company.

Citron introduces World Acceptance Corp (NASDAQ:WRLD) and advises readers that there is a lot of substance to this story.   There is a huge disconnect between reality and the image that World Finance presents to its customers and Wall Street.  Citron will lay out the contrast with its customary links, and as usual, invites readers to judge for themselves.

Undisclosed Lawsuits  ( Yes, plural intended ! )  and Insider Stock Sale

First and foremost Citron notes a lawsuit filed in New Mexico, just affirmed by the State Supreme Court clears the way for class action status, overturning the mandatory arbitration clause in World Finance’s loan contract terms.

http://honolulu.injuryboard.com/miscellaneous/new-mexico-supreme-court-strikes-down-onesided-mandatory-arbitration-clause.aspx?googleid=262170
http://www.publicjustice.net/briefs/Cordova_decision_042909.pdf
http://www.publicjustice.net/briefs/Cordova_Brief_020508.pdf

Second, a separate suit filed Feb 9, 2009 in Illinois state court, also seeking class action status, alleges the company’s loan forms violate the Federal Truth in Lending laws.  The company has not disclosed either of these suits, or the direct business risks they pose to WRLD.

Meanwhile the company just reported “great earnings” in an 8-K, and two days later, WRLD’s CEO filed and sold stock.  As a matter of fact, the insider selling has been so constant that as of writing, the CEO holds only 125,000 shares of stock — not very much skin in this game.

The company has had years to disclose the New Mexico suit and over three months to disclose the Illinois suit, and has not done so as of today, probably because they are  in a legal fight for their lives to just keep the business operating.  In part 3 Citron will show how almost every state they operate in, as well as the federal government, is taking a long hard look at these predatory practices.
Citron believes that if the federal government or any state that they operate in imposes even slight changes on the way they do business, the catastrophic risks of WRLD’s entire loan portfolio will be exposed and this entire company could just “go away”.

Citron Research Roadmap

In this report, part 1 of a multi-part series, Citron will introduce you to a business so unbelievably abusive of society’s most economically vulnerable citizens, you simply will not believe it is even legal.  In fact, it might not be legal for long — in its current form.  In the regulatory risk section, we will show you, in the freshly penned words of the company’s own business association, that they indeed fear they may soon be put out of business.

In part 2 we will reveal how the company indulges in accounting shenanigans which, in combination with its inconceivable fee structure, allow it to front-load earnings exaggeratedly while burying a growing mass of loans of dubious collectability on its balance sheet.

In part 3, we will review the various regulatory initiatives underway at the state and national level aimed specifically at preventing the type of abuse World Finance inflicts on its borrowers.  We will describe the lawsuits challenging World Acceptance’s business practices and the validity of its existing loans.  We will also review a civil case won against the installment loan industry with facts so outrageous that it serves as a “poster child” story for why sweeping regulation is required.

Business Summary

Shares Outstanding	16.16 million shares
Recent Market Cap	$440.4 million
Cash:	$6.3 million
Loan Book (net)	$460.4 million
Outstanding Debt	$  208.3 million

World Acceptance’s business is consumer “installment” loans, small (averaging under $1,000) unsecured loans extended to society’s most economically vulnerable people from low-rent storefront locations.  It operates in 11 mostly southern states as well as Mexico.  Here’s a typical location:

http://maps.google.com/maps?f=q&source=s_q&hl=en&geocode=&q=World+Finance,+South+Carolina&sll=37.0625,-95.677068&sspn=50.69072,78.398437&ie=UTF8&ll=33.984857,-81.071087&spn=0,359.994308&z=18&iwloc=A&layer=c&cbll=33.98489,-81.071547&panoid=idaPdp46U049Qyl7H9BZRg&cbp=12,242.62991203665985,,1,0.6314797360980203

Dirty Secret #1:  Entire Business Model Runs on “Loan Flipping”

The company claims these loans are for the unexpected medical bill or car repair — which sounds like a fair rationale….until you read WRLD’s 10-K, where you come upon this:

“In fiscal 2008, approximately 83.0% of the Company’s loans were generated through refinancings of outstanding loans and the origination of new loans to previous customers. A refinancing represents a new loan transaction with a present customer in which a portion of the new loan proceeds is used to repay the balance of an existing loan and the remaining portion is advanced to the customer. The Company actively markets the opportunity to refinance existing loans prior to maturity, thereby increasing the amount borrowed and increasing the fees and other income realized. For fiscal 2008, 2007 and 2006, the percentages of the Company’s loan originations that were refinancings of existing loans were 73.3%, 74.3% and 75.6%, respectively.”

This statistic proves that WRLD’s business model is overwhelmingly dependent on an unsavory and increasingly prohibited practice called Loan Flippping.  Not only do they engage in loan flipping, they brag to Wall Street that they actively market the flipping of loans!  They try so hard to stay under the radar that they are the only business with 900 branches and no branch locator on their corporate website.  www.worldacceptance.com

Here is how the business really works:

Someone walks into one of these storefront locations to borrow a small sum, say $100 to $300.  With just a signature and a list of references, he gets an 8-month loan with a fee payable up front (tacked onto the loan balance), and a loan with interest calculated using a frontloaded method.  After two months, whether he tries to pay off the loan, just make his monthly payment or neither, he is aggressively sold a renewal loan.  In appx 80% of the company’s loan transactions, the customer has signed a “renewal” and is handed a few more dollars.  The catch is there is a new set of fees tacked onto the loan balance, bookable as immediate revenue to the company, as well as more front-loaded interest (more about this later).  Any subsequent installment payments made by the borrower will go almost exclusively to interest, and the borrower will face a higher payment threshold to reduce his principal.  This is how the effective APR on these loans can quickly spiral to above 100%.

The dark purpose of the “active marketing” of refinancings is to ratchet up a borrower’s balance to a value that exceeds their next check, be it SSI, unemployment, social security or welfare, assuring that they will be unable to pay off their loan in full.  (Yes, industry employees have already testified to this practice in court cases.)  This traps borrowers in a cycle where most of their payments will be applied to fees and interest, and not reduction of principal. That is the “sweet spot” for the company’s profits.

Even though the company charges off a hefty sum for bad loans, Citron asks the question that the market will have to decide:
What is the real value of a loan book comprised of appx. 700,000 unsecured loans averaging $800, owed by borrowers who have been flipped multiple times, have already paid MORE than their fair share of interest, who have been exposed to intense collection harassment as documented in class-action lawsuits, and whose total payments have already far exceeded the principal…..but still owe more than they ever borrowed?

That is the question that we will all soon be able to answer.

Dirty Secret #2:  The Face of Installment Loans Victims.

A human face was given to this shadowy business when a lawsuit was won in usually business-friendly Oklahoma, on behalf of a mentally disabled man whose installment loan was handled with such abuse that he was driven into homelessness.  Although WRLD was not the primary defendant, they were an active perpetrator, extending a loan to a man with an IQ of 59, to pay off his previous installment loans to another company – after he had already been flipped 25 times!
.
Here’s the recap of the lawsuit.
http://www.hwh-law.com/content/default.asp?contentid=21
(Please scroll down halfway to “Security Finance Predatory Lending Practices”)

The circumstances of the New Mexico case (Cordova) are just as outrageous (see above links.)    Citron will examine these suits and their implications in parts 2 and 3.

Dirty Secret #3:  The Company Itself Fears The End is Near

Citron notes the obvious changes in the political environment with regard to consumer protection.  These will be detailed in part 3.  For now, let us observe that, regardless of the legislative debate about what level to cap interest rates, if “loan flipping” is prohibited, the music stops for the installment loan business – it is effectively over.

Don’t take our word for it.  Look at the words penned by the hastily-formed industry mouthpiece comprised of World Finance and a few of its competitors to fight regulatory change:  http://www.nilaonline.org/

“Enactment of this legislation will not only restrict what installment companies may charge for our services, it could well force us out of business altogether.”

http://www.gaindloanassn.org/pdf/H_S_Communication_Packet.doc

Conclusion

As the financial pressures of unemployment, foreclosure, repossessions and bankruptcies take their toll on the country’s most economically disadvantaged, political pressure is mounting within more and more states, as well as federally, to take action to curb predatory lending practices.

Citron believes the prospects for sustainability in this business are bleak, not just in terms of social policy and politics, but WRLD’s exceedingly dubious financials also fail from a business standpoint.  Any reasonable “stress test” of WRLD’s iceberg-size loan portfolio would render the company a zero.

Cautious investing to all.

stock ticker: IBOC

Citron reviews some amazing facts about regional bank International Bancshares.

Yesterday, IBOC announced a “strong quarter” in a PR that came out right in the middle of a strong day for the market without any prior notice.  If you were looking for the conference call…look again.   They seem to be the only public bank in their region that will not talk to investors.  If you were looking for a balance sheet….look again.  They are the only bank in their region who gives you just a headline without a balance sheet in the PR.  Instead, management offers the blanket statement,  “We are confident in the strength of our balance sheet and especially the quality of our loan portfolio”

You’d have to be a hermit not to know that banks from coast to coast are under stress.  Why?  Because they all got caught up in making very bad loans during the “bumper crop” of bad paper originated during 2005 to 2007.  If many wrote down the value of the loans on their books to reflect current market realities, they would be insolvent.  

Citron reminds readers that IBOC’s book of commercial and construction loans, the two largest sources of pending delinquencies, doubled during the go-go period of 2005 to 2007.   With nearly 1.4 billion in real estate and construction loans classified as “maturing within one year”, Citron marvels at how IBOC’s glowing report yesterday can possibly square with reality.

Influential banking analyst Meredith Whitney commented last week, “Commercial real estate will decline ‘hard and fast,’ on Bloomberg Television. “For a lot of the regional banks that have so much commercial real estate exposure as a percentage of their core capital levels, it’s going to be more difficult.”    
http://www.bloomberg.com/apps/news?pid=20601103&sid=axJDzrSHTzXk&refer=news 
But according to IBOC management, they’ve got an immunity card.

While every other bank who accepted TARP money is selling stock to repay the government and beef up its balance sheet, IBOC has decided to buy stock to combat short sellers while still holding TARP money.  Funny, if they are so pleased with their construction loans from the boom years, they why not return the public’s TARP money — after all it does stand for Troubled Assets Relief Program.

The Competition

While IBOC’s PR gives short shrift to its loan losses, here’s what competitors are saying about the Texas market:

From Zion Bank this week:

“The Company recognized an impairment loss on goodwill during the first quarter of 2009 of $634.0 million or $5.55 per diluted share compared to $353.8 million during the fourth quarter of 2008. The first quarter impairment loss was at Amegy Bank of Texas, which has $616 million of goodwill remaining after this impairment. This loss primarily reflects declines in market values of peer banks in Texas and a weaker economic outlook in that state.

And ….

“The most significant driver of the loss we experienced this quarter was the non-cash impairment of goodwill of nearly $634 million. All of this relates to our 2005 acquisition of Amegy Bank of Texas. The impairment charge primarily reflects declines in market values of peer banks in Texas and the weak economic outlook in that state with the decline in energy prices that we’ve seen in recent months.”

From Cullen/Frost:  (who refused TARP money)

As expected, Texas is not immune to the effects of the broader U.S. recession. The state’s overall economy is slowing, impacted by weaknesses in the job market, lowered rig counts and reduced exports linked to Mexico’s economic problems. Although our non-performing asset levels have been impacted by the recent slowdown in the Texas economy, we remain confident in our ability to manage credit quality. Cullen/Frost is well positioned to navigate through difficult times, as our executive team was with the company during the 1980s

The other Texas regional banks Cullen/Frost Bank, First Financial, Sterling, and Texas Capital all reported this week, accompanied by consistently cautious conference call comments from management, and analyst downgrades.  Oh, but we forgot …. IBOC doesn’t have analyst coverage, and doesn’t do conference calls.

What’s under the covers?  Citron reviews IBOC’s loans of record

Citron cannot fathom how IBOC expects investors to believe its current bad loan reserves are sufficient to match the scope of its problem loans.  Specifically, from 2007 to 2008, non-accrual loans and 90 day past due loans increased 213% from $54 million to $170 million.  During the same period the allowance only rose 19% from $61.7 million to $73.5 million.  The allowance as a percent of non-accrual and past due declined from 114% to 43%, and astounding decline.  If the allowance had stayed at 114%, pretax earnings would have been 60% lower. 

To try to gain more clarity on its loan portfolio, Citron looked at some of IBOC’s largest financing chunks, as much as we were able to gather from public sources.

The Spring  — $ 70 million financing by IBOC, nearing construction completion.
Current status:  Our best estimate, only 50% sold with 10% deposits.

One of Austin’s first luxury high-rise condo projects is nearing completion. 
http://austin.bizjournals.com/austin/stories/2006/09/18/daily13.html  

How’s the market now?  Citron notes that next week Austin will see an auction of condos in a luxury project now estimated to fetch 40% of their planned sales price through auction
http://www.cnn.com/2009/LIVING/04/28/condo.auction.incentive.economy/

To the Dallas Fed, the Austin market looks like this:

“Conditions in the Austin real estate market remain weak, as they do across the state,” said D’Ann Petersen, an economist with the Federal Reserve Bank of Dallasin a recent Statesman article. “The national recession has trickled down to Texas and the state, and its major metros are seeing job losses. The credit situation has also impacted the real estate sector in Austin, especially the higher-priced segment.”

http://community2.myfoxaustin.com/_Austin-Jobs-and-Housing-Outlook/BLOG/257878/82263.html

But not to IBOC.

Barton Place:
This one, due for completion in early 2010, is just 40% sold with 10% deposits. 
http://www.bartonplaceaustin.com/BPA_pdfs/bartonplace_loan_acquired.pdf

Astroworld:
This loan, to redevelop a 104 acre site formerly a Six Flags amusement park site next to the Houston Astrodome, was proudly announced as a “major” deal for IBOC.  The purchase price was $77 million, presumably mostly with money borrowed from IBOC.  Two years later, its just a vacant site with weeds growing up through the pavement. 

http://www.thefreelibrary.com/Angel%2FMcIver+and+IBC+Bank+Close+Deal+on+104-Acre+Six+Flags+AstroWorld…-a0146509564

Sapphire:
This South Padre Island project, just opened, we can not figure out occupancy here but we have to imagine with the devaluation of the peso along with the violence in Mexico, any border town might suffering, unless its an IBOC financed-project, of course.
http://sapphiresouthpadre.com/index.html

Citron estimates these 4 projects alone account for perhaps 20% to 25% of IBOC’s construction loan book.  If the company would host a conference call and field questions openly, perhaps some genuine transparency on this troubled book of business could be established.  Meanwhile, it appears to Citron that IBOC’s $70 million loan loss reserve is insufficient to cover the liability of these 4 imperiled projects.  That’s before we even begin to consider the overhang of the rest of their $1.8 billion real estate / construction portfolio, which itself is just an outsize portion of its $5 billion plus loan portfolio. 

Conclusion

There is a complete disconnect between IBOC management’s rosy portrayal of conditions and objective data points about IBOC’s financings outstanding.  While its competitors all speak cautiously about the slowing Texas economy, IBOC insists everything is great, but offers no transparency whatsoever into its loan portfolio.

Citron notes IBOC’s exposure to construction loans is more than twice its competitors, its gross yield from loans is well higher than its competitors (indicating riskier loans when originated) and its reserves are the lowest of its peers. 

Meanwhile, the company threatens to buy back stock from “different” pools of money than the TARP dollars it has taken. 

It is Citron’s opinion that the day of reckoning for this bank is only a matter of time.
Cautious investing to all.  

stock ticker: EDU

 

One of the great challenges of investing in companies in “emerging markets” is valuation.  What is a fair price and what is overvalued?  Well for many investors the answer comes too late.

Come on Down …. and get Acquainted with New Oriental Education and Technology Group (NYSE:EDU)

This company offers private education services in China.  It runs classes for both schoolchildren and adults, with a special emphasis on teaching English to Chinese adults.

“Historically, our core businesses have been English language training for adults and test preparation courses for college and graduate students. “  EDU – 20-F  10/23/2008

Turning to the numbers, EDU’s backward facing PE for 2008 is a jaw-dropping 40.  Its market cap of 1.85 billion has it valued at a price to sales of over 9:1.  This is number so stratospheric there are virtually no cases in recorded financial history of it being sustainable.

Yet, there is no doubt there is demand for education, and in particular, teaching English in China.  However, this is a sector with no discernable barrier to entry — the company is not teaching for degrees and therefore does not need accreditation.

In February of 2009, EDU lowered earnings dramatically, and the share price took a 20% hit, showing a slowdown in a business that probably had benefited greatly from crush of business leading up to the 2008 Olympics.

But now, only 2 months later we believe the story has taken a turn for the worse. True valuation is difficult to pinpoint until a transaction occurs in the space between two reliable parties at arms-length.  Just yesterday, EDU’s  pre-eminent competitor was bought, and now everything has changed.

In their filings they state,

“We face competition for our “Elite English” program primarily from Wall Street Institute and EF English First, both of which offer English training courses for adults in many cities in China. Wall Street Institute began providing high-end English training courses to adults in major cities several years before we entered this market and enjoys a first-mover advantage.”

So here we see that Wall Street Institute is a competitor with equal if not stronger brand recognition.  Wall Street Institute’s seller was Carlyle Group, not exactly naive investors who would sell a property for a mistakenly low price. ”

The Envelope, Please

http://online.wsj.com/article/BT-CO-20090415-702374.html
The transaction price was $145 million cash.

So let’s look at the valuation of this recent and highly relevant transaction.

	Wall Street English	NewMarket Corp (EDU)
Recent sale price	$145 million
Market capitalization		1.87 billion
Sales growth rate	40%	28% to 35% (guidance in 6-K filed February 12, 2009)
Price to sales ratio	2:1	Greater than 9:1

It could also be argued that Pearson “paid up” for Wall Street English, as they are going to add them to an existing business and share all back office services.

Just as a reality check, if EDU were valued at par with this transaction based on a multiple of sales, it would be trading at a share price below $14.25

It has to be noted that Wall Street Institute’s buyer, Pearson, is a $5.5 billion dollar company.  They made this acquisition for an obvious reason — to compete in this market space.

Yet, analyst models, on which the company’s nose-bleed price target depend, show the company’s net profit margins actually rising steeply fro current levels of 24% to over 32% by 2011.  China is the world’s most price-competitive market space.  Citron questions whether a valuation that depends on sharply increasing margins as well as hugely increased revenues makes any sense at all …. especially when the barriers to entry in this business are so low.
Crystal Ball Says

EDU reports in a few days, and no doubt it will be a tad better than its lowered guidance announced February.  But for extra credit, what will the analysts say about the valuation point on the Wall Street Institute acquisition?

No doubt, they’ll claim it’s not an “apples to apples” comparison.  After all, Wall Street Institute concentrates on teaching English to high-end adults, while EDU’s business is broader.

The facts are that the “English to high-end adults” business is the mainstay of EDU’s business – by their own admission it’s been their core business since founding, and is their highest margin sector.  Describing in their own words their newer, more diversified offerings:

“Some of these operations have not generated significant or any profit to date and we have less experience responding quickly to changes, competing successfully and maintaining and expanding our brand in these areas without jeopardizing our brand in other areas. Consequently, there is limited operating history on which you can base your evaluation of the business and prospects of these relatively more recent operations. “  EDU – 20-F  10/23/2008

It is Citron’s opinion that the Wall Street Institute valuation metric is indeed very ominous for EDU.  We can debate what variety of apples are being compared, but the difference between EDU’s 9x sales and the 2x sales valuation of their primary competitor is a reference point investors will ignore at their own risk.

Conclusion:

In the good old days, a “China IPO” incubated by a “prestigious” Wall Street investment brokerage firm, was a ticket to valuations completely detached from reality.  New Oriental seems like a throwback to this frothy era.

As an investment, the company could continue to perform in stellar fashion for years to come, but with limited metrics to distinguish “same store sales” vs. “growth by acquisition”, not to mention the uncertainties of overseas company financial reporting, its fantasy-land valuation exposes shareholders to the potential of extreme price erosion, with nothing coming from the company but a stream of good news met by a constantly oozing share price.

Cautious investing to all.

stock ticker: IBOC

Citron Research Redefines “Bad Bank”

This past Friday the FDIC seized 3 more banks to bring the total for 2009 up to 20. What are the telltale signs that a bank is on the brink? Citron believes that IBOC is doing more than just giving signs; it is screaming out that something is really wrong Deep in the Heart of Texas.

Loans on the Books

When analyzing any bank you have to start with the loan portfolio. Below is the loan breakdown on IBOC.
From 2004-2008, almost all of the growth of IBOC’s book of business is construction lending, with the greatest increase occurring in 2006 and 2007, obviously the high-water mark of the real estate bubble. Commercial, mortgage, and consumer loans are actually down from 2004. What is even more alarming is that 73% of these construction loans — nearly $1.4 billion, mature in the next 12 months.

			December 31,
			2008			2007			2006			2005			2004
			(Dollars in Thousands)
Commercial, financial and agricultural			$	2,574,247		$	2,426,064		$	2,337,573		$	2,376,276		$	2,710,270
Real estate—mortgage				888,095			798,708			785,401			847,512			960,599
Real estate—construction				1,911,954			1,835,950			1,404,186			901,518			749,689
Consumer				169,589			190,899			198,580			218,607			229,302
Foreign				328,948			285,008			309,144			281,947			239,622
	Total loans			5,872,833			5,536,629			5,034,884			4,625,860			4,889,482
Unearned discount				—			(1	)		(74	)		(168	)		(508	)
	Loans, net of unearned discount		$	5,872,833		$	5,536,628		$	5,034,810		$	4,625,692		$	4,888,974

Maturing
			Within one year			After one but within five years			After five years			Total
			(Dollars in Thousands)
Commercial, financial and agricultural			$	760,911		$	1,642,972		$	170,364		$	2,574,247
Real estate—construction				1,394,919			498,448			18,587			1,911,954
Foreign				214,830			107,806			6,312			328,948
	Total		$	2,370,660		$	2,249,226		$	195,263		$	4,815,149

In order to compare apples to apples we thought it would be fair to make some comparisons to another regional bank in Laredo/San Antonio region, Cullen/Frost Bankers, known as Frost Bank (NYSE:CFR)

CFR has grown their loan balances across all areas with no measurable concentration in construction loans. In stark contrast to IBOC’s exposure, which is over 250% of tangible book value, CFR’s construction loan balance is less than 100% of tangible book value. Next, note that CFR’s allowance for bad debt is 10% of its construction loans, compared to IBOC, which has reserved at a rate of only 3% on its construction loans.

Of even greater concern, Citron examined the publicly-traded institutions that took between $100 million and $500 million of TARP funds, a group of 43 companies. We found one startling statistic: . IBOC had the highest ratio of construction loans to total loan portfolio, and yet they had lowest loan loss reserve rate for that loan class.
http://www.fsround.org/tarp/pdfs/CCP.pdf

Assessing the market

Especially in light of IBOC’s severe lack of disclosure (see below) investors are left to judge the financial health of IBOC on their own. Naturally, attention turns to the underlying conditions of the real estate construction market in the bank’s specific region. Don’t take our word for it, just last week the Texas Fed declared the state is officially in a recession.
http://www.chron.com/disp/story.mpl/ap/tx/6315165.html

And if you think it does not affect Laredo, just listen to the local news.
http://www.pro8news.com/news/local/40882912.html?video=YHI&t=a

Wikipedia lists construction projects in Laredo, Texas. http://en.wikipedia.org/wiki/List_of_buildings_in_Laredo,_Texas Citron called the local Chamber of Commerce in Laredo — EVERY single one of the proposed/under construction projects listed in Wikipedia above has been cancelled or postponed.

Here is one project for which IBOC is lead lender that just went into foreclosure a few weeks ago:

http://www.highlandernews.com/pages/full_story?page_label=highlander_local_news&id=1999561-Skywater+foreclosure+sale+pending&article-Skywater%20foreclosure%20sale%20pending%20=&widget=push&instance=special_coverage_bullets_right_column&open

Here is another major construction project funded by IBC that went into foreclosure also last month.
http://www.bizjournals.com/seattle/othercities/austin/stories/2009/03/09/story5.html?b=1236571200%5E1789143

Lastly, here is a project where IBC was the largest creditor and they ended up purchasing the project themselves out of foreclosure. http://en.wikipedia.org/wiki/Sunrise_Mall_(Corpus_Christi,_Texas)

If Citron was able to find these with a simple Google search, imagine what else is really out there? Citron suggests that IBOC management will not likely part with this information voluntarily. Company management does not host conference calls, and the detailed disclosure about its loan portfolio is seriously deficient, especially in the midst of the financial environment of 2009.

Management:

Criticisms of the company’s practices, and in particular, the extravagance of the CEO’s expenditures including Citation jet and high salary, have come from places as near as their local newspaper.
http://www.thelastamericannewspaper.com/default.asp?sourceid=&smenu=358&twindow=Default&mad=No&sdetail=1318&
wpage=1&skeyword=&sidate=&ccat=&ccatm=&restate=&restatus=
&reoption=&retype=&repmin=&repmax=&rebed=&rebath=&subnam
e=&pform=&sc=2525&hn=thelastamericannewspaper&he=.com

Largest shareholder and director Tony Sanchez is extremely influential in the operations of the bank. Incredibly, he was also the head of Tesoro Savings and Loan, which folded in 1988, leaving taxpayers with $160 million bill. http://www.texnews.com/1998/2002/texas/guv0822.html

While the company took $216 million of taxpayer money during the last week of November, Sanchez, along with the CFO Imeldo Navarro cashed in close to $20 million worth of stock in the following 3 weeks. The insider dumping has been ruthless as recently as March 5, where Sanchez registered and began selling 800,000 shares of stock, at the low of the market. Citron is incredulous that companies accepting TARP money can allow their insiders to dump stock on the market in the same month …but we don’t make the rules.
http://finance.yahoo.com/q/it?s=IBOC

Additional Red Flags to Consider – Disclosure Failures

• Large amount of related party loans — $79.4 million as of IBOC’s recent 10-K
• No disclosure of the breakdown of their loan portfolio
• Company does not hold any conference calls
• No Analyst Coverage

Conclusion

The obvious question of the day is what impact the new Treasury troubled asset program will have on IBOC’s untenable situation.  In the opinion of Citron, the new program only accelerates the day of reckoning for IBOC’s “living-in-denial” strategy.  The new program brings price discovery to bad assets, and IBOC has not even begun the process of disclosing the writedowns that would threaten its solvency.  Meanwhile, while investors look to datapoints like the status of commercial construction projects in Laredo, insiders keep stamping out stock sales.

It is unavoidable that someone at IBC has a lot of explaining to do, but if history repeats itself, don’t expect an explanation from the company. When in doubt, follow the money. It flows from the taxpayers’ of the United States, through the “black hole” of the bank’s balance sheet, and directly into the insiders’ pockets via their relentless insider stock sales. The money flow is the clearest “tell” of all — from those who really know what is happening Deep in the Heart of Texas.

Cautious investing to all.

stock ticker: APOL

Needless to say our country is in a mess.  We have allowed greed to blur the lines between right and wrong and the result is the headlines that we are forced to read daily.  Unfortunately, this greed is not limited to banks and brokerage firms, but its reaches have extended to the sacred institution of education.  This year alone almost 600,000 education jobs are at risk because of state budget cuts.  Yet, the University of Phoenix (NASDAQ:APOL) continues to roll on as the #1 largest recipient of Government guaranteed student loans in the country.  When you see how they operate their business you will be appalled.

Citron believes there are many headwinds facing the company including:

• Increasing Cohort Default Rate for loans
• Price Competition in the industry
• Looming restrictions on student loans

This report will focus solely on Apollo’s unsavory business practices and the tactics they use to deceive the government and their own customers.

All of the referenced documents in this report have just been made available in the public record within the past 5 weeks.

Before we go any further, let us put one thing in perspective:

The state of Arizona has already announced that they are cutting more than $133 million from public K-12 education for the coming year 2009:

http://www.abc15.com/content/news/phoenixmetro/story/AZs-newest-budget-cuts-trim-millions-from-K-12/sZalsQgaMEqVQcRbaODM6Q.cspx

That is less money than the insiders of Apollo have reaped from stock sales in the past 8 weeks alone!

Qui Tam

The ongoing Qui Tam lawsuit against Apollo has released some astounding documents over the past month.  All investors must understand that it is ILLEGAL for “for profit” education companies to financially incentivize enrollment counselors for performance.  This is the heart of the qui tam suit and challenges a practice that, if eliminated, could topple Apollo’s entire business model.  While this case has been grinding ahead for quite some time, these pieces of evidence were recently submitted into the court record.  They show UOP engaging in intentional and systematic deception of the government about its compensation scheme for enrollment recruiters.

As documented in the suit, earlier in the decade Apollo embarked on a path of becoming more of a marketing company than an educational institution.  Since the year 2000, Apollo has seen their enrollment increase in size by 200%, the faculty increase 100%, during which time the ranks of its enrollment counselors swelled by a staggering 1000%.

Expressed another way, the student to faculty ratio went up from 9:1 to 15:1 while the number of enrollment counselors per student ratio nearly tripled from 166:1 to 69:1.

Nice Case Summary (PDF)  [ See page 48 ]
And just to address skeptics who think we have cherry picked a few docs from the case, it should be noted that Plaintiffs have submitted over 25,000 documents in hard copy, and thousands more in electronic form that document their claim of performance-based compensation for enrollment counselors at UOP.

Confidential Memo!!

Below is a compensation table in which the exact number of enrollments generated by an employee is correlated to a specific salary level, pay cut, and/or cash award and/or time off.  The company has marked it “Confidential” — until now, that is.

Confidential Exhibit (PDF)

Deceiving the US Dept of Education

Below is a set of internal emails in which supervisors are specifically coached by senior staff to refrain from referring to “starts” or “enrollments” in written performance reviews of enrollment counselors, although it is obvious that that is the main evaluation criterion.  Supervisors are coached specifically to rewrite page 1 of their reviews because “The Department of Education audits these reviews”.
Exhibit G (PDF)

Trying to Fly Under the Radar

The testimony of a former employee, who testifies that a company official (Director of Enrollment Dustin Phillips) stated that the “performance matrix” (compensation schedule for EC’s) was constantly being reformulated as part of a “smoke and mirrors” effort intended so that Apollo could “fly under the radar” with regard to Department of Education audits and prohibitions on incentive compensation.
Exhibit K (PDF)

The Company Admits Wrongdoing

And lest you think this evidence is just little bits of exception and trivia culled by disgruntled employees, look at the jaw-droppingly explicit admissions from former President Brian Mueller and his crew at an analyst group meeting in 2006, now excerpted as a trial exhibit: (Mr. Mueller abruptly resigned this year with no explanation after spending 20 years at Apollo.)

“Counselor compensation is one of the biggest advantages our company has had over the years. It is our ability to incent enrollment counselors for their performances. ”

“We’ve got 3,800 sales people…that we are able to drive specific performance levels that we have not been able to drive in the past”

Apollo Admission in Analyst Day Presentation (PDF)
To which Citron comments:  “Sales people? He really said that?”

While we do not believe at this point that APOL will get put out of business by the Federal Government, we do believe there is an inherent risk to their franchise, especially with an administration that has promised to focus on accountability.

Apollo’s application for re-certification under Title IV has now been on month-to-month status for the last 19 months… we can see why.

What is chilling to Citron is the amount of insider selling of Apollo stock over the past 3 years (in the hundreds of millions), during which time they delay the inevitable court date while claiming that they do not pay their enrollment counselors incentive compensation for performance.

Glengarry Glen Ross - Phoenix Style

The boiler room mentality was revealed on the same analyst day quoted above when former President Brian Mueller stated:

“We call them six times a day for four days, 24 times in the first four days. We don’t leave messages; we want a live voice. When we get a live voice, then we want to transfer that prospective student to an enrollment counselor who’s best able to convert that student.”

Just to prove that these tactics are not a thing of the past we refer to yet another lawsuit that was re-filed in January of 2009.  Filed by a former employee, Chad McKinney, the lawsuit portrays an unmistakeable boiler room work environment.  The former employee in this lawsuit stated he was harassed because he would not commit unlawful acts in recruiting students.  The suit confirms that his salary was based on enrollment goals.

“If I met a “goal”, which in essence was quota of 4 new students per month, I was not to be reprimanded.  If I did better on the quota I was told I would get a 20% increase in salary after 6 months.”

Without even discussing the merits of the case, it is the attachments that corroborate everything Citron has discovered about Apollo.

Blitzes

According to the lawsuit, blitzes are designated times (by the manager), three times a day, during which enrollment counselors were expected to not leave their cubicles, even to go to the bathroom, and to make as many telephone dials as possible, and schedule as many student appointments as possible.  To show how “boiler room” this whole thing is, just look at this email from Carlyn Lindsten, associate director of enrollment.  No editorial comment is necessary once you read them.
The Blitz (PDF)

Trick Messages

Another popular tactic of Apollo Group is to use trick messages to get leads to return phone calls.  Below is an email from Barbara Keramati and Marive Wright, enrollment managers, instructing their sales force on how to trick prospects into returning phone calls:

Trick Messages (PDF)

Only Starts Count

The most damning email came from an enrollment manager who tells their staff the true spirit of their recruitment effort:

“Remember, students have to attend three nights or post three weeks in order to get START credit, which is what counts in the end.”

Starts Count (PDF)

It is not surprising that this type of recruitment pressure has led to a graduation rate of 4% according International Center for Education Statistics, an organization within the Department of Education. Now true, this number only includes those students who have never enrolled in college previously.  However, we cannot explain how bad this is without making a comparison.  Just look at Arizona State (same state) which has a graduation rate of 56%.
http://nces.ed.gov/collegenavigator/?q=university+of+phoenix&s=AZ&id=372213

[ Click on “Graduation and Retention Rate” ]

Welcome Mr. Arne Duncan

In the midst of the government discussing a new era of oversight that is as far-reaching as salary limits for White House personnel as well as proposed salary limits on government-assisted financial institutions, we welcome a new Secretary of Education, Arne Duncan.  Mr. Duncan, a known reformer, has promised to reform education in the United States.  In a CNN interview given just two days ago he makes these comments regarding the proposed $150 billion education stimulus package.
http://www.cnn.com/2009/POLITICS/01/30/campbell.brown.duncan/#cnnSTCText

Mr. Duncan states:  “Yeah, we’re going to have to keep very close track of the money, and we’re going to have to implement this impeccably. And it’s very important, as you said, that the money goes where it’s needed.”

So how will Mr. Duncan assess the value of $2.5 billion of Government guaranteed student loans being funneled through Apollo’s enrollment/recruitment boiler room sales operation next year, only to result in hundreds of millions of dollars flowing straight to company insiders as they cash out their stock?

Aren’t there more effective ways to shore up the country’s secondary education institutions than this?

Conclusion

So let’s get this straight.  The largest recipient of student loans in the country is a for-profit school who uses trick phone calls and boiler room tactics to get students enrolled.   They admittedly pay incentive compensation to their army of enrollment counselors, a practice which could easily jeopardize 75% of their revenue.  The school has one of the lowest graduation rates in the country …and yet the business model exists only because of US Government loan guarantees.

And we are supposed to believe that this house of cards is invulnerable to education reform?  And further, investors should march to the analysts’ drumbeat that their business is going to grow enough to justify the lofty multiple of a growth stock, as they marshal the public’s money into the face of wave after wave of insider stock sales?

Cautious investing to all.