2nd UPDATE:US Education Dept Being Investigated Over Rules--Source

The U.S. Department of Education's Office of Inspector General has launched a probe into possible influence by short-sellers on the Education Department's recent rulemaking process, according to a person familiar with the matter.

The investigation may proceed for some time, and there is no guarantee the OIG will make any specific findings.

The Education Department has come under fire from a number of sources since it began issuing a package of new rules last summer that will affect for-profit college operators such as Apollo Group Inc. (APOL), ITT Educational Services Inc. (ESI) and Corinthian Colleges Inc. (COCO). The Education Department released 13 of 14 rules in October but has yet to release the most controversial, which would tie graduates' student-loan repayment rates to programs' access to federal financial aid. As student-loan default rates rise, that rule is intended to ensure programs are educating their students for gainful employment in a recognized occupation.

In November, Sen. Richard Burr (R., N.C.) and Sen. Tom Coburn (R., Okla.) sent a letter asking the OIG to look into possible ties between the department and investors who were selling short the stock of various for-profit education companies. Correspondence between the parties, which include FrontPoint Partners's Steve Eisman, had been released by the department after Citizens for Responsibility and Ethics in Washington, a watchdog group known as CREW, filed requests under the Freedom of Information Act.

Meanwhile, Sen. Michael Enzi (R., Wyo.) on Thursday sent a letter to Education Department Secretary Arne Duncan asking the department to release "all Department of Education written correspondence, email or otherwise, regarding the development of the proposed gainful-employment regulation," including documents from the Office of the Secretary related to the allegations. Enzi is ranking member of the Senate Health, Education, Labor and Pensions Committee, of which Burr is also a member.

Additionally, lobbying groups supporting the for-profit colleges have alleged the Education Department leaked early copies of the rules to outside organizations and people with financial interests in the industry.

The so-called "gainful-employment" rule has seen strong opposition from lobbyists and a number of members of Congress, as many schools fear they may face program closures if they lose access to the funds. The U.S. House of Representatives voted last month to de-fund the gainful-employment rule, but the measure was later dropped from the final budget bill.

The Education Department said earlier this month it was "very close" to issuing the final rule, which will be "much more thoughtful" than an early draft. The department has said it sought input from a number of parties, including the schools that could be affected by the rules.

FrontPoint Partners's Eisman, the hedge-fund portfolio manager famous for his bearish bet on the mortgage industry, likened for-profit schools to subprime mortgages at an investor conference in May. He sent a copy of that presentation to the Education Department, according to documents released by CREW, and repeated many of the criticisms in front of a Senate committee hearing in June.

A representative from the Education Department referred questions to the OIG. An OIG representative said it's the agency's policy to neither confirm nor deny investigative activity.

The OIG investigation was first reported Thursday in the Daily Caller, also citing sources.

-By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com

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