Risk & Compliance

Kennedy to SEC: Probe Sallie Mae Execs

Did inside information from the White House spur Sallie's chairman to sell 34 percent of his holdings?
Marie LeoneFebruary 16, 2007

This article has been updated since it was published on February 16. The original article stated that five Sallie Mae executives, including CFO Charles Andrews, sold stock within 10 days of the release of President Bush’s 2008 budget proposal; in fact, the trades were mandatory transactions related to tax requirements.

Scooter Libby may not be the only White House denizen being investigated for leaking information. On Tuesday, Sen. Edward Kennedy (D-Mass.) asked the Securities and Exchange Commission to examine whether officials at student-loan lender SLM Corp. — also known as Sallie Mae — violated insider-trading rules by selling stock before the release of President Bush’s 2008 budget proposal.

The proposed budget includes a $14.9 billion cut, spread over five years, of government subsidies paid to such private-sector student-loan companies as Sallie Mae, Nelnet, and Student Loan Corp. The budget plan sent shockwaves through the student-loan industry and sent stock prices tumbling: share prices for market leader Sallie Mae dropped nearly 9 percent at the news, while shares of Nelnet and Student Loan Corp. dipped almost 10 percent and 6 percent, respectively.

About a week later, on February 13, Kennedy sent a letter to SEC chairman Christopher Cox requesting that the regulator look into stock trades made by Sallie Mae officers and directors — particularly those made by Sallie’s chairman, Albert L. Lord, who sold 400,000 shares to net $18.3 million just days before the budget proposal became public. Lord would have made $1.4 million less had he waited until after the budget announcement. SEC spokesperson John Heine said the commission declined to comment on Kennedy’s letter.

Specifically, Kennedy wants to know if Sallie Mae officials were tipped off by someone inside the Bush Administration who knew the contents of the budget plan before it was released on February 5.

Sallie Mae officials deny that Lord’s sell-off was prompted by inside information. The timing of his stock sale “was completely and utterly coincidental,” Sallie Mae spokesman Tom Joyce told CFO.com. The level of subsidy cuts contained in the budget proposal was “a surprise” to the industry, added Joyce, although he confirmed that industry observers did speculate about cutbacks to the subsidy program before Bush’s announcement.

Lord’s stock trades, which were made on February 1 and February 2, represent 34 percent of his direct holdings in Sallie Mae. According to Joyce, Lord informed the company on January 23 that he intended to sell 400,000 shares. Then, on January 25, Lord announced his intention to sell the stock at a regularly scheduled Sallie Mae board meeting — an announcement that was recorded in the board minutes, said Joyce. Lord told Sallie Mae directors that he was using the proceeds of the stock sale for business ventures that had nothing to do with Sallie Mae, according to the spokesperson.

The private-sector student-loan program has come under fire in the past for questionable lending tactics and for using loopholes to boost the number of loans that qualify for government subsidies. The private loans, which are an alternative to direct government lending, have historically provided sizeable profits to the loan companies. Part of the reason is that the U.S. government guarantees that lenders will receive a 9.5 percent interest rate for loans made to students, even if market lending rates dip below that amount. The balance is made up with government subsidies.

Sallie Mae, which reported a 35 percent profit margin and $1.12 billion in net income in 2005, harshly criticized the Bush proposal, calling the subsidy cut “harmful.” Company officials also said the cutbacks would force some lenders to exit the business, thereby reducing students’ lender choices. Sallie Mae noted that the cutbacks would “move us closer to a government-run student loan monopoly.”

Currently 80 percent of all college borrowers use private-sector student-loan programs, reports Sallie Mae.

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