Clinton-Allied Education Firm Hid IRS Probe Prior To IPO Launch
Laureate Education, Inc. — which on Wednesday will launch its IPO on NASDAQ — failed to tell investors in federal filings that IRS officials are reviewing congressional charges it had a “pay to play” relationship with Bill and Hillary Clinton, The Daily Caller News Foundation’s Investigative Group has learned.
Laureate’s relationship with the Clintons began in 2010, when it paid the former president $16.5 million as its “honorary chancellor” for five years. Baltimore-based Laureate — led by chairman and CEO Douglas Becker — also donated up to an additional $5 million to the Clinton Foundation.
And during former Secretary of State Hillary Clinton’s tenure, the Department of State’s U.S. Agency for International Development awarded $55 million to the International Youth Foundation (IYF), which is linked to Laureate and is chaired by Becker.
Laureate operates 71 educational institutions in 25 countries with a heavy presence in Latin America.
The issue came to a head in a July 15, 2016, letter to IRS Commissioner John Koskinen by 64 Republican members of the U.S. House of Representatives, saying such relationships create “an appearance that millions of dollars in taxpayer money was channeled to IYF by Secretary Clinton’s State Department as a kickback for her husband’s generous contract as an honorary Laureate chancellor.”
Koskinen informed the congressmen on July 22, 2016, that he referred the matter to the federal tax agency’s Exempt Operations Program, which regulates charities.
While Laureate did disclose the $16.5 million payment to Bill Clinton in its S-1 filing with the Securities and Exchange Commission (SEC), company officials said nothing about either the IRS referral or congressional concerns. The SEC requires firms planning IPOs to disclose all potential “risk factors” to investors.
Laureate is the biggest for-profit educational system in the country. As a candidate, Hillary Clinton scorned for-profit universities and the Obama administration forced several for-profit educational companies out of business.
Obama said for-profit schools exploited low-income students who were left with heavy debt and a near-useless degrees — yet both Clintons energetically supported Laureate.
Companies have broad discretion on disclosing liabilities, but Laura Anthony, founding partner of Legal and Compliance, Inc., a corporate securities and business transaction firm, told TheDCNF that failure to disclose problems can expose a company to future legal and market risks.
“If there is an omission of a risk factor, then there is exposure to the company and its agents,” Anthony said. “I can’t foresee what impact, if any, it’s going to have on stock price, which is driven by emotion as much as by anything else.”
But Anthony explained, “this information would have a detrimental impact on the company and the stock price … If that was my client, I would tell them it should be disclosed.”
Under the Securities Act of 1933, if there is a material misrepresentation or an omission of facts in an S-1, injured investors can sue a company and even the underwriters.
“An S-1 is a document allows an issuer to reduce its own risks by making the fullest possible disclosures about a particular adverse development going forward,” Wall Street analyst Charles Ortel told TheDCNF. “So, it’s in the interest of the issuer to disclose as much as possible of any potential risk.”
Ortel said Laureate’s relationship with the Clintons “reeks of the potential for ‘pay to play,’ and corruption and influence peddling. How do you defend paying Bill Clinton $16.5 million for part-time work?”
The Laureate IPO underwriters include Morgan Stanley, Credit Suisse, Citigroup, Goldman Sachs, Barclays, JP Morgan and BMO Capital Markets, according to its S-1. Laureate’s principal owners — who obtained the firm in 2007 through a leveraged buyout led by KKR — include such figures as billionaire liberal activist George Soros and Microsoft’s Paul Allen.
Steven A. Cohen, another member of the original investor group, reached a settlement with the SEC for insider trading in January 2016, which bars him from managing money for outside investors until 2018.
“Governance is an issue because basically the company is dominated by the LBO firms,” Kathleen Smith told TheDCNF. Smith is a manager of IPO Exchange Traded Funds at the Greenwich, Conn.-based Renaissance Capital.
“On its 10-person board, the LBO investors have 7 seats. And most importantly of all, these insiders are going to have 98 percent voting control. This is not a friendly setup,” Smith said.
Laureate is also “still highly leveraged,” she added.
KKR and similar firms assumed $1.7 billion in debt when it privately purchased Laureate in 2007. That debt will not be eliminated by the $500 million that Laureate officials hope to raise in Wednesday’s IPO.
Laureate has suffered massive losses in recent years, reporting $85 million in losses in 2013, $162 million in 2014 and $315 million in 2015, according to its S-1.
The company also reported material weaknesses related to inadequate controls over key financial reports, and that it is facing a corruption investigation in Turkey.
Laureate has enlisted the help of other high-profile political figures. It added former World Bank president Robert Zoellick as an independent director to its board in 2013. Also in 2013, the International Finance Corporation, a World Bank subsidiary, invested $150 million in Laureate, increasing to $200 million, according to the S-1.
Laureate also recruited former Mexican President Ernesto Zedillo, the last Mexican head of state from the Institutional Revolutionary Party, which governed the country as a monopoly party for 71 years.
TheDCNF contacted both Laureate Education and the IRS. Neither responded to our request for comment.
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