Monday, September 30, 2013

My response to Truth Matters: A look at the “Tilson Tirade” on Online Learning

Jeanne Allen, head of the Center for Education Reform, posted an article today (see below) entitled Truth Matters: A look at the "Tilson Tirade" on Online Learning, in which she responds to my presentation on K12.


I've known Jeanne for many years, we have a very friendly relationship, and I truly admire the difficult work she's done in the trenches over many years fighting for better schools for kids and parents – which is why I'm puzzled that she can't see how K12 (and most of the rest of its industry) have franticly pursued growth at all costs, resulting in an educational catastrophe for the significant majority of kids enrolled in online schools.


But it's OK for we reformers to disagree on certain issues. I welcome a healthy debate, so in that spirit, below is an open letter to Jeanne in response to her article:


Dear Jeanne,


Nearly two weeks after going public with my analysis and conclusions about K12, of the dozens of people I heard from, not a single person had anything positive to say about K12. In fact, it appears that I was very late in discovering what many other people had already figured out: that, if anything, K12 is even worse than I had described (hard as it is to imagine).


So it's great to finally hear someone try to rebut my arguments – after all, if I'm wrong, I want to know about it. But after reading your article carefully a number of times, it hasn't introduced even the tiniest bit of doubt in my mind that my conclusions are correct that K12 has run amok, is engaging in a variety of bad acts, and is running schools with the worst academic outcomes I've seen in my 24 years of involvement with this movement.


The argument that underlies most of your 10 points is that I cherry-picked information from a handful of disgruntled and/or biased former employees and researchers to draw false conclusions that are otherwise unsupported by the data. The problem with this argument is that, by your own admission, your article is "only a brief expose of what's wrong with the first 5 pages of text" in my presentation. But my presentation is 123 pages long! The first five pages are only the introduction, which is why the title of page 8 says "Summary of Why I'm Short K12's Stock."


If the totality of my presentation were just the first five pages, I'd agree that you have a point. Yes, one or two former employees might be disgruntled. Yes, one or two researchers might biased against K12. Yes, the data in one or two states might be flawed. But I present over 100 pages of interviews, investigative journalism reports, research studies, state data, etc. – all of which say the exact same thing. It's not as if 60% of the data points are against K12 and 40% are in favor – it's more like 99% vs. 1%. It reminds me of the old saying: "If it looks like a duck, walks like a duck, and quacks like a duck, it's probably a duck."


You would be doing me a great favor if you would, in your promised subsequent article(s), move beyond attacking me and my numerous sources, and present actual data and evidence that rebuts my arguments. Please show me – I really want to know – any evidence that the students at even one of K12's 54 schools are doing well. To be clear, I'm not talking about a few anecdotes – I acknowledge in my presentation that "a few students at even the worst online schools are doing well." Rather, show me evidence that rebuts what one person I spoke with told me: "To be sure, [online schools] work well for some students, but I'd guess only 15% of the ones cyber charters are currently serving."


I want to respond specifically to three things you wrote in your article:


1) You wrote:


I'll limit this to educational facts and data – and let the investing community delve deeper into ethical questions about someone who attempts to malign a company while shorting that company's stock.


First, I'm scratching my head at how you use the words "facts" and "data" in your article multiple times, yet I couldn't find a single fact or data in your entire article. Not one! All you did was cast aspersions on my facts and data.


Second, your raising the issue of "ethical questions" remind me of two old sayings: "Don't throw stones when you live in a glass house" and "Whose bread I eat, his song I sing."


I've openly disclosed my short position in K12 at every opportunity and made it clear that my funds and I will profit if K12's stock goes down.


Now I call on you to be similarly transparent about your financial interest in this debate. Specifically, how much money has the Center for Education Reform taken from K12, Connections Education (the second-largest online charter company), and other online charter organizations over, say, the last five or ten years? My understanding is that they have generously supported your organization.


I know for sure that both K12 and Connections will be featured prominently at CER's 20th Anniversary Celebration next week, CER at 20 (the press release about the gala confirms that "Current sponsors of CER at 20 include Charter Schools USA, K12, Inc., Connections Education…"). In addition, two of the honorees at the gala are William Bennett, the first Chairman of K12, and Barbara Dreyer, the Co-founder and CEO of Connections Education.


To be clear, I am not criticizing you for accepting their support. But it is highly ironic to raise "ethical questions" about my conflict of interest without disclosing your own.


2) You write that I am "opposed to all online schools." Most folks don't understand the nuances between online/cyber/virtual schools, hybrid schools, blended learning, and online learning (confusion that K12 takes full advantage of), so I amended this paragraph on page 6 of my presentation to read:


Note that my critique is specifically of K12, not all online charter schools, for-profit charter schools or blended learning schools. While I think the online charter school sector has, overall, run amok, there are a small number of good online schools – and a few students at even the worst online schools are doing well.


3) Lastly, in point #9, you write:


Finally Whitney gets to academic achievement, which I will explore further in my next edition. However, here are a few notes to chew on.


Once again we look at NEPC for data, not any credible source.


I find it curious that in a five-single-spaced-page article you completely duck the single most important issue for any school operator: the academic achievement of students. In contrast, I address this issue in great depth across 25 pages of my presentation (pages 34-60), of which NEPC data is only a small part. I eagerly await your "next edition."


Then you write:


Whitney slams K12 for not permitting outside evaluators to look at their data. Where are his outside evaluators?


What do you mean, where are my outside evaluators? Even if K12 were willing to share its data (which it's not), why would it be my responsibility to hire outside evaluators? In light of the criticisms from all directions of K12's dismal academic results, you'd think the company – if it even had mediocre data – would be eager to put these issues to rest by hiring credible independent evaluators, especially since K12 now admits that the Scantron results, which it's been trumpeting for years, can't be relied on (see page 39 of my presentation).


Finally, you turn to student churn and write:


To be sure, K12 and others do not retain kids well in the first couple of years. There is enormous churn, and some of that might be due to the organization running the school, and some might be due to the kind of situation each student brings and leaves with.  We need to know more… and we simply don't. We need more data, which would have been a noble use of Whitney's bully pulpit.


But the lack of data doesn't stop Whitney from accusing K12 of fraud.


My response is three-fold. First, to your comment that calling for more data "would have been a noble use of Whitney's bully pulpit," I point out on page 62 of my presentation that CEO Ron Packard said: "we haven't chosen to" disclose churn rates to investors. In fact, K12 is so loath to release the data it has on student churn that it's defied two letters from the SEC demanding that it do so.


Second, while you assert that there's a "lack of data," in reality there's quite a bit of data showing shockingly high student churn, which I cover in pages 62-65 of my presentation.


Third, I find it interesting that you chose to use the word "fraud" because it doesn't appear anywhere in my presentation (the closest I come is to ask Is K12 Defrauding States Via Lax Enrollment Policies? in the title of pages 31-33). A Freudian slip?


Sincerely yours,




From the Desk of
Jeanne Allen

Truth Matters
A look at the "Tilson Tirade" on Online Learning.
Whitney Tilson is a self-described reform warrior who from his hedge fund perch disseminates information and opinions – as well as a variety of travel logs about his own escapades around the world – with a wide and growing group of people that just like being "in the know." It's often entertaining, sometimes informative, and in general, everyone gets a kick out of reading about themselves or something Whitney likes that they did.
Obviously no one likes reading about something they did Whitney doesn't like. He doesn't mince words. Sometimes when he criticizes he's right. Often, he's wrong. One such example is his tirade against online learning in general, and K12, Inc. in specific. 
Presenting to his email audience his 100-page plus Power Point to the Value Investing Congress "proving" that K12 and online learning sucks, Whitney takes the reader through a series of arguments that he is 100% convinced are right.  The fact that he presented to such an esteemed body is worrisome for anyone who thinks he is wrong. Upon further scrutiny, it turns out the Value Investing Congress, while big, was actually founded by Whitney himself, so being invited to present there isn't like getting invited to the Clinton Global Initiative! 
But anyone who makes statements like "online education is a cancer" requires more scrutiny, don't you think? To that end, here is just a brief expose of what's wrong with the first 5 pages of text in Tilson's Tirade. (I'll limit this to educational facts and data – and let the investing community delve deeper into ethical questions about someone who attempts to malign a company while shorting that company's stock.)
THE FIRST TEN FLAWS in An Analysis of K12 and Why It Is My Largest Short Position, By Whitney Tilson, Kase Capital
#1  —Whitney says he is opposed to all online schools:
"The schools I'm talking about are ones in which students are supposedly learning by sitting at home all day in front of a computer, interacting with teachers almost exclusively online."
Supposedly? I don't know of many people who make statements about kids "supposedly" sitting in front of computers all day that actually understand how online learning works.  Yes, teachers deliver instruction via the computer. Some are live, many are posted and self-paced.  The best instruction in the world can be online and self-paced. The worst instruction in the world can be online and self-paced.  But this paints the picture that the child is glued to a teacher behind a computer screen when in actuality, the experience can be much richer than that. Regardless, Whitney provides no evidence of this "fact."
#2 — In these next excerpts, the writer makes inferences and assumptions about who can benefit and why – and we're asked to think about his logic, his reason, as if this kind of critique is new – and factual…
"While online schools can be an excellent option for certain students, it's a very small number – typically those who have a high degree of self-motivation and strong parental commitment. It's sort of obvious if you think about it. Do you think you would have learned more during your K-12 educational experience if you'd sat at home in front of a computer, or gone to school and had daily face-to-face interaction with teachers?"
#3  — The next sloppy assertion comes when he quotes a Brookings Institution researcher, Tom Loveless, who has done some good work in the past, and some rather mediocre work. He provides this opinion, which Whitney uses as evidence:
"We're talking about high schoolers and young kids. The idea that parents go to work and leave their kids in front of a computer—it's absurd."
Just a few sentences earlier Whitney acknowledges that virtual or online schools actually require a coach to be with the student every day. The notion that a parent or grandparent, or hired adult might be working with kids is never explored in this report.
#4  — An interview with the former head of the Ohio Virtual School provides much fodder for assertions about K12. Whitney argues that it is this interview that sent him over the edge and on his new crusade.  The former head of this K12-managed charter school says the company was all about making money and growth and didn't care about student achievement. Shocking that a former employee would say something like that.  How many of us have had former employees that loved the job when they had it, but upon leaving – suddenly discovered all sorts of things they really found fault with.  Most professionals would never discuss a personnel matter with people externally, so we really do not know the story behind why his particularly school head left and why he feels compelled to damn his former employer. Maybe he is right to condemn, may he's not, but his opinions about his former employer does not a case against online learning make.
#5 — A Teachers College researcher and professor is given lots of credibility in asserting that K12 never cared about kids.  Never mind that Teachers College and its various sub-organizations and researchers have consistently stood against any education reforms that put parents and students in the driver's seat! He told Whitney that
"The virtual providers like K12 are now mostly going after at-risk kids, kids on their last straw – if they didn't sign up, many would be dropouts or go back to juvenile court."
So of course, it fit the profile, and Whitney took it to the bank.
This professor goes on to say:
"K12 and Packard use this as an advertisement, saying they're doing noble things and wondering why they're being criticized. It's almost comical. It's so misleading and conniving."
This is a teacher of teachers? Putting out opinion as fact? Unbelievable.
#6  — One person is quoted as saying that online schools do lots of advertising and enroll kids who don't succeed just for the money. Wow, now that's convincing.
#7  — Next Whitney is quoting someone criticizing K12 on "Glassdoor," a website that permits people to post anonymously about a company without any need for verification.  It's like a Trip Advisor or any number of rating systems that anyone can participate in. We're supposed to give such a quote credibility – even when there are dozens of positive comments about K12 on the same page linked to his damning discovery.
Whitney tells us that he believes it a "catastrophe" to permit low income students to be enrolled in an online school.  Really? It's a catastrophe for a child whose schools and environment has not served him well and is disadvantaged and has any number of good reasons to do his schooling outside of a traditional classroom?  It sounds like Whitney doesn't believe that what's good for higher income students isn't good for lower income students, even if it's a choice their parents make.  Whether he's right or wrong is irrelevant – he has no data that supports his allegations – again. 
And we're only on page 4.
#8 — Low spending on teachers is demonstrated by a bar graph the result of data supplied by the National Education Policy Center (NEPC). Hello?? Do you know who these people are?  The NEPC is run by individuals with degrees, masquerading as researchers, who are funded by unions and have since 1994 been involved in "research" that criticizes and finds fault with ANY charter school efforts, companies that work in charter schools and anything without unions at their core. Alex Molnar, Gary Miron and others on the NEPC team have never been credible, and never trusted by anyone left, right or center who really cares about research. They make up what I once called, more than 10 years ago – the Don't Worry, Be Happy crowd – who believe US education has never been better and any attempts to change it are simply self-serving.
That said, even if the data NEPC's chart shows about the level of teacher spending were right, there's no connection between the spending on teachers and student achievement. We hear from Whitney about ONE disgruntled teacher that says EVERY teacher had her same experience. Where's the rigor on this? Where is "EVERY" teacher saying this? Shouldn't be too hard to find them all, right?
Would you trust a survey in which ONE person said they liked something? Would you not go to a restaurant because ONE person was unhappy? This is the problem with education writ large today. We are so quick to buy into someone's "data' simply because it sounds so darn convincing
#9 — Finally Whitney gets to academic achievement, which I will explore further in my next edition. However, here are a few notes to chew on.
Once again we look at NEPC for data, not any credible source. Whitney slams K12 for not permitting outside evaluators to look at their data. Where are his outside evaluators?
To be sure, K12 and others do not retain kids well in the first couple of years. There is enormous churn, and some of that might be due to the organization running the school, and some might be due to the kind of situation each student brings and leaves with.  We need to know more… and we simply don't. We need more data, which would have been a noble use of Whitney's bully pulpit.
But the lack of data doesn't stop Whitney from accusing K12 of fraud.
#10 — Finally - for now - he connects us to state reports in Colorado and Pennsylvania, where he presents "studies" from newspapers that show student achievement low and dollars potentially being misspent.
We are given a link to an article about Colorado with some state data about online schools and many comments from reformers commending the reporters for their investigation.  There's information about schools, and analysis of what that might mean, but no actual analysis of student performance over time or SES data, and because it's aggregate data, we don't know who goes to that school and who succeeds, or not.  It's general, it's not a great picture, but we simply don't know what that means for the kids the schools serve.  It might be bad, very bad, as Whitney suggests, or it might be good, for some. I've looked at it and I'm an expert and I know in order to make a conclusion I'd have to do a lot more work and get more data to understand if kids achieve or not.
I presume state officials have done this.  As most people know, state officials are on the hot seat for making laws work for kids.  Many work and have great success with chartering and ensuring quality outcomes for kids.  For whatever reason, officials in Colorado -- a state that has mounds of good data about schools -- have not shut down its virtual schools, though the record shows that they have scrutinized and intervened to improve many.
A New York Times article is cited as evidence that online schools in PA are very bad and yet again, there is no objective school-by-school data upon which this is based so the conclusions belong to the reporter and to Whitney, not to any comprehensive, proper evaluation. 

But Whitney is willing to make pronouncements, regardless.  He is a friend to good causes and children's needs, and most of the time to education reform, but this new vendetta against online learning in general for kids, and one particularly company, K12, appears to be lacking in real rigor, and content, and truth.
Aristotle once said that "our duty as philosophers requires us to honour truth above our friends". I'd say our duty as stewards of sound policy require us to honor truth above our friends.
Oftentimes because a person has a big megaphone, they will have an impact on policy regardless of the data they present.  The result is that policy is often made based on someone's opinion, rather than real live success.  Research isn't objective right because it's done by someone who has advanced degrees. It's as flawed as the human mind itself.  We've seen this repeatedly.
The most important thing people of principle can do when reviewing someone's words or comments or research, and not having enough data themselves to make a determination of right or wrong is to stop and ask the questions:

  • Does he have facts and have they been vetted by other people who have no bias in the matter, and no prior knowledge of the issue?
  • Has he interviewed a large enough sample of people to know that it's bad, or is he/she just repeating what has been said that confirms his/her deepest suspicions?
  • Has the person actually been to see and talk to the very people he is calling frauds or worse, those he is saying have been duped?
  • Has the person actually seen the work – the school, the students, the parents, the educators, the actual, raw data — about which he is writing?
  • Does he understand data and how it is created?

The Internet is a marvelous thing. But it's also produced a parade of acts that entertain and get applauded, often for simply being part of the show. Just as a walk through Barnes & Noble demonstrates that not all books are more than someone's folly, a stroll over thousands of Google results daily demonstrates that just because it lives doesn't mean it should. Sadly, the same problem we work to solve in the schools is a problem outside: namely, the lack of real rigor and content when it comes to learning, using and analyzing information.
One example is Diane Ravitch. A lot of people talk about Diane Ravitch. Some consider her courageous for standing up to the people whose work, research and causes she once advanced, wrote about, studied and celebrated.  She liked standards once, and now she just wants her grandkids to have fun and meaning (because I guess standards are just not fun and not meaningful and testing to find out if they have met standards kills childhood).  Diane liked choice once upon a time because she saw the inadequacies in schools and the fact that a student's lifetime could be spent in a bad school with no escape. Now she rallies her growing army of ignorance against anyone who believes in freedom and choice for the poor as social justice. Why she does that is the subject of much debate. I actually think I have the root cause, and her communications to me over the years will help me shape my thoughts I will share in the not-too-distant future (not because I think Diane Ravitch, the person or critic, needs more attention, but because the attention she has created against real educational opportunity for children is morally repugnant, harmful to real people who don't live in an upscale Brooklyn Heights apartment among people who only agree with her, and truly unfounded and inaccurate).
I don't have the luxury of stopping everything to read and analyze Whitney Tilson's documents or Diane Ravitch's hundreds of pages of commentary and rants against education reformers.  But in the pursuit of truth, I can do a few pages at a time.  We all can. 



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Gregg Fleisher, Chief Academic Officer of the National Math and Science Initiative, on K12

Re. K12, my friend Gregg Fleisher (, Chief Academic Officer of the National Math and Science Initiative, wrote:


Actually appreciated the you made public that you shorted the stock. I don’t think anyone who knows you at all, or even people who don’t know you and just read your blog would think that your passionate disapproval for K12 is driven by personal financial gain.


We’ve done a lot of work reviewing and have a lot of data on online education programs. Some do have some decent student outcomes for students who are not traditionally underrepresented, but only when supplemented with other materials, or used as a supplement. But most don’t show significant student outcomes at all.


More importantly, we have not seen any online learning used as a standalone that has had student outcomes for traditionally underrepresented students. Some online learning does work for traditionally underrepresented students with the support of a teacher if it’s used as a supplement. For example, some great schools that serve traditionally underrepresented students use Dreambox Learning for their youngest students. It’s great math software, but to get the desired student outcomes, one can’t just turn it over to a student without proper, immediate guidance to make sure the student stays on track. 


Everyone knows that online education is here to stay. It can be done right for traditionally underrepresented students, but only with the guidance of a teacher. We’ve done a lot of research on this and believe we know the market. Nobody has made us rethink our stance yet.  


If anyone reading your blog has data that shows online learning works for traditionally underrepresented students, especially in math and science, we’d love to check them out and potentially partner with them.

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K12's Insight Schools

Re. K12 targeting at-risk students, despite how inappropriate online schools are for nearly all such students, I added this slide to my presentation:


I Suspect K12 Is Setting Up Insight Schools Primarily to Escape Scrutiny


      K12 acquired and is now expanding its Insight schools that "tend to focus on academically at- risk students" (most of whom are low-income minorities)

      There is almost nothing about Insight on K12’s web site or in its 10K, but CEO Ron Packard said the following on the most recent investor call:

   The Insight strategy is moving along nicely, and we're excited to be opening the Insight in Ohio. And we're putting a lot of human brain capital into developing the right model for academically at-risk kids.

   And the beautiful thing about the Insight model and the strategy is we want to have schools whose entire culture, from the teachers to administration to the curriculum, is built around taking children who are behind grade level and bring them up to grade level, taking students who are coming to high school credit deficient, who would likely be high school dropouts, and graduating them from high school. So it's a very different culture that you would have than what we traditionally had originally in our virtual academy.

   So the idea is absolutely to have one school of each type in every single state we operate in and make sure that students find the right option for them.

      I suspect that what's really going on here is that K12 is engaging in "virtual bussing" of students out of its existing schools primarily to escape the rapidly multiplying government inquiries and punitive measures resulting from its abysmal academic results

      Though Packard claims that Insight schools have “a very different culture,” my preliminary inquiries indicate that the schools use a very similar curriculum and often the same teachers and infrastructure

      In other words, it appears to be just a shell game

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Sunday, September 29, 2013

The Toll of Guns on Children

What a heartbreaking front-page story in today’s NY Times:

Children shot accidentally — usually by other children — are collateral casualties of the accessibility of guns in America, their deaths all the more devastating for being eminently preventable.

They die in the households of police officers and drug dealers, in broken homes and close-knit families, on rural farms and in city apartments. Some adults whose guns were used had tried to store them safely; others were grossly negligent. Still others pulled the trigger themselves, accidentally fracturing their own families while cleaning a pistol or hunting.

And there are far more of these innocent victims than official records show.

A New York Times review of hundreds of child firearm deaths found that accidental shootings occurred roughly twice as often as the records indicate, because of idiosyncrasies in how such deaths are classified by the authorities. The killings of Lucas, Cassie and Alex, for instance, were not recorded as accidents. Nor were more than half of the 259 accidental firearm deaths of children under age 15 identified by The Times in eight states where records were available.

As a result, scores of accidental killings are not reflected in the official statistics that have framed the debate over how to protect children from guns.

This is journalism at its finest – original research that can influence public policy (and maybe even parental behavior) to save lives. Mark my words – it will win a Pulitzer.

This mom nails it:

“There are no accidents,” Ms. Sandoval said. “There are simply irresponsible, stubborn, cowardly adults unwilling to stand up against the gun lobby and those who support it.”

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My conflict of interest on K12

I’ve had many conversations with various folks about K12 since I went public last week with my presentation about it (which I continue to update regularly – the latest version is always posted at:; also, the article I published is posted here).


Two of my friends wrote the following: “You have an ineradicable conflict of interest on this one.” And “I think you lost the moral high ground when you shorted the stock. I wish you had stuck to your role as a reformer on this one.”


I’m glad they told me this because I’m sure many others have similar feelings and I’d like to address them.


While I do much more investing on the long side (i.e., buying stocks in the hopes that they go up), I’ve also been shorting stocks (i.e., betting that they will go down) in the funds I manage for more than a decade.


I’m well aware of the widespread perception that it’s vaguely nefarious and un-American to bet against a company – and even worse to publicly speak out against a company. If you stop and think about it for a moment, however, you’ll quickly realize how foolish this viewpoint is. Healthy markets need a vigorous debate about the level of the market overall as well as the valuation and prospects of specific sectors and companies. Imagine the bubbles that would form if everyone only said and thought positive, bullish things. In fact, you don’t have to imagine this at all: just look at two of the biggest bubbles and busts in history just in the past 15 years – among internet stocks and the housing/debt bubble – and the horrific consequences. I would argue that had there been more skeptics (like me) who were warning – it turns out, 100% accurately – about these bubbles, they wouldn’t have grown as large and the aftermath wouldn’t have been so painful.


So now let’s turn to: a) my short position in K12’s stock in the funds I manage in my day job as a hedge fund manager and; b) my public criticism of the company, in part using my platform as an ed reformer (my night job). Is my friend right that I have “an ineradicable conflict of interest”? Absolutely! But isn’t it funny how nobody ever points out that the management and board members of K12, who own tens of millions of dollars of K12 stock and are regularly granted copious amount of stock options, have a conflict of interest as well?


In fact, their conflict of interest is exponentially larger than mine. They stand to reap millions of dollars if the stock goes up – far more than I would gain if the stock goes down. And this is only one of dozens of investments in my funds (while it’s my biggest short, it’s only a bit over a 3% position), so whether K12’s stock continues to rise or collapses (as I expect), it is not going to have a meaningful impact on my business or life. In contrast, if K12 is, to quote Jeff Shaw, the former head of K12’s Ohio Virtual Academy, “a house of cards that is going to collapse,” this would have an enormous financial impact on the senior executives at the company, could cost them their jobs, lead to them being investigated, etc. So let’s be clear: they have far more incentive to try to put lipstick on this pig than I do to point out that it is, in fact, a pig.


But what about my other friend’s comment that I “lost the moral high ground” when I shorted the stock and that I should have “stuck to [my] role as a reformer”? To answer this question, allow me to give you the timeline. I first shorted K12’s stock more than 16 months ago in May 2012, periodically added to the position over the next year, and haven’t traded in it at all since May of this year. As with most of my short positions, I didn’t disclose or discuss my K12 short position until two weeks ago.


So what changed and led me to go public? The answer is simple: I spoke for the first time with a former K12 employee (Jeff Shaw) two weeks ago and since then have spoken with a number of other former employees and others who know the company well. These conversations, in turn, led me to do even deeper research into the company’s business practices, academic results, etc.


I struggle for words to describe my feelings about what I’ve found. Horrified doesn’t begin to express it. I already believed that K12 was doing some bad things – that’s why I was short the stock – but when I really started digging, I discovered that things were far worse than I’d realized: the student churn, the way the company increasingly targets the most at-risk kids even though it knows that nearly every one of them is sure to fail, the likely bilking of states via enrollment fraud, the way it effectively controls many of the nonprofits that have been granted charters and siphons all of the profits out of them, the buying of politicians, etc.


But worst of all are the academic results. I’ve never seen anything like it. The numbers at every K12 school I’ve seen make the old Locke HS in LA – once the most notorious high school in America before Green Dot took it over – look like Stuyvesant! Look at the data from Tennessee in my presentation (pages 50-51), which shows that the students at the K12 school had less academic growth by far than all 1,300 other elementary and middle schools in the state).


Or consider Ohio, where the state recently reported that the six biggest cyber schools in the state all got Fs on their state progress reports, with OHVA doing worst of all. The state counts a progress score of -2 as a complete failure for a school – and OHVA’s score was -27!


Having become convinced that K12 has run amok and is doing real educational damage to tens of thousands children every year – and giving our entire movement a huge black eye – what was I supposed to do? Remain quiet? Ha! Cover my position before going public so people wouldn’t criticize me for my conflict of interest? What would my investors think of that? I did a ton of research, made an investment based on my conclusions from that research, and then I’m supposed to get rid of that investment because someone might criticize me? Ha!


To be clear: I am not bearish on K12 because I am short the stock. Rather, I am short the stock because I am bearish on K12. Anyone who knows me knows that I’d be saying and doing exactly the same things whether or not I had any position in the stock. But I know I’ll be criticized nevertheless. So be it. I’m used to taking plenty of slings and arrows…

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Cyber schools flunk, but tax money keeps flowing

Stephanie Simon of Politico wrote a two-part series on K12 this week that is truly an outstanding piece of journalism. Most stunningly, she got K12 Executive Chairman Nathaniel Davis to admit that the company’s Scantron test results, which K12 peddles to shareholders, politicians, regulators, etc., can’t be relied on:

The company boasts that Scantron results show its students outpace the national norm for yearly growth in reading and match it in math. When the Securities and Exchange Commission questioned K12 about its academic results earlier this year, K12 again pointed to the Scantron data as proof of its success.

Yet those data are “not as accurate as they could be,” K12 Executive Chairman Nathaniel Davis acknowledged in an interview.

The Scantron tests are optional for K12 students, and about 30 percent decline to take them. That means the company has been comparing a self-selected group of K12 students to the national norm, which isn’t appropriate, Davis said.

The company, he said, needs to find “a more honest assessment” of student progress.

Simon also got Susan Patrick, president of the International Association for K-12 Online Learning, an industry trade group, to admit:

“Unless we address these quality issues that have emerged quite profoundly,” the poor performance of cyber schools will “put the entire industry of education innovation at risk. We need to have an honest discussion about this.”

She also documents how K12 and other online charters spend big money to buy off politicians:

Yet when researchers from the National Education Policy Center at the University of Colorado Boulder evaluated academic achievement at every one of the more than 300 online schools in the U.S., they found “serious and systemic” problems throughout the industry. There has been little effort by legislators to rein them in, said Gary Miron, a co-author of the report. The NEPC receives funding from unions that generally oppose online schools, but even strong proponents of digital learning say there’s been a disturbing lack of movement to close failing cyber schools.

“There has not been the political will to do so,” said John Bailey, executive director of Digital Learning Now!, an advocacy group.

Critics say it’s no mystery why the political will to close virtual schools is weak. Parents whose kids do thrive in the schools stage rallies and email blitzes when they perceive a threat. The online industry also works very effectively to secure political support.

K12, for instance, last year contracted with 45 lobbyists in state capitols across the country and donated $625,000 to politicians of both parties, ballot initiatives and political associations such as the Republican Governors Association, according to records compiled by the National Institute on Money in State Politics and the Center for Responsive Politics.

K12 spokesman Jeff Kwitowski calls the donation levels “extremely small” compared with the huge sums spent by other advocacy groups, such as teachers unions. Last year alone, the National Education Association and its affiliates spent tens of millions on political campaigns.

Among individual donors backing cyber schools, few have been as generous as William Lager, who founded Ohio’s largest virtual school, ECOT — and who runs both the company that manages the school and the company that sells the school its online curriculum.

Lager has contributed $387,000 to Republican politicians and political organizing committees just in the past year and a half, a period in which the state began to calculate academic growth for all students in cyber schools — and found ECOT sorely lacking. On the most recent state report card, ECOT got an F on every measure except one, for which it earned a D.


Cyber schools flunk, but tax money keeps flowing

By STEPHANIE SIMON | Politico, 9/25/13 11:14 PM EDT

Taxpayers send nearly $2 billion a year to cyber schools that let students from kindergarten through 12th grade receive a free public education entirely online.

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From China to Chicago, K12 Inc. markets more than virtual schools

Stephanie Simon’s second article highlights how K12 is branching out, finding new ways to serve (or bilk) students (and, often, taxpayers). The new Insight schools are particular appalling:

The bipartisan education reform movement sweeping the nation calls for opening up public schools to free-market competition. That has meant sending billions of tax dollars to private, for-profit companies to educate kids.

But the companies do more than pay teachers, develop curriculum and buy supplies with all that revenue.

They use it as a launchpad for new products, new brands and new markets.

Consider K12 Inc., the nation’s largest private operator of public schools. It runs 54 online schools in 33 states and Washington, D.C. But it also runs a tutoring center in the United Arab Emirates. It sells courses to the Cook County correctional system in Chicago. It’s making a big push to get its new online curriculum for toddlers into Head Start preschools for low-income kids.

…Websites for Insight Schools, a network of tuition-free, online public schools, serve up a five-question quiz, “Is an online high school right for you?”

Respond that you don’t care about earning a high-school diploma and don’t like studying at home and you’re still told: “Based on your answers, Insight Schools may be a good fit for you.” The sites also feature video testimony from two students who emphasize that studying at Insight leaves them with ample free time for video games, music and hanging out with friends.

Insight is a division of K12 Inc. and represents a key element of the company’s diversification strategy: Developing new brands of schools in addition to its trademark Virtual Academies.

K12 now runs nine Insight Schools, which use a less rigorous curriculum, offer more intensive tutoring and are meant to appeal to struggling or indifferent students. It also manages several Flex Academies, which bring students to a brick-and-mortar school building to take some of their classes with live teachers, in addition to working through online lessons in cubicles. K12 is also testing online Preparatory Academies, targeted at college-bound students.

The multiple brands let K12 attract a broad range of students. They may also help the company weather controversy over its poor test scores.

Nathaniel Davis, K12’s executive chairman, said he would like to get some Insight schools certified as “alternative” campuses for at-risk kids. Such schools often get more leeway to continue operating despite low test scores. And states often fund education for at-risk students long beyond the traditional high school years, so if K12 can keep those students enrolled into their early 20s, it can keep collecting tax dollars to teach them, said Allison Cleveland, an executive vice president at K12.

As for the Flex Academies, Davis said they’re not as profitable for K12 but they generally post stronger test scores, which tend to impress politicians and regulators — who may then be more favorably inclined to approve other online models, including K12’s more lucrative Virtual Academies. “That’s one reason to do it,” he said.


From China to Chicago, K12 Inc. markets more than virtual schools

By STEPHANIE SIMON | Politico, 9/27/13 5:09 AM EDT

The bipartisan education reform movement sweeping the nation calls for opening up public schools to free-market competition. That has meant sending billions of tax dollars to private, for-profit companies to educate kids.

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Friday, September 27, 2013

We need to quickly regain the moral high ground and cut thie online charter school cancer out of our movement

QUADRUPLE STOP THE PRESSES!!! (I think I’ve never gone beyond triple, so I’m breaking new ground!)


I just posted an article on Seeking Alpha, An Analysis of K12 and Why It Is My Largest Short Position (posted at:, which is a follow-up to my presentation that I sent around last week (an updated version of it is posted at; I’ve added more than a dozen slides to what I presented last Tuesday, with lots of interesting new material).


As I hoped, by publicizing my analysis and critique of K12, a number of people who know the company well have contacted me. Suffice it to say that when I gave my presentation last Tuesday, I was 99% certain that my assessment of K12 was correct, but after hearing from them, I’m now 100% certain.


Their overall feedback can be summarized as:


1)      Everything in my presentation is correct, but:


2)      K12’s bad acts and the harm it’s doing to students are even worse than I documented; and


3)      K12 and its online peers are able to continue their bad acts thanks in part to education reformers (myself included), who have remained silent as the online charter school sector has completely run amok, resulting in an ongoing (and rapidly growing) educational catastrophe for hundreds of thousands of kids every year (K12 alone had average student enrollments of 117,563 as of June 30th, making it more than twice the size of KIPP).


(Note that my critique is specifically of K12, not all online charter schools, for-profit charter schools or blended learning schools. While I think the online charter school sector has, overall, run amok, there are a small number of good online schools – and a few students at even the worst online schools are doing well.)


Here are quotes from people I’ve spoken with just this week:


·         "I met with Ron Packard years ago and could tell his motivations had little to do with kids, everything to do with manipulating state regulation to protect his interests. I started digging into the results, the business model, the organization, and discovered much of what you lay out in detail in your presentation. As I said, they are terrible and epitomize everything that we should be working against in the ed reform movement."


·         “You’re totally right about K12 and, on top of it, they lie all the time. It’s naïve to trust anything they say. So I’m not sure if their schools can be fixed, at least under the company’s current leadership. There’s no such thing as a successful online school in the entire country. To be sure, it works well for some students, but I’d guess only 15% of the ones cyber charters are currently serving.”


·         "I know the company very well and your presentation rings true. They have a well-deserved terrible reputation."


I’m embarrassed by my own ignorance and silence on this issue, so I’m determined to make up for this by using my bully pulpit to get the word out to my fellow reformers that we need to immediately end our collective silence for two reasons:


1)      It is morally unconscionable and rank hypocrisy to say we care about kids and fight for every child to get a high-quality education – yet fail to recognize and act when bad actors in our movement lure more and more kids into schools to which they are completely ill-suited, where students are almost certain to fail and suffer a major educational setback; and


2)      K12 and its ilk are giving the entire reform movement a bad name. They have cleverly positioned themselves as champions of charter schools, parental choice, and blended learning, with the result that their terrible schools and various bad acts give our enemies endless fodder to attack us and drag us all down.


Consider Pennsylvania, which has more students (35,000) in online charter schools than any other state. As I show on pages 51-52 of my presentation, the academic results of these schools are dismal. CREDO concluded: "In both reading and math, all 8 cyber schools perform significantly worse than their traditional public school counterparts." 35,000 mostly failing kids is a big number, which rivals some of the biggest districts in the state. Yet do we reformers turn a blind eye to 35,000 failing kids in a regular district? Of course not! So why are we doing so in the online charter schools “district”?


If you favor charter schools, giving parents more choices, and using technology to give kids a better education at a lower cost (as I do), you should be fighting (as I am) to get rid of BAD charter schools, BAD choices for parents, and BAD use of technology to miseducate kids.


So why isn’t this happening? Why have reformers been so silent? Think there are six answers:


1)      Ignorance. I’ve had my finger on the pulse of the education reform movement for more than a decade – but, as I’ve come to realize, not the entire movement. I hang out with the nonprofit/TFA/KIPP types and know very few people in the for-profit ed sector. Among most people like me, online charter schools aren’t even on the radar screen. (This is also perhaps in part due to the fact that the online charter sector was very small until quite recently.)


2)      Genuine belief (mostly rooted in ideology). Many folks love the concept of online charter schools for various reasons: they’re nonunion, aren’t controlled by “The Blob”, are lower cost, further parental choice, and the technology is very cool (the wave of the future!). And K12 is very clever in spinning all negative reports to make it seem like they’re isolated incidents and/or politically motivated. So if you’re predisposed to believe the online charter school story (and don’t look hard at the evidence), it’s easy to believe.


3)      They seem like friends. At first glance, K12 champions the same things we champion (expansion of, more funding for, and less red tape for charter schools, parental choice, blended learning, etc.), plus the unions really hate them, so they must be our friends, right?


4)      Political necessity. We reformers are almost always outmanned, outspent, and outgunned at least 10:1 by the unions and their lobbyists in the school boards, city councils, and state legislatures around the country. So when K12 shows up with a lot of money and an army of lobbyists and offers to join us in our fight for better funding for charters, etc. (and against various poison pills the unions are always trying to get passed), are we really going to say no because the charter school bill we like has a little part of it that allows online charters unchecked growth, little or no accountability, and more funding?


5)      Concern about the movement. K12 has been so clever in wrapping themselves in the major reform issues noted above that many reformers worry that if we attack K12, our enemies will use this to hurt other, good aspects of our movement.


6)      Money. K12 has been very clever in cultivating reformers and reform organizations, offering a lot of money, conference sponsorships, etc. You know the old saying: “Whose bread I eat, his song I sing.” It’s exactly what the teachers unions do to win support from groups like the NAACP.


In my view, taking this money from K12 is blood money. To any of my friends who are working with and/or taking money from K12, let me put it to you this way: if Randi Weingarten offered you a similar amount of money, lobbying support, etc. in exchange for selling out at-risk kids trapped in failing schools, would you take it? Of course not – you’d be outraged that she’d think you were so unprincipled to even dare to make such an offer. So why are you doing exactly this with K12, selling out over 100,000 kids, an increasing number of whom are at-risk, most of whom are getting a worse education than even the worst bricks-and-mortar school???


Folks, better late than never, we need to quickly regain the moral high ground and cut this cancer out of our movement.


Best regards,



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Tuesday, September 17, 2013

My Presentation on K-12

This afternoon at the Value Investing Congress (the investment conference I co-founded) I presented the attached presentation entitled: “An Analysis of K12 (LRN) and Why It Is My Largest Short Position”.

(If you’re interested in investing, the next Congress will be in Las Vegas on April 3-4, 2014 (with my Pre-Congress Workshop on April 2nd). Look here for more info and if want to attend, let me know and I’ll send you our best discount code.)

I know the company and the space well (K12’s primary business is running online charter schools in 33 states and DC), and it’s a VERY high conviction short (meaning the funds I manage will profit if the stock price declines). I think that the company has run amok in many, many ways, inappropriately targeting the most at-risk students, with dismal academic results, off-the-charts student turnover, coming under increasing scrutiny. K12 reminds me of the subprime mortgage lenders and for-profit colleges when they were flying high – and the ending will be similar I believe.

Here’s the summary of why I’m short K12’s stock (page 8 of my presentation):

  •  K12's aggressive student recruitment has led to dismal academic results by students and sky-high dropout rates, in some cases more than 50% annually
    • I wouldn't be short K12 if it were carefully targeting students who were likely to benefit from its schools – typically those who have a high degree of self-motivation and strong parental commitment
      • But K12 is instead doing the opposite; numerous former employees say that K12 accepts any student and actually targets at-risk students, who are least likely to succeed at an online school
      • One former employee said: "K12's recruitment of inner-city and at-risk "last resort" students had another benefit – these students used up less of K12's educational and teaching resources while permitting K12 to collect full funding from the states."
    • Like subprime lending and for-profit colleges, the business makes sense on a small scale but, fueled by lax regulation and easy government money, the sector has run amok
  • There have been so many regulatory issues and accusations of malfeasance that I'm convinced the problems are endemic
    • Enrollment violations, uncertified teachers, conflicted relationships with nonprofit charter holders
  •  I have been looking for years and have not found a single K12 school that is free of scandal and posting even decent (much less good) academic results
  • States (and the IRS) are waking up to what K12 is doing and the company is coming under increased scrutiny, which is beginning to impair K12's growth – and I believe this trend will accelerate
  • Yet the stock, trading at nearly 50x trailing earnings, is priced as if K12 will continue to grow at high rates for the foreseeable future and also improve on its persistently low margins and free cash flow
And lest anyone think I’m opposed to for-profit or inline schools, I write (page 9):
  •  I think an online school can be a great option for some students and families, but an inappropriate and harmful option for others
  •  I am a champion of high-quality charter schools (including online and/or for-profit ones), but I think that low-quality charter schools give the movement a black eye
  • To be clear: I am not bearish on K12 because I am short the stock. Rather, I am short the stock because I am bearish on K12

It’s important to keep in mind that K12 is not at all representative of the charter sector. Approximately 70% of charter schools are nonprofit and K-12’s 117,563 students are only 5.2% of all charter students nationwide.

If you have had any dealings with K12, positive or negative, I’d love to hear about them!

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Ravitch's Reign of Error

I just received in today’s mail Ravitch’s latest screed, Reign of Error: The Hoax of the Privatization Movement and the Danger to America's Public Schools. I already know exactly what it says, but I guess I’m going to have to wade through it anyway – oh, the brain damage… Fortunately, other people are already tearing it to (well-deserved) shreds, so maybe I’ll get lucky and won’t have to invest too much time doing so myself.

However, there is one thing I’m certain that Ravitch and I agree on: K12 and other similar schools. I think the entire sector of for-profit online schools has run amok and is giving the entire charter (and reform movement overall) a bad name.

Here’s a brilliant critique by Kyle Smith in the NY Post this week:

Public schools? They’re fine.

Teachers who can’t be fired? No problem at all.

Our international competitiveness in education? Nothing to worry about.

Too many kids dropping out of high school? It’s a myth. And anyway, some kids are just poor, hence doomed, so what are schools supposed to do about that?

Get ready for the world’s longest excuse note: Diane Ravitch’s new book “Reign of Error: The Hoax of the Privatization Movement and the Danger to Public Schools.” Only this note is from the teachers’ unions (who have paid Ravitch for her flackery) to you.

The dog ate your child’s education.

Ravitch’s book purports to be a point-by-point destruction of the arguments for school reform, (a word she cloaks in scare quotes), choice and competition. She thinks that the local monopoly stranglehold of the average union-run public school is somehow a good thing and that parental choice and competition are bad.

The book veers between argument and rant. Ravitch seems scarcely able to stop sputtering out meaningless and irrelevant buzzwords that she hopes will inspire ill will towards school choice. Again and again — hundreds of times — she tosses out words meant to stir up irrational hatred. I refer to words like “privatization” (which no one is proposing), “entrepreneurs,” “corporations,” “profits” and (most hilariously) “creationism,” which she claims is one of the hidden agendas of school reformists.

Yet school reform and charter schools (which are generally just public schools freed from union red tape) are among the few political solutions floating around that are genuinely bipartisan.

I’m not surprised to see Parent Revolution on the ball, creating a blog to rebut the book:

Dear Colleague,

As many of you are aware, education pundit Dr. Diane Ravitch has written a new book scheduled for public release today, Tuesday, September 17.  The title of the book is 'Reign of Error: The Hoax of the Privatization Movement and the Danger to America's Public Schools.'

Dr. Ravitch will now travel around the country promoting her book and providing her perspective on education reform and public schools in America.  As you can probably gather from the book's title, she strongly opposes reform efforts to make our public education system stronger. 

At Parent Revolution we have, of course, a different perspective to that of Dr. Ravitch.  Where she sees doom and gloom, we see opportunity.  Where she sees deep crisis for the status quo, we see positive change for America's children.

While there are many speaking out for various directions of education reform, Dr. Ravitch uses much of her platform to justify and protect the current broken and low-performing system.  As such, she positions herself as one of the last bulwarks against the rising tide of reform and change. 

As you know, we fundamentally disagree with Dr. Ravitch on many positions she takes.  We believe her work appeals more to a circle-the-wagons tribalism than a genuine endeavor to seek common ground around improving our children's education.

That is why, over the next two weeks, we will be doing a 'deep-dive' into her latest book. We will be analyzing each chapter of the book, summarizing her position, highlighting any inconsistencies, and providing our own perspective.  At the same time, where we do agree with Dr. Ravitch on an issue, we will report that also.

Our daily postings – starting today – will be on our 'Truth in Education Reform'

We hope you will look at our analysis. 

Agree or disagree with Dr. Ravitch, her latest work deserves a thorough analysis.  By doing it this way, we believe the discourse around education reform – and, ultimately the kids -- will be better served.



P.S. Again, the site to find our analysis is

Derrick Everett

In fairness, I want Ravitch to be able to make her case, so for those of you who won’t have the time to read the book, here’s a lengthy excerpt from it that ran in Salon this week:

Of course some schools and districts have very low test scores and low graduation rates, and this has always been true. Most of these schools and districts have two features in common: poverty and high concentrations of racial minorities. The combination of these two factors is associated with low test scores. Children whose parents are poor and have low educational attainment tend to have lower test scores.
Children who are poor receive less medical attention and less nutrition and experience more stress, disruption, and crises in their lives. These factors have an ongoing and profound effect on academic performance.
That is why poor children need even more stability, more support, smaller class sizes, and more attention from their teachers and others in their schools, but often receive far less, due to underfunding.
Unfortunately, many people are unwilling to address the root causes of poor school outcomes, because doing so is either too politically difficult or too costly.
They believe it is faster, simpler, and less expensive to privatize the public schools than do anything substantive to reduce poverty and racial isolation or to provide the nurturing environments and well-rounded education that children from prosperous families receive.
Instead, the privatization movement nonchalantly closes the schools attended by poor children and destabilizes their lives. The privatization agenda excites the interest of edu-entrepreneurs, who see it as a golden opportunity to make money. But it is bad for our society. It undermines the sense of collective responsibility for collective needs. It hurts public education not only by attacking its effectiveness and legitimacy but by laying claim to its revenues. The money allocated to privately managed charters and vouchers represents a transfer of critical public resources to the private sector, causing the public schools to suffer budget cuts and loss of staffing and services as the private sector grows, without providing better education or better outcomes for the students who transfer to the private-sector schools.

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