Whitney Tilson Fires Back in Response to "Tilson Tirade" - Hedge Fund Alpha (formerly ValueWalk Premium)
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Whitney Tilson Fires Back in Response to "Tilson Tirade"

Whitney Tilson is out with a strong response to a ‘supporter’ of K12, Inc. (NYSE:LRN) (a stock which Tilson is short), who attacked Tilson in a recent article. As Tilson noted earlier ‘Criticism Isn’t Stopping me’, below is the latest. See more from Tilson on the company here and here.

Whitney Tilson fires back via his education reform blog

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


Whitney Tilson

Courtesy of Kase Capital

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,



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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