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Career education is a vital pipeline to high demand jobs in the workforce. Students from all walks of life benefit from the opportunity to pursue their career education goals and find new employment opportunities. Join Dr. Jason Altmire, President and CEO of Career Education Colleges and Universities (CECU), as he discusses the issues and innovations affecting postsecondary career education. Twice monthly, he and his guests discuss politics, business, and current events impacting education and public policy.
Jason Altmire (00:04):
Hello, and welcome to another edition of Career Education Report, I'm Jason Altmire. And today as our guest, we have one of the world's most successful short sellers, she is a hedge fund manager, she's a celebrity on Wall Street because of her success and around the world, you can learn about her in the media, she's been featured in multiple documentaries with regard to her success. Fahmi Quadir is our guest, thank you for being with us.
Fahmi Quadir (00:33):
Thanks, Jason, thanks for having me.
Jason Altmire (00:36):
Fahmi, you first rose to fame, or at least notoriety at a very young age, at the age of 25, when you set your sights on the pharmaceutical giant Valiant, which at the time around 2015 was a darling of Wall Street considered to be a model for success and you had a different take, and so you did some research and really made a name for yourself in turning that company upside down with what happened. And maybe we can start there with what set your interest on that company, and then I'd really like to dig into your background because you don't have a typical background for somebody on Wall Street, but let's start with Valiant, which I think is where most people know you from. How did that work for you?
Fahmi Quadir (01:23):
Well, Jason, I like to explain my career as a series of happy and serendipitous accidents. So when I was planning to actually go get my PhD in mathematics, prior to that, I was working at corporate intelligence, specifically focused on the pharmaceutical industry. And through that work, I became very familiar with the specialty pharmaceutical business model, which involved a lot of financial engineering, taking on a lot of debt, acquiring drugs, raising the price of drugs. And eventually, what we would see would happen on the business side of things, is that these drugs would become less accessible to patients and eventually those prescriptions would start going down and eventually the company is no longer successful at marketing those drugs because the consumer is forced to find alternatives.
(02:17):
Before I even entered into the world of finance, I was very familiar with Valiant Pharmaceutical and its business model. It was something that caused a lot of problems for me as far as the challenges I was trying to solve for my clients, one of them being the issue of drug shortages. So obviously, as a general consumer that takes pharmaceuticals, we expect that when there are shortages of life-saving drugs, pharmaceutical companies will manufacture those drugs to meet the demand. But what we saw on our side, and as an analyst, I was predicting these drug shortages and I became very successful at doing that, but my clients would instead actually be using that information not to optimize their manufacturing processes, but rather increase the price of drugs.
(03:07):
When I eventually moved into finance and was working as a short selling analyst, it was natural for me to actually proceed with short selling from the perspective of understanding how these businesses operate from the inside and understand where the weaknesses in those business models are. So while the traditional Wall Street analyst is looking at the quarterly earnings of Valiant and looking at how much they're able to squeeze margins from the increase of these prices on drugs, I understood that in the long run, this game is not going to work out for Valiant, and at some point, they won't continue to be able to buy more drugs to make up for the prescriptions that they're losing through these drug price increases.
Jason Altmire (03:52):
And you were among the first to make that observation, maybe the first, but certainly among the first. And I think that story is instructive when you look at your background because you, for all kinds of reasons, do not represent the stereotypical Wall Street or finance person. And I think with your background, you mentioned you have a mathematics background, you're a mathematician by training, you, I think it's fair to say, did not intend to get into finance in the way that you did. Can you talk about the transition and growing up? And I know you had an experience in the 2008 financial crisis when you were a teenager that was very instructive to you and led to your motivation in what you do today.
Fahmi Quadir (04:36):
I am a child of immigrants, so I'm a second generation American and my parents made lots of sacrifices for me to be where I am today and experienced the educational opportunities that I had. So I was raised from a very early age to pay it forward to my communities and use the gifts that I have of my skills, of my knowledge to make a difference. And I really felt passionately about this, I continued to feel passionately about this, and growing up, I felt that a career in high finance and Wall Street would be an antithetical to these very core beliefs that I had.
(05:14):
In fact, my older sister and her husband were both working at Goldman Sachs, so it wasn't really something that I aspired to at the time, if anything, I was more of the anti Wall Street movement, I was extremely passionate about my views. So when we go into 2008, my father who had worked in community banks and regional banking for much of his career, he was laid off after working with his bank for over 20 years at the time. And to see the speculative risk that led to that happening even though my father had nothing to do with subprime mortgages was really distressing. I saw what he had to go through, and especially being an older person then, laid off, still paying for a daughter to go through college, what he had to do through the stress he went through and the time it took then to find a new job, met another bank.
(06:14):
And it really helps me understand that capital markets dictate so much of what we do, and it's almost like this invisible force that will affect our job, the products that we consume, the decisions we make on a day-to-day basis. And sometimes we forget that the importance that they play and then the ordinary person doesn't really appreciate how important capital markets are. So it was a wake-up call for me, it perhaps entrenched me even further into those anti-Wall Street views, but it did force me to reckon with the fact that what happens on Wall Street has far-reaching repercussions.
Jason Altmire (06:52):
And this, I think, is really instructive because we're going to get into this, but you've developed a reputation that if you are a company, you do not want to hear that Fahmi Quadir is looking into your business. And you have a nickname, the Assassin, which I don't know if you like that nickname or not, but you're universally known for your ability to take down a company just by doing your research and taking an interest in it and to have that experience.
(07:21):
In 2008, I read another interview that you had done and you had said that you had sympathy for those hurt by market profiteers, especially those who were unethical risk-takers gambling with other people's money. So you didn't intend to get into Wall Street, but what you do now as a short seller, I'm interpreting, is you want to affect change, you're not doing it to make money, you're doing it to pursue your passion. Would that be correctly stating it?
Fahmi Quadir (07:50):
Absolutely. Obviously, I have to make money, I have to pay rent, I have to pay the bills, but what I realized was that I could use short selling in a rather subversive way and use it to affect change at capital markets because I'm not going to be able to destabilize or get rid of capitalism as we know it, that's not realistic. There are virtues to a free market that I appreciate and I acknowledge, but the importance is ensuring that those free markets are also fair markets and that they're also efficient markets.
(08:24):
Realizing that I could use short selling as a tool to more effectively direct capital away from businesses that may be doing harm to the general public, it fulfills this sense that I have a duty to pay it forward to my community and to contribute and make things at least incrementally better. So yes, you do make money selling short, but if I really wanted to profiteer off of markets, there are far easier ways to do it.
Jason Altmire (08:53):
I've heard you talk in other settings, you grew up reading Karl Marx, you grew up with a more liberal ideology, you have certainly conflicting views on what many who work on Wall Street would perceive to be their goals and aspirations. How do you feel like that thought process and the information that you were taking in as a young person has impacted your thinking and your way of going about your business on Wall Street?
Fahmi Quadir (09:21):
Well, there's this book called The Outsiders, which a lot of hedge fund managers and other business titans will point to as an example of how effective management, effective CEOs traditionally are seen as outsiders as these rogue mavericks who are unafraid to make difficult decisions. But I feel like in some cases, these mavericks or these outsiders that are being referred to, they have very similar backgrounds, perspectives, experiences, and motivations. Whereas, I am coming to the markets, to short selling with something entirely different, a different set of incentives and motivations from my peers, and in some ways, that could make me more effective, and I do believe it contributes to my success as a short seller because it is a very difficult business, so you need to have more than just money.
(10:15):
Of course, money is always a good motivator, but when you're up against rising markets, against companies that seek to retaliate against you, against the just negative sentiment against your business model, then of course you need to have a deeper sense of purpose in the work because that'll keep you pressing, that'll keep you working harder to develop conviction when it counts the most. So that is really important, but I think my set of experiences and my motivations and the purpose that I bring also helps me not lose sight of what the original purpose here is and that is to use short selling to enact meaningful change in capital markets in these publicly traded companies that are interacting with consumers and with the general public. As long as I remember my core set of values, it really allows me to take on very big battles and continue to fight.
Jason Altmire (11:12):
And when you say to enact meaningful change through your work, you specialize in identifying companies that you perceive are misleading the market, committing fraud, engaging in unethical or predatory practices, and then you do your research, you have a suspicion and you do research, and I'm going to ask you about your method of research and what it is that you look for.
(11:35):
But I do want to point out, as you are well aware, that short sellers sometimes are criticized for the work that they do and you have not been immune to that criticism. There was a New York Times article, you've been profiled in every possible setting in the New York Times, they had a quote that I saw that they portrayed it as digging up dirt on big companies. So again, you have perhaps a different motivation for doing that, but talk about in the context of how you do your research and what you look for, the fact that you think you're doing it for the good rather than just digging up dirt.
Fahmi Quadir (12:12):
Before I get into the way I specifically do things, I would just like to explain to the audience that most of the short selling that happens in markets, and we're talking the vast, vast majority of short selling, is done by machines, not by individual people like me digging up dirt. So it's just another tool that's used to trade markets and it improves liquidity of capital markets and improves price efficiency. But getting to the digging into these companies, there are various lines of defense that in the capital markets we have against fraud, and short sellers are definitely one of the lines of defense. So first you may have whistleblowers, and those whistleblowers may be internal to a company, they may be auditors of the company, there's not really an incentive for those whistleblowers to come forward and dig up dirt on the businesses that they are either working in or getting paid by.
(13:11):
Then you also have journalists who are positively incentivized to dig up dirt because if they're able to do so successfully and get a big scoop, then of course that's a career making story, a good example is Bethany McLean with Enron. Short sellers, similar to journalists, we are also incentivized to dig up dirt because, of course, we stand to profit off of that. But what you need to understand though is that the risk we're taking on is far greater than the potential for profit because if we are wrong in the information that we're presenting or the conclusions that we're coming to, we have the potential for infinite losses, whereas the maximum gain is capped at just from wherever the stock is trading to zero.
(13:56):
And on top of that, given the resources that the companies we're shorting have, it is likely that even if those companies are engaged in some bad practice or fraud, they can spend millions of dollars to ensure that we're unable to do our job and do our research and dig up that dirt because it is a lot cheaper for them to spend that money on the costs to intimidate the short seller versus actually come clean about whatever fraud may be occurring.
(14:29):
I always like to remind people that the reason for losses in these cases of fraud or bad behavior is not the short seller, the reason that people lose money in these companies is because executives were engaged in fraud. And that's what we have to remember, so anyone who is participating in capital markets should really want there to be this activity, this active investigation of misrepresentations or things that just don't add up because it can protect us all from future losses.
Jason Altmire (15:02):
And you have earned a reputation where when you speak markets react, that comes with responsibility, so what are the protections that are in place for any short seller to just flood the market with negative information about a company and then profit when the stock goes down as a result?
Fahmi Quadir (15:23):
Well, of course the same thing would go for any individual who releases research promoting the price of a company and saying that you should buy it. We're all privy to the same laws, so if you are lying about information and if you're intentionally misrepresenting information, then you are subject to litigation risk. There also runs the risk of, if you are intentionally releasing wrongful information or if you're intentionally lying, you are also subject to investigations into market manipulation. And then these are things that could not only cost you a lot of money, and short sellers don't have a lot of money, can also land you in jail.
(16:06):
There are incredible amounts of risks, and that's why whenever you are to speak publicly or even behind the scenes, most of the work we do is not publicly, most of the work we do is with regulators or with journalists, with agencies, stakeholders that can actually do something about these situations, we have to be sure that what we're presenting is well cited, well researched, where we can point to exactly how we're making a conclusion. We always have our counsel review every single word, my older sister is a lawyer at Insecurities, so she has always trained me to really err on the side of caution no matter what we do or say. So for us, I understand the responsibility, I take it very seriously, and that's why we are very limited in the amounts that we publicly engage with markets in general.
Jason Altmire (17:02):
And I mentioned that when you speak markets react and that you're not someone that a company wants to hear is looking into their business. In late January, Adtalem Global Education learned that you were looking into their business because you made an announcement that you were going to short that stock. And Adtalem, as our audience knows, they're a publicly traded for-profit education company and they operate multiple institutions, what drew your attention to Adtalem? And then on a larger perspective, you've said some fairly negative things about for-profit higher education in general, what drew your attention to the industry?
Fahmi Quadir (17:44):
There has been short selling activity historically in the for-profit higher education sector, but there hasn't been in over 10 years. And a lot of that is simply because in the last cycle, a lot of these publicly traded companies either closed down or they had decided to go private. And then what we also have seen is that with rising rates, suddenly companies that were able to finance their way through difficult periods are having a more difficult time accessing financing. So the current situation right now with just the macroeconomic backdrop has forced us to revisit a lot of companies that have maybe been ignored for the past 10 years and see how current financial pressures might be affecting their fundamentals today and moving forward.
(18:35):
We looked at for-profit universities in general because there's a lot of regulatory risk. So when we first launched the fund, part of our universe building, our pipeline building exercise was to go through various industries that are subject to onerous guidelines, regulations that are subject to multi-agency oversight. Because when there are situations like this, even if you have a perfectly ethical operator, there is always the risk of something going wrong or there being some issue related to some law. And the bigger the company, the more schools that an operator has to manage, the more difficult it gets because there are usually going to be different guidelines that are affecting those different schools in different states, so there's a lot.
(19:30):
And for a firm like ours that is so focused on doing a lot of deep work, we like to see lots of complexity, whether that's financial complexity or regulatory complexity. So the Adtalem case, you had really both of those things and just the sheer amount of federal dollars that were going into support at telehealth students was definitely something that was interesting to us. So when we saw that they had made a very big expensive purchase of Walden University, we thought it would be a good time fundamentally to start looking Adtalem.
Jason Altmire (20:06):
And you said it wasn't just regulatory risk, you very bluntly criticized their business model and you said, and I quote, "that they're a toxic byproduct of an imperfect higher education system," referring to the for-profit education system in general. And you cited the regulatory risk of government regulations, but you also referenced outcomes and results, and then Adtalem responded, it is fair to say. So where do things stand now with regard to your perception of Adtalem in the for-profit, higher education sector in general?
Fahmi Quadir (20:46):
With respect to Adtalem, we're actually in the process of writing a more in-depth report now into Walden University because we really do want to stress that there is a big disparity between what students are paying for an education at Walden, what they're getting paid for jobs after they graduate Walden, and what the average student either graduate or undergraduate across the US is making. And this affects the Walden student ability to repay their loans, which presents a big potential for losses for the US taxpayer.
(21:25):
We are working on looking at very detailed data right now program by program to outline why we are so concerned. And that is really our focus, but as we've now released this research into Walden, we've of course been hearing from students, from other stakeholders in the industry who are expressing their concerns with other institutions, so we will look at every piece of information that we get, but for now, we are really focused on this issue of graduate student debt and Adtalem and Walden specifically.
Jason Altmire (22:02):
When you say you're looking at other institutions or have been encouraged to do so, is that limited within the purview of your role only to publicly traded institutions, or are you looking more broadly?
Fahmi Quadir (22:16):
At the moment, just given I am a short seller and I have fiduciary duties to my investors, the priority is of course focusing on opportunities that are publicly traded. But through this process, we're engaging with government agencies, with politicians and others who have influence over how these industries operate, so of course, the information that we get collectively, we hope to present to these various stakeholders so we can advocate for better regulations and better oversight of more of these institutions, not just Adtalem.
Jason Altmire (22:51):
We're familiar on this podcast with some of those consumer groups that are out there, certainly some of the political leaders that have expressed concern. And I'm not obviously going to ask you to tip your hand on who exactly you've been talking to, but is it fair to assume from what you've said, that you're in contact with many of those high profile critics and you're going to work with them to try to find a way to advocate for change in the for-profit sector, is that fair?
Fahmi Quadir (23:21):
Our hope is to not only work with critics, but also to work for advocates or industry insiders because I think the best way forward for meaningful and lasting sustainable change is for all stakeholders in the room to come to agreements on certain issues. So we are of course engaging with some critics, but we're also looking to speak with other stakeholders who have historically supported the for-profit sector.
Jason Altmire (23:48):
And part of that, you came on this podcast and you're having the discussion and we would hope to keep in touch at some point in an appropriate way moving forward. The last thing I wanted to ask you about is, you have gained notoriety, but also you have critics because of the work that you do, and I've seen you talk about the personal toll that takes, the risk of cyber attack, personal threats, things like that. And as a young person with a long career in front of you, how does that impact your thinking on things? Because you've taken such a high profile stand and you've become such a well-known person that I think it is interesting that you do feel this way.
Fahmi Quadir (24:36):
It's a really great point, Jason, but the truth is, I would not be in an industry where I'm subject to infinite losses if I was too concerned about these other more personal risks. I would say in general and me specifically, short sellers, we have a different relationship with risk than the average market participant because not just of the financial tolls that these campaigns can take, but of course the personal ones. So of course, some of this is the cost of doing business, so you accept that, but the important thing is to have a very strong support network of my family, my friends, my investors, so while they are busy worrying about my personal risks, I can focus on my work and my research.
Jason Altmire (25:25):
And just to close, if somebody wanted to learn more about you, the work that you do, how would they find that information?
Fahmi Quadir (25:33):
They can go to my website, safkhetcapital.com, there is some information there, some of the papers that we published on Adtalem and other companies. That's probably a good place to start, but I'm sure if you put my name into Google, there's also quite a bit.
Jason Altmire (25:51):
I can attest to that, if you Google Fahmi Quadir, you will find more information than probably anywhere else. Fahmi Quadir, thank you so much for being with us today.
Fahmi Quadir (26:02):
Thanks for having me, Jason.
Jason Altmire (26:11):
Thanks for joining me for this episode of the Career Education Report. Subscribe and rate us on Apple Podcasts, Google Play, Spotify, or wherever you listen to podcasts. For more information, visit our website @career.org and follow us on Twitter @cecued, that's at C-E-C-U-E-D, thank you for listening.