Letter To Securities And Exchange Commission Chairman Cox

Letter

KENNEDY STUDENT LOAN INVESTIGATION UNCOVERS ADDITIONAL BACKROOM DEALINGS

Recent investigations of relationships between student loan companies and college financial aid officers show a pattern of back-room dealing that has no place in financing higher education.

An investigation by Senator Edward M. Kennedy has uncovered that, in late 2001, financial aid administrators at the University of Texas, the University of Southern California, and Columbia University and Education Department official Matteo Fontana acquired shares of Student Loan Xpress stock (known at that time as Direct III Marketing, Inc.) from the current President of Student Loan Xpress, Fabrizio Balestri. Mr. Balestri apparently acquired the stock through a private placement of stock a few months before starting work as President of the company (on January 1, 2002). It appears that the placement was organized and orchestrated by Direct III Marketing founder Robert deRose. Private placements are generally only available to certain accredited entities (usually wealthy individuals and institutions), and the law places restrictions on purchasers' ability to resell shares acquired in this manner.

Mr. Fontana and the financial aid administrators bought the shares from Mr. Balestri at a significant discount to their market value, and at least one of the financial aid administrators apparently paid Mr. Balestri in cash. Strangely, Mr. Balestri later sent a "Memorandum of Gift" to each of the recipients of the stock, purporting to show that he had given them the shares for free -- in fact, all had bought the shares from him at the significantly discounted price.

Importantly, the company's share of student loan business at the schools whose financial aid administrators purchased this discounted stock increased significantly over the next few years. For example, Student Loan Xpress had 5.15% of FFEL loan volume at Columbia University in 2002 - by 2006, that share was 12.17%.

Senator Edward M. Kennedy released the following statement: "The characteristics of this transaction, especially Mr. Balestri's apparent effort to conceal his sale of shares to financial aid administrators and an Education Department official, raise significant concerns about its legality under securities laws. It also raises the question of whether a quid pro quo existed between these financial aid officers and Student Loan Xpress. I am referring this matter to the SEC for investigation, and my office will continue to probe inappropriate relationships between student loan companies and school officials charged with protecting students' interests. I appreciate CIT's cooperation with my investigation and its determination to get to the bottom of this matter quickly."

Senator Kennedy sent the following letter to the Securities and Exchange Commission last night:

Dear Chairman Cox:

I'm writing about facts that have come to my attention that raise concerns about the propriety of sales of shares of a company providing federally-guaranteed student loans, Student Loan Xpress. The shares were acquired in a private placement by the current President of the company and quickly sold to others. I believe the facts surrounding these transactions warrant an inquiry by the Commission.

Specifically, it has come to my attention that Fabrizio Balestri, who became President of Student Loan Xpress (currently owned by CIT) on January 1, 2002, participated in late 2001 in a private placement of that company's shares (then named Direct III Marketing, Inc.). It appears that the placement was orchestrated by Direct III Marketing founder and current Vice Chairman of Student Loan Xpress Robert deRose. Shortly after purchasing "units" (comprised of shares of stock and warrants to purchase shares) offered in the private placement, Mr. Balestri sold these units to financial aid officers at the University of Texas, the University of Southern California, and Columbia University and to Education Department official Matteo Fontana.

It appears that Mr. Balestri acquired the shares in the private placement at a significant discount to their market value and sold them to the purchasers described above at the same discounted value. Apparently, at least one of the financial aid administrators paid Mr. Balestri in cash. It particularly concerns me that Mr. Balestri apparently later sent a "Memorandum of Gift" to each of the recipients of the stock, purporting to show that he had given them the shares for free - when all had bought the shares from him at the discounted price.

The circumstances described above raise concerns about the legality of these transactions. Therefore, I write to ask that you investigate whether the transactions described above comported with applicable law and regulations.

Thank you for considering this request, and I look forward to your reply.

Sincerely,

Edward M. Kennedy
Chairman

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