Signal Hills’ free newsletter, Education Signals, is without doubt worth reading if you follow the school improvement industry. However, your editor argues that the May 30 issue's bit on the Reading First fiasco has not served k-12 investors well.

Aside from the perfectly reasonable objective of letting investors know Signal Hill is out there doing business, Education Signals is intended to give investors a sense of how the investment banker’s research staff views the impact of all manner of events on investment possibilities - to help investors with their own calculations about opportunities and risks.

In k-12, the dominant risks are political. Reading First offers important insights into how the market rules might change.

What your editor finds strange is how authors Trace A. Urdan and Jeff Lee chose to characterize the latest report on the scandal by Senate Educational and Labor Committee Chairman Edward Kennedy’s staff. There is no doubt that while Edward Kame' ennui was advising the Department of Education on Reading First regulation, he was also under contract with Pearson to write a textbook for the Reading First market, and that he was acting under the direction of Pearson when he and the firm's top officials lobbied Assistant Secretary Susan Neuman on behalf of Pearson with regard to the program. Urdan and Lee argue that there is no smoking gun in the emails linking what Kame' ennui did with some specific offer of compensation for his lobbying by Pearson, but it should be fairly clear that Kame' ennui and Pearson had a shared financial interest in Reading First regulation that advanced sales of his textbook.  (See here.)

Casting the story in the very narrow framework of whether “publishers pressured public advisors” like Kame' ennui to lobby on their behalf, and noting that the emails used in Senator Kennedy’s investigation show no “explicit quid pro quo” implies that the business threat to publishers is short term, confined criminal charges, and there are no further implications for the broader k-12 market.

Three points suggest  a very reasonable chance that this assessment is off base:

First, on the narrow issue of criminality. Investigations are far from complete. There have been criminal referrals to the Justice Department and prosecutions of government consultants like K may well occur.

Second, the challenge to publishers is not in criminal law, it’s in the politics of k-12 market regulation under NCLB.

Kennedy and House Education and Labor Committee Chairman George Miller understand that if the Reading First program been implemented as intended by law, the major publishers would have been largely frozen out. Why? Because not one of their Reading First offerings had any evidence of improving student success in reading, and that’s what NCLB’s Reading First’s provision require. (Kame' ennui’s textbook was barely been completed in time to make the market, let alone subject to evaluation!)  Had the rules for Scientifically Based Reading Research been enforced as written into law and intended by Congress, it is very likely that “research-proven” Success for All would have won the bulk of the business, and the publishers would be facing their first truly serious threat to k-12 market dominance.

Second, this is not an issue isolated to elementary reading. Some variation of the “scientifically-based” requirement for purchases occurs over 160 times in NCLB. In most areas of k-12, publishers programs lack any serious evaluation - they are "research free." On the other hand, there are hundreds of new small providers whose products and services can meet the evaluation test. If the law’s “scientifically based” provisions are enforced with vigor by the Department of Education, publishers have a nontrivial problem, and small firms have a great opportunity.

To this editor, that perspective on Reading First offers investors a much better understanding of market risks and opportunities than the fact that no one in the publishing business is likely to go to jail.