SEC Charges Current, Former Executives Of For-Profit Chain ITT Educational Services With Fraud

ITTBack in September ITT Educational Services – the operator of for-profit college chain ITT Technical Institute – revealed it was facing increased scrutiny by several government agencies. That scrutiny turned to action this week as the Securities and Exchange Commission filed fraud charges against current and former executives with the company for their part in concealing problems with company-run student loan programs.

The SEC announced Tuesday that the charges against former CEO Kevin Modany and current CFO Daniel Fitzpatrick stem from their alleged fraudulent concealment of the poor performance and looming negative financial impact of two student loan programs the company financially guaranteed to investors.

The loan programs – called PEAKS and CUSO – provided loans for ITT’s students after the collapse of the student loan markets. ITT guaranteed that the loans carried little risk of loss from the student loan pool to entice financial institutions to finance the loans.

According to the SEC complaint [PDF], the loans performed so poorly by 2012 that the company’s guarantee obligations were triggered. However, instead of disclosing the issue to investors, ITT and its management took a variety of actions to create the appearance that ITT’s exposure was more limited.

“Our complaint alleges that ITT’s senior-most executives made numerous material misstatements and omissions in its disclosures to cover up the subpar performance of student loans programs that ITT created and guaranteed,” Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, said in a statement. “Modany and Fitzpatrick should have been responsible stewards for investors but instead, according to our complaint, they engineered a campaign of deception and half-truths that left ITT’s auditors and investors in the dark concerning the company’s mushrooming obligations.”

The SEC alleges that ITT and the executives engaged in a fraudulent scheme and made a number of false and misleading statements to hide the magnitude of ITT’s guaranteed obligations to the loan programs.

For example, ITT regularly made payments on delinquent student borrower accounts to temporarily keep PEAKS loans from defaulting and triggering tens of millions of dollars of guarantee payments, without disclosing this practice.

ITT also netted its anticipated guarantee payments against recoveries it projected for many years later, without disclosing this approach or its near-term cash impact.

While these actions don’t spell the end for ITT-operated schools, they do mark another issue for the for-profit company that is already under government scrutiny.

Back in February 2014, the Consumer Financial Protection Bureau sued ITT for allegedly pressuring students into predatory loans and mislead students on future job prospects and salaries.

SEC Announces Fraud Charges Against ITT Educational Services [Securities & Exchange Commission]