On Tuesday, the Securities and Exchange Commission announced it was charging ITT Educational Services Inc., its chief executive officer Kevin Modany, and its chief financial officer Daniel Fitzpatrick with fraud, alleging that they hid from the company’s investors the how badly two student loan programs were performing. ITT offered investors a guarantee that limited the investors’ risk, but according to the SEC, by 2012, the two programs, titled “PEAKS” and “CUSO,” had tanked so badly that ITT’s financial guarantees to investors had been set in motion and began to swell.
The two programs were meant to offer off-balance sheet loans for ITT’s students. When they began to fail, according to the SEC, ITT started paying off delinquent student borrower accounts so the PEAKS loans would not default and catalyze ITT making guarantee payments worth tens of millions of dollars.
The SEC also charged, “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.” Another complaint revolved around ITT’s misleading its own auditor and withholding vital data.
ITT’s stock plunged by roughly two-thirds in 2014 as ITT started leaking how much it would have to pay in guarantees.
Andrew J. Ceresney, Director of the SEC’s Division of Enforcement, charged, “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. 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.”
First and foremost, ESI worked diligently with multiple leading, independent legal and financial experts before making accounting and disclosure judgments on the third-party loan programs that ended years ago. Second, we acted in good faith in making these judgments on complicated accounting and disclosure issues. We are confident that the evidence does not support the SEC’s claim. We are eager to have the court clear our reputation that has been unnecessarily endangered by the SEC’s action.
Fredric Firestone, Fitzpatrick’s attorney, said “we do not believe he did anything wrong, and we look forward to our day in court.”
ITT shares dropped 10.32 percent to $3.60 in Tuesday morning trading.
ITT is currently appealing a ruling stemming from charges by the U.S. Consumer Financial Protection Bureau that the company engaged in predatory lending practices. CFPB Director Richard Cordray said that ITT “used high-pressure tactics to push many consumers into expensive loans destined to default.” In March, a federal court in Indiana rejected all off ITT’s claims except one.
A Senate Committee reported in 2012, “ITT’s most recent default rate is the sixth highest rate of loan default amongst the 30 schools examined by the committee.”
The report also stated, “As of June 30, 2011, ITT has exhausted the lending capacity of the PEAKs program and is no longer originating additional PEAKs loans, although the company has indicated they are interested in reinstituting a similar program.” The report noted, “ITT’s 37.1 percent profit margin is the highest amongst the 30 companies the committee examined.”