[Updated (5/12/2015, 12:51 p.m.) with further details, the company’s response, and comment from a call the SEC held with reporters.]
ITT Educational Services Inc., its chief executive, and its chief financial officer have been charged with fraud by the Securities and Exchange Commission for allegedly hiding from investors “the poor performance and looming financial impact of two student-loan programs that ITT financially guaranteed,” according to a news release from the commission.
The commission’s complaint, filed in the U.S. District Court in Indianapolis, says ITT attempted to hide the fact that the loan pools underlying two of its programs had performed so badly that the company would be on the hook for losses that came from those financing the loans.
It also states that ITT made payments on delinquent borrowers’ accounts to keep their loans from defaulting, which would have triggered “tens of millions of dollars of guarantee payments.”
“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,” said Andrew J. Ceresney, director of the commission’s Division of Enforcement, in the release.
In a news release, the company said it was “deeply disappointed” with the commission’s “unfounded charges.” It continued: “Throughout the relevant time period, we repeatedly expanded our disclosures in an effort to present material information to investors. We also repeatedly conferred with outside experts, as well as our outside, registered independent auditor. We shared extensive information with these experts to confirm that our accounting treatment was reasonable and appropriate. The company’s robust record of consultation and deliberation rebuts any allegation of wrongdoing.”
The company added that it was “eager to have the court clear our reputation.”
Kevin Modany is ITT’s chief executive, and Daniel Fitzpatrick is its chief financial officer. In a call with reporters on Tuesday, Mr. Ceresney said the “sophisticated scheme designed to mislead investors” was “orchestrated and executed at the company’s executive suite” by Mr. Modany and Mr. Fitzpatrick.
The company is also the target of other legal action. The Consumer Financial Protection Bureau sued ITT last year, saying it had pressured students to take out loans it knew they would be unlikely to pay back. Mr. Ceresney said on Tuesday that while the SEC’s investigation of the company involved some of the same loans, it had been conducted separately and focused on how ITT dealt with investors, while the bureau’s probe “focuses on consumer harm.”
That’s a meaningful difference in focus, as Ben Miller, senior policy analyst in the Education Policy Program at New America, noted on Twitter:
ITT has long been considered among the for-profit education companies on the shakiest financial footing. Last August, Mr. Modany announced plans to resign in February, but he has not yet stepped down. In April, ITT announced that Mr. Fitzpatrick would retire as chief financial officer in October, but would stay with the company as an adviser.
The company serves about 50,000 students at some 130 campuses in 39 states and online.
