SEC Charges ITT Educational CEO And CFO With Fraud

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Is the crack down on for profit “colleges” continuing? The SEC announced on Tuesday, May 12th that it is suing ITT Educational Services and its CEO and CFO for fraud.

According to the SEC, ITT CEO Kevin Modany and CFO Daniel Fitzpatrick “engineered a campaign of deception and half-truths” to mask the extent of losses ITT was suffering from student loan programs it created in the 2009 recession.

ITT Educational operates 135 for-profit colleges around the U.S. (most under the ITT Technical Institute brand). ITT colleges boomed with new students during the recession, but also saw traditional sources of private student loans dry up due to the financial crisis. In 2009, ITT made a deal with new lenders that put the company at risk if student loan defaults increased, which they have.

The share price of ITT Educational slumped over 40% Tuesday morning after the SEC announcement, dropping to as low as $1.77 per share. ITT’s stock was already down 84% over the last year.

More on SEC charges against ITT

Of note, ITT Educational estimated it owed more than $262 million on two student loan programs known as PEAKS and the 2009 Entity as of Sept. 2014.

“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,” noted Andrew J. Ceresney, director of the SEC’s division of enforcement, in a written 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.”

For examples of misleading statements, the SEC highlighted that ITT regularly made payments on delinquent student borrower accounts to try and keep PEAKS loans from defaulting, which would trigger tens of millions of dollars of guaranteed payments to lenders, without disclosing it was doing so.

The SEC also accused ITT Educational and its senior execs of misleading and withholding information from ITT’s auditor.

Statement from ITT Educational

In a statement released to the media early Tuesday afternoon, ITT denied the allegations.

“ITT Educational Services, Inc. vehemently disagrees with the U.S. Securities and Exchange Commission’s mistaken decision to bring an enforcement action against the company – a decision that endangers all of our students,” ITT noted. “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.”

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