For-profit college operator accused of fraud

Kevin McCoy | USA TODAY

National for-profit colleges operator ITT Educational Services (ESI) and two of the firm's top executives were charged with fraud Tuesday by the Securities and Exchange Commission.

ITT, its CEO, Kevin Modany, and Daniel Fitzpatrick, the firm's chief financial officer, hid from investors the poor performance and looming financial impact of two student loan programs that had been financially guaranteed by the company, the SEC alleged in a federal lawsuit.

The Indiana-based company's for-profit colleges include ITT Technical Institute, which has more than 130 campuses nationwide, and Daniel Webster College. Both offer associate's and bachelor's degrees in a wide range of programs.

ITT formed the loan programs, known as "PEAKS" and "CUSO," to provide off-balance sheet loans for students at the company's colleges following the collapse of the private student loan market. The company provided a guarantee that limited any risk of losses in a bid to induce others to finance the risky loans, the SEC charged.

The underlying loan pools performed so badly that ITT's guarantee obligations were triggered and started to balloon by 2012.

However, instead of notifying investors that the company projected paying hundreds of millions of dollars on the loan guarantees, ITT and the two executives allegedly engaged in a fraudulent coverup scheme and made false and misleading statements to hide the magnitude of the financial impact.

ITT secretly made payments on delinquent accounts of student borrowers, a practice that temporarily kept PEAKS loans from defaulting and triggering tens of millions of dollars of guarantee payments, the SEC charged.

Without telling investors about the near-term cash impact, the company also netted its anticipated guarantee payments against recoveries it projected for many years later, the SEC alleged. Additionally, ITT and the executives allegedly misled and withheld significant information from the company's auditor.

ITT's stock price declined dramatically in 2014, losing approximately two-thirds of its value as the company began to disclose the financial consequences of the loan guarantees and alleged company practices.

In a statement issued by ITT spokeswoman Nicole Elam, the company said it "vehemently disagrees" with the SEC enforcement action and contended the move "endangers all of our students."

"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," the company said.

An attorney for Modany did not immediately respond to a message seeking comment. Fredric Firestone, a defense lawyer representing Fitzpatrick, said, "We do not believe he did anything wrong, and we look forward to our day in court."

News of the allegations sparked a new plunge in the company's stock. ITT shares sank 43.5%, or $1.75, to close at $2.27 Tuesday.

Citing the alleged "material misstatements and omissions" in disclosures to investors, Andrew Ceresney, head of the SEC's enforcement division, said Modany and Fitzpatrick "engineered a campaign of deception and half-truths that left ITT's auditors and investors in the dark concerning the company's mushrooming obligations."

In a separate legal action last year, the U.S. Consumer Financial Protection Bureau sued ITT for alleged predatory lending practices. CFPB Director Richard Cordray charged that the for-profit colleges chain "used high-pressure tactics to push many consumers into expensive loans destined to default."

ITT moved to dismiss that case, in part on legal grounds that the CFPB lacked legal jurisdiction. A federal court in Indiana rejected all but one of the company's claims in March. ITT is now pursuing an appeal of that ruling.