WALL STREET JOURNAL: SEC Charges ITT Educational Services, Top Executives With Fraud

Career College Central Summary:

  • The Securities and Exchange Commission on Tuesday said it brought fraud charges against ITT Educational Services Inc. and two of its top executives, alleging they misled investors about the looming financial impact of two badly-performing student-loan programs on the for-profit educator.
  • According to an SEC complaint filed in the U.S. District Court for the Southern District of Indiana, the company, Chief Executive Kevin Modany and Chief Financial Officer Daniel Fitzpatrick concealed from ITT’s investors the poor performance and magnitude of ITT’s guarantee obligations for two student-loan programs.
  • ITT, which last month said Mr. Fitzpatrick planned to retire as finance chief in the fall, said it “vehemently disagrees” with the SEC’s “mistaken” decision.
  • ITT formed the student-loan programs to provide off-balance-sheet loans for ITT’s students in the wake of the financial crisis, when the market for private student loans dried up and for-profit schools created new ways to help students pay their tuition bills. To entice others to finance the risky loans, ITT provided a guarantee that limited any risk of loss from the student loan pools, the SEC said.
  • In a statement, ITT said it repeatedly expanded its disclosures in an effort to keep investors informed. The company said it shared information with experts, including an independent auditor, to confirm that its accounting treatment was appropriate.
  • “The company’s robust record of consultation and deliberation rebuts any allegation of wrongdoing,” the company said in a release.
  • ITT added that it has reached out to the U.S. Department of Education, accrediting agencies and state regulatory authorities to ensure they understand the company’s position.
  • “We would expect any regulator would refrain from taking any action against the company, and thereby against our students and employees, until we have had our day in court,” ITT said in a release.
  • According to the SEC’s complaint, the loan pools performed so poorly by 2012 that it triggered ITT’s guarantee obligations.
  • But the SEC alleges ITT didn’t disclose to its investors that it projected paying hundreds of millions of dollars on its guarantees. Instead, ITT and its management acted to create the appearance that ITT’s exposure was more limited, the SEC said.

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