SEC Charges ITT Educational Services, Top Executives With Fraud; For-profit educator allegedly hid poor performance, financial impact of student-loan programs

http://www.wsj.com/articles/sec-charges-itt-educational-services-top-executives-with-fraud-1431442507

SEC Charges ITT Educational Services, Top Executives With Fraud

For-profit educator allegedly hid poor performance, financial impact of student-loan programs

The Securities and Exchange Commission said it has filed fraud charges against for-profit educator ITT Educational Services and two top executives. ILLUSTRATION: BLOOMBERG

CHELSEY DULANEY

Updated May 12, 2015 11:54 a.m. ET

The Securities and Exchange Commission on Tuesday said it brought fraud charges against ITT Educational Services Inc. and two of its top executives, alleging that 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 worked with multiple legal and financial experts before making decisions on “complicated accounting and disclosure issues” related to the third-party loan programs. ITT noted that the programs ended years ago, and the company said it acted in good faith in making the judgments.

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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.

In one example, the SEC said ITT made payments on delinquent student borrower accounts to temporarily keep loans from defaulting and thus triggering tens of millions of dollars in guarantee payments.

ITT last year began to disclose the magnitude of payments it would need to make on the guarantees, sending its shares plummeting.

Shares of ITT, down about 90% in the past year, fell by $1.55 to $2.47 in late-morning trading.

“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,” the company said. “We are confident that the evidence does not support the SEC’s claim.”

The for-profit college industry has come under increasing government scrutiny lately. Operators have been criticized as driving student debt and recruiting aggressively to boost profits while providing a poor-quality education to students.

Earlier this month, another for-profit college operator, Corinthian Colleges Inc., filed forchapter 11 bankruptcy-court protection, the final step toward a full shutdown in the wake of a financial crisis that began last summer.

ITT had previously warned that it faced scrutiny from federal regulators over the loan programs.

Last year, the Carmel, Ind.-based company revealed that it received a Wells notice from the SEC, warning that a civil enforcement action could be coming.

In March, ITT missed a deadline to file its annual financial results with the SEC, also citing the citing the private-education loan program.

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