A lawsuit was filed last month by the U.S. Securities and Exchange Commission against ITT Educational Services and its two top executives. It’s alleged that they lied and concealed information from investors about losses on two student loan programs that eventually amounted to hundreds of millions of dollars. The Carmel-based for-profit college company runs ITT Tech campuses throughout the country. The SEC said in a news release:
ITT created the loan programs after the private student loan market collapsed, to help students cover costs not taken care of by federal and state aid. ITT guaranteed repayment of the loans to entice lenders to finance the loans by minimizing the risk, an SEC news release said. By 2012, so many students were defaulting on the loans that ITT’s guarantee was triggered, the news release said. ITT projected owing hundreds of millions of dollars on its guarantees — but instead of telling investors that the loans were performing poorly, the company and its top executives “engineered a campaign of deception and half-truths, that left ITT’s auditors and investors in the dark concerning the company’s mushrooming obligations.
Here’s how the SEC said ITT hid how much the guarantee obligations would cost:
• Without disclosing it, ITT made payments on delinquent student loans to keep them from defaulting and triggering guarantee payments.
• ITT framed its anticipated guarantee payments against projections of future recoveries — creating a short-term cash crunch — but it didn’t disclose that approach.
• ITT didn’t consolidate one of its loan programs into its financial statements, even though it controlled the loan program’s economic performance.
• ITT “misled and withheld significant information” from its auditor.
The SEC names ITT chief executive officer Kevin Modany and chief financial officer Daniel Fitzpatrick in its case — both of whom had recently announced their departures from the company. ITT is also facing another government lawsuit over one of those student loan programs. The Consumer Financial Protection Bureau (CFPB) accused ITT of predatory lending practices by pushing students into costly private student loans while knowing they would be likely to default.
Both the SEC and the CFPB complaints are pending in the U.S. District Court for the Southern District of Indiana. For-profit colleges are under increasing federal scrutiny over the cost and quality of their education. We mentioned these schools in a separate section of this issue. Government investigations led to the shutdown of the for-profit Corinthian Colleges, which oversaw the Everest College chain, during the past year.
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