Top executives at ITT Educational Services, one of the largest operators of for-profit technical schools, lied to investors about high rates of late payments and defaults on student loans backed by the company, according to a complaint filed Tuesday by the Securities and Exchange Commission.
In the case of ITT, the SEC filed civil fraud charges against the company, chief executive Kevin Modany and chief financial officer Daniel Fitzpatrick for allegedly making false and misleading statements about the failure of two in-house student-loan programs.
Rather than disclose the tens of millions of dollars in impending losses to investors, regulators say the company made secret payments on delinquent accounts to delay defaults. Executives assured investors in conference calls that the programs were performing well, while ITT’s obligations to pay out on soured loans began to balloon.
"Modany and Fitzpatrick should have been responsible stewards for investors but instead . . . 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," said Andrew J. Ceresney, director of the SEC's division of enforcement.
In a statement, ITT said that it is "deeply disappointed" in the SEC's "mistaken decision" to bring charges against the company.
“We vehemently disagree with the SEC’s position and we are confident that the evidence does not support the SEC’s claims,” the company said, adding that officials “are eager to have the court clear our reputation.”
With 130 campuses in 39 states, ITT offers criminal justice, business, information technology, nursing and other programs to about 50,000 students. At the height of the 2008 financial crisis, the company created two in-house student-loan programs as private lenders retreated from the market. Banks stopped extending credit to students at for-profit colleges because of their historically high default rates.
To get investors to finance the in-house loans, ITT offered a guarantee to limit the risk of students not repaying the debt. If a certain percentage of loans soured, the company agreed to cover the principal, interest and fees.
Because ITT kept the loan programs off its balance sheet, investors did not have direct information about the performance of the debt. And when students began defaulting en masse around 2011, all investors could rely on was the company’s word, the SEC said.
By the fall of 2012, ITT shelled out $8 million as guarantee obligations came due, but executives allegedly failed to inform investors that the company was facing an additional $30 million in payments at the end of that year. Regulators say the company used accounting tricks to hide the impending financial trouble. It wasn’t until last year that ITT reported over $60 million in charges related to its loan programs, a revelation that tanked its stock.
ITT said it consulted with experts, including an independent auditor, to confirm that its accounting was appropriate. The company pointed out that it has reached out to accrediting agencies, state regulatory authorities and the Education Department to ensure that they understand its 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,” the company said in the statement.
But this isn’t the first action against ITT. The loan programs in question are at the heart of a lawsuit that the Consumer Financial Protection Bureau filed against ITT last year.
In that case, the consumer watchdog accused the company of providing zero-interest loans to students but failing to tell them that they would be kicked out of school if they didn’t repay in a year. When students could not pay up, ITT allegedly forced them to take out high-interest loans to repay the first ones, the CFPB said.
The allegations are similar to ones the CFPB made against beleaguered for-profit Corinthian Colleges, which ran an in-house student-loan program known as Genesis. The agency said Corinthian set its tuition and fees for bachelor’s degrees at $60,000 to $75,000 to force students to borrow from the program and then received a slice of the lender’s fees.
Allegations that Corinthian trapped students in predatory loans and lied about the success of its programs ultimately led to a series of government lawsuits, loss of its access to federal funding and bankruptcy. Now some are wondering whether ITT will meet the same demise.
“They are not in good shape and it’s mostly a function of how likely it is that they can continue enrolling people,” said Barmak Nassirian, director of federal relations and policy analysis for the American Association of State Colleges and Universities. “That is really the challenge the entire sector faces, but one that obviously a financially embattled company will have a harder time doing.”
New-student enrollment at ITT as of the end of March was down 16 percent over the prior year, while total enrollment was down 10 percent year over year. Michael Tarkan, an analyst at Compass Point, said that the enrollment trends at ITT are worse than the broader industry. Still, the school enrolled 14,000 students in the first quarter.
Unless the Education Department cuts off ITT’s funding, as it did with Corinthian, Tarken said that “the pace of the decline at ITT won’t be as rapid.”
Spokeswoman Denise Horn would not say whether the Education Department plans to pull ITT’s funding, but said the agency “has been monitoring the SEC oversight of ITT.”
She noted that ITT was required to provide the department with a letter of credit for about $80 million, which will remain in place for the next five years. The letter is meant to protect students and taxpayers if the company is unable to cover federal student-aid liabilities.