Risk & Compliance

For-Profit Educator’s CFO, CEO Charged With Fraud

The top execs at ITT Educational Services concealed the extremely poor performance of student loans that the company financially guaranteed, says t...
Matthew HellerMay 12, 2015

The U.S. Securities and Exchange Commission on Tuesday charged ITT Educational Services, its CEO, and its CFO with failing to disclose the “abysmal” performance of student-loan programs that the for-profit educator financially guaranteed.

CEO Kevin Modany, 48, and CFO Daniel Fitzpatrick, 55, fraudulently concealed from investors “the extraordinary failure” of the two programs and “the looming effect of that failure on ITT’s financial condition,” the SEC said in a civil complaint filed in Indiana.

ITT had provided a guarantee that limited any risk of loss from the underlying student loan pools. The loans performed so poorly that, by 2012, the company projected paying hundreds of millions of dollars on its guarantees, the SEC said.

“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,” Andrew J. Ceresney, director of the SEC’s Division of Enforcement, said in a news release.

The student loan programs, known as the “PEAKS” and “CUSO” programs, were both created by ITT to provide off-balance-sheet loans to students in the wake of the financial crisis.

ITT owns the ITT Techncial Institute, which has more than 130 campuses in the United States.

As part of the executive’s efforts to conceal the extent of ITT’s exposure, the SEC said, Modany and Fitzpatrick regularly made payments on delinquent student borrower accounts to temporarily keep PEAKS loans from defaulting and triggering guarantee payments, without disclosing this practice.

In a news release, ITT said it was “deeply disappointed in the U.S. Securities and Exchange Commission’s mistaken decision to bring an enforcement action against the company,” insisting that it had “repeatedly expanded our disclosures in an effort to present material information to investors.”

After ITT last year began to disclose the magnitude of its loan guarantee obligations, its shares plummeted. The stock, down about 90% in the past year, fell by $1.62, to $2.40, in trading Monday.

ITT last month announced that Fitzpatrick was retiring after 10 years as CFO, effective Oct. 29. The SEC said he was “significantly involved in the structure and operation” of the loan programs, as well as in ITT’s public filings and disclosures.

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