The former chief executive and the former CFO of ITT Educational Services have agreed to fines and other sanctions to settle charges that they hid the “abysmal” performance of two student loan programs from investors.
The settlement wraps up a fraud case that the U.S. Securities and Exchange Commission brought in 2015 against ITT, ex-CEO Kevin Modany, and ex-CFO Daniel Fitzpatrick shortly before the for-profit college operator filed bankruptcy.
The two executives were accused of failing to disclose the “extraordinary failure” of the off-balance sheet loan programs and that ITT was potentially on the hook for tens of millions of dollars of payments under guarantees it had made to the funders of the loans.
After ITT began disclosing its true financial condition in 2014, its stock price fell by approximately two-thirds.
As part of the settlements, Modany and Fitzpatrick agreed to pay fines of $200,000 and $100,000, respectively. They also are barred from holding senior positions at public companies.
“Holding individuals accountable – particularly senior executives – is a critical focus of our enforcement program,” Stephanie Avakian, co-director of the SEC’s Division of Enforcement, said in a news release.
ITT operated 137 technical college campuses in 39 states, with an enrolment of about 35,000 students. Following the collapse of the private loan market, it created the “PEAKS” program, which made more than $300 million in loans to students, and the “CUSO” program, which made about $141 million in loans.
To induce outside lenders to finance the loans, the company provided guarantees that would be triggered if enough students defaulted.
According to the SEC, the underlying loan pools had performed so abysmally by 2012 that ITT’s guarantee obligations were triggered and began to balloon. But Modany and Fitzpatrick allegedly took various steps to hide the company’s potential exposure, for example by making payments on behalf of delinquent borrowers, which had the effect of delaying looming guarantee payments.
The SEC settled its case against ITT in July 2017. The settlements with Modany and Fitzpatrick averted a trial set for Monday.