Two former senior ITT Educational Services executives agreed to an officer and director bar to settle allegations of fraud.
In settling charges brought by the U.S. Securities and Exchange Commission on Monday, former CEO Kevin Modany and former CFO Daniel Fitzpatrick also agreed to pay $300,000 worth of civil penalties in the U.S. District Court for the Southern District of Indiana, Indianapolis Division.
In a 2015 complaint, the SEC alleged that ITT, Modany and Fitzpatrick concealed the poor performance of two student loan programs financially guaranteed by ITT, owner and operator of the ITT Technical Institute, once among the country’s largest private for-profit college systems with 35,000 students across 130 campuses in 38 states.
Following the collapse of the private student loan market, ITT established two loan programs, known as “PEAKS” and “CUSO,” to provide off-balance sheet loans at the company’s campuses.
ITT provided a guarantee that limited any risk of loss to attract third parties to finance the loans, the SEC alleged.
The underlying loan pools performed so poorly that ITT’s guarantee obligations were triggered and began to balloon.
The SEC complaint said that rather than notifying investors that the company projected paying hundreds of millions of dollars on the guarantees, ITT, Modany and Fizpatrick allegedly engaged in a fraudulent scheme, making a number of false and misleading statements to hide the magnitude of the guarantee obligations.
For example, ITT regularly made secret payments on delinquent student borrower accounts, temporarily keeping the PEAKS loans from defaulting and triggering tens of millions dollars of guarantee payments, the SEC alleged.
The company also netted its anticipated guarantee payments against recoveries projected for many years later without telling investors of the near-term cash impact and misled and withheld significant information from the company’s auditor, the SEC charged.
The SEC sued ITT after the school spent several years posting high student loan default rates, with several campuses posting higher default rates than graduation rates.