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SEC Claims Corinthian Colleges Fudged Numbers to Access Student Loan Funds

(CN) – The Securities Exchange Commission claims in court that now-defunct Corinthian Colleges Inc. incurred unnecessary long-term debt in order to access federal student loan funds.

Corinthian, based in Santa Ana, California, operated 125 for-profit schools in the U.S. and Canada from 2004 to 2015. The SEC’s complaint was filed in the U.S. District Court for Central California against former CEO and director Jack D. Massimino and CFO Robert C. Owen, accusing the duo of signing off on a misleading annual report and a form 8-K, which notifies investors of important events.

According to the complaint, the U.S. Department of Education used a metric called “composite score” to determine the timing and conditions of a company’s access to funds. Corinthian needed a score of at least 1.5, both for the funds and to meet the requirements of its commercial bank, where the company held $145 million in long-term line credit. Under the department’s methodology, the complaint says, “increases in long-term debt effectively increased Corinthian’s composite score,” and Corinthian used this knowledge for years to boost its scores by borrowing from its long-term line of credit, then quickly repaying the debt.

Corinthian was notified by the department on August 16, 2013, that its composite scores were improperly inflated, but the company allegedly went forward with filing inaccurate statements with the SEC on Aug. 20, 2013, which mentioned the department’s decision but reported that Corinthian disagreed with it. Corinthian issued stock after the misleading reports, the complaint alleges.

Moreover, Massimino and Owens allegedly failed to disclose in the filings that for fiscal 2012 and 2013, Corinthian engaged in the same improper score inflation conduct that the department determined improper in 2011.

“Corinthian thereby misled investors regarding the regulatory and financial risks facing the company, and, as a result, regarding its cash and liquidity,” the complaint alleges.

On June 12, 2014, the department imposed a hold on funds for Corinthian due to an unrelated issue and because of uncertainty that the company could pay its expenses, Massimino entered into an agreement with the department authorizing the company to sell or close its campuses. By February 2015, Corinthian was delisted from the NASDAQ.

The SEC seeks an order directing Massimino to pay a civil penalty of $80,000 and Owen to pay $20,000, as well as an order permanently stopping both men from violating the Securities Exchange Act.

The complaint was filed by the SEC's Douglas M. Miller.

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