INDIANAPOLIS (CN) – The CEO and CFO of ITT Technical Institute juggled the books to conceal hundreds of millions of dollars of expenses in failing student loan programs, the SEC said Tuesday.
The 15-count federal complaint accuses CEO Kevin Modany and CFO Daniel Fitzpatrick of defrauding investors by concealing that its PEAKS and CUSO student loan programs were failing miserably in 2012, triggering ITT obligations to pay hundreds of millions of dollars for its guaranteed loans.
The profit-seeking chain college has more than 130 outlets, or campuses, in 38 states. Like many profit-seeking chain colleges, ITT has been accused, in The New York Times and elsewhere, of having high tuition and low standards.
The off-balance sheet PEAKS and CUSO programs were created in 2009 and 2010 to combat declining student enrollment as the private loan market dried up. To induce students to sign up, ITT guaranteed the loan pools, and handed out $441 million in loans through them, the SEC said in its 56-page complaint.
The loans performed terribly and by 2012 the loans obligations were trigged and ballooned. Rather than admit it, Modnay and Fitzpatrick concealed it, “and ITT’s guarantee obligations,” the SEC said in the lawsuit.
“For example, in October 2012, after ITT received its first demand for a multimillion-dollar guarantee payment on the PEAKS program, Modany and Fitzpatrick devised a plan whereby ITT actually made payments on behalf of student borrowers who had failed to make timely payments, which had the effect of temporarily delaying further defaults,” the SEC says in the fourth paragraph of 212 in the complaint. “This practice – which ITT later innocuously titled ‘Payments on Behalf of Borrowers,’ or ‘POBOB’ – had the effect of delaying tens of millions of dollars of looming PEAKS guarantee payments ITT would otherwise have had to make. The defendants concealed this practice from ITT’s investors (among others) and instead made statements in public filings that led investors to believe the PEAKS program and its composite student loans were performing relatively well.”
Neither Modany nor Fitzpatrick disclosed this to auditors, despite warnings from a legal adviser that the practice may be illegal, the SEC claims.
The payments on behalf of borrowers were akin to paying the minimum amount on a high-interest credit card, and drastically increased the amount of money the school would owe.
The cover-ups failed, and ITT’s stock price fell by two-thirds in 2014, the SEC said in a statement announcing the lawsuit.
The SEC wants Modany and Fitzpatrick permanently barred from being officers for any public company, ordered to disgorge performance bonuses and profits from the sale of stocks, and damages for securities fraud, aiding and abetting, falsified books and records, false certifications, deceit of auditors, false SEC filings, and other charges.
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