SEC lays fraud charges against ITT Educational Services

ITT Educational Services and its executives engaged in a "campaign of deception" by hiding from investors the poor performance of student loans that were projected to cost it hundreds of millions of dollars, US authorities charged Tuesday.

The national operator of for-profit colleges, its chief executive Kevin Modany and its chief financial officer Daniel Fitzpatrick were charged with fraud in the civil complaint filed in a US district court by the Securities and Exchange Commission.

ITT is already being sued by the Consumer Financial Protection Bureau, which accused the company last year of predatory lending by pushing students into high-cost, private loans that were likely to end in default.

Student loans and default rates on that debt have skyrocketed in the US in recent years, prompting worries that it could cause the next financial crisis. Lawmakers have proposed bills to refinance student loans, while regulators have been cracking down on the marketing of those products.

The level of student loan debt hit a record high of almost $1.2tn in the first quarter of 2015, with delinquencies of 90-days or more reaching about 11.1 per cent, according to a report by the Federal Reserve Bank of New York released Tuesday.

ITT engaged in systematic fraud by providing risky, off-balance sheet loans to its students, for which ITT provided guarantees that limited the loss risk to those financing the debts, according to the SEC.

Shares in ITT fell by about 40 per cent Tuesday morning on the SEC action.

The underlying loan assets performed "so abysmally" that by 2012, ITT's guarantee obligations were triggered, the SEC said.

Yet, instead of disclosing to investors that ITT projected it would have to pay hundreds of millions of dollars on its guarantees, ITT made it appear that its exposure was much smaller.

ITT did not disclose that it regularly made student loan payments itself to temporarily keep the loans from defaulting, which would have triggered the guarantee payments, the SEC said.

ITT also misled and withheld significant information from ITT's auditor and used an accounting technique that offset anticipated guarantee payments against recoveries it projected for many years later, without disclosing this approach.

"ITT's senior-most executives made numerous material misstatements and omissions in its disclosures to cover up the subpar performance of student loans programs," said Andrew Ceresney, head of SEC enforcement. "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."

ITT said it "vehemently disagrees" with the SEC's enforcement action, which the company said "endangers all of our students." ITT also worked with multiple legal and financial experts, and noted the third party loan programs have ended.

"We acted in good faith in making these judgments on complicated accounting and disclosure issues," ITT said in a statement. "We are confident that the evidence does not support the SEC's claim."

An attorney for Mr Fitzpatrick said his client was a man of integrity. "We do not believe he did anything wrong and we look forward to our day in court," he said. ITT announced last month that Mr Fitzpatrick would be retiring in October.

An attorney for Mr Modany did not respond to a request for comment.

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