The Securities and Exchange Commission (SEC) reached a settlement Friday with two senior executives from the now defunct ITT Educational Services, Inc. (ITT), a for-profit chain that closed in 2016 after losing compliance with its accreditor, the Accrediting Council for Independent Colleges and Schools (ACICS), and being essentially barred from participating in Title IV programs.
The officials — former Chief Executive Officer Kevin Modany and former Chief Financial Officer Daniel Fitzpatrick — were charged in 2015 with concealing from investors the catastrophic financial conditions of two student loan programs ITT financially guaranteed. If not for the agreement, the executives would have entered trial starting Monday.
“Holding individuals accountable — particularly senior executives — is a critical focus of our enforcement program,” said Stephanie Avakian, co-director of the SEC’s Division of Enforcement, in a statement Friday. “These settlements, entered into on the eve of trial after years of litigation, reflect our commitment to this accountability.”
In an effort to provide security to weary investors, ITT offered financial guarantees for two student loan programs it created. The original SEC complaint alleged the executives made several “false and misleading statements to hide the magnitude of ITT’s guarantee obligations.”
The scheme was one of many instances subject to investigations and lawsuits, including a 2014 Consumer Financial Protection Bureau (CFPB) allegation that ITT coaxed students into high-cost private student loans. After ACICS, which is facing its own rounds of scrutiny, found the for-profit chain to be out of compliance with accreditation standards in 2016, the Department of Education (ED) increased federal oversight and revoked ITT’s ability to enroll new students who receive federal financial aid. The company closed and filed for bankruptcy soon after.
The abrupt action left thousands of students, enrolled in 137 campuses spanning 38 states, scrambling to continue their education elsewhere or receive relief for student debt no longer balanced by the promise of a degree.
ITT’s tuition costs were significantly higher than those at community colleges or public four-year institutions. An associate degree could cost more than $44,000, and bachelor’s degree programs could cost $88,000, according to the CFPB.
Although most of ITT’s revenue came from federal aid — explaining why ED’s 2016 crackdown delivered a fatal blow — the remainder was attributed to risky private lenders the company encouraged students to utilize and student loan programs ITT created itself.
The SEC complaint alleged the company fraudulently operated two programs it created to hide the financial state of the student loan pools from investors and auditors. To maintain the facade, ITT officials made regular payments on delinquent student borrower accounts to delay impending default and trigger guarantee payments, deceiving investors of the true financial status of the loans.
“Our complaint alleges that ITT’s senior-most executives made numerous material misstatements and omissions in its disclosures to cover up the subpar performance of student loans programs that ITT created and guaranteed,” said Andrew Ceresney, director of the SEC’s Division of Enforcement, in a 2015 statement.
The resolution Friday prohibits the executives from serving in senior positions at public companies for five years, suspends them from practicing as accountants before the SEC, and requests financial payments of $200,000 for Modany and $100,000 for Fitzpatrick. Neither official admitted or denied the allegations.
While the agreement concludes the SEC’s law enforcement actions against ITT, thousands of defrauded students are still embroiled in a battle for debt relief.
Upon the company’s closure, enrolled students could choose to either apply to discharge their loans or transfer their credit hours to another institution, foregoing the option of loan discharge. In 2016, ED promulgated borrower defense rules to help students who wanted to discharge their student loan debt. But in 2017, Secretary of Education Betsy DeVos froze this practice and proposed new rules, which are slated for publication in the coming weeks, following a series of negotiated rulemaking sessions.
Thirteen senators, including Sen. Elizabeth Warren (D-MA), who has proclaimed herself a DeVos watchdog, wrote a letter in April that urged DeVos to accelerate student loan debt relief for defrauded borrowers.
“More than a year after ITT Tech's closure, significant numbers of former students and their families remain stuck in financial limbo and with credits and degrees of little labor market value,” the senators wrote.
Publication Date: 7/10/2018