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SEC Announces Fraud Charges Against Parent Company Of ITT Technical Institutes

LOS ANGELES (CBSLA.com) — Executives for a private college system focusing on technical studies with several campuses across the Southland are facing fraud charges for allegedly concealing key financial information from investors, federal regulators announced Tuesday.

A complaint filed in U.S. District Court (PDF) by the Securities and Exchange Commission alleges ITT Educational Services Inc., its chief executive officer Kevin Modany, and its chief financial officer Daniel Fitzpatrick "fraudulently concealed" from investors the "the poor performance and looming financial impact of two student loan programs that ITT financially guaranteed."

According to the complaint, the national operator of the for-profit colleges along with Modany and Fitzpatrick allegedly formed two student loan programs to provide off-balance sheet loans for ITT students in the wake of the collapse of the private student loan market.

In order to induce others to finance the risky loan programs - known as the "PEAKS" and "CUSO" programs - ITT provided a guarantee that limited any risk of loss from the student loan pools, according to officials.

The complaint alleges, among other activities, that ITT regularly made payments on delinquent student borrower accounts to temporarily keep PEAKS loans from defaulting and triggering tens of millions of dollars of guarantee payments, without disclosing the practice to investors.

As ITT began to disclose the actual amount payments it would need to make on the guarantees, ITT's stock price declined dramatically, falling by approximately two-thirds over the course of 2014, regulators said.

"Modany and Fitzpatrick should have been responsible stewards for investors but instead, according to our complaint, 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," said Andrew Ceresney, director of the SEC's enforcement division.

ITT Educational Services operates over 130 ITT Technical Institutes in 38 states, including over a dozen campuses across California, with campuses in Oxnard, Sylmar, San Bernardino, and other cities.

There was no immediate response to the complaint from ITT or its executives.

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