The Securities and Exchange Commission has reached settlements with two former senior executives of ITT Educational Services Inc., which the Commission says hid its true financial condition from investors. The resolution successfully concludes an SEC case against the national operator of for-profit colleges that was otherwise scheduled to begin trial on July 9.
Under the terms of the agreements, former CEO Kevin Modany and former CFO Daniel Fitzpatrick are barred from holding senior positions at public companies and ordered to pay penalties in the settlements filed in federal court in Indiana.The SEC alleged that they fraudulently concealed the poor performance and looming financial impact of two student loan programs that ITT financially guaranteed. The firm previously settled fraud charges based on the same alleged conduct.
Modany and Fitzpatrick settled the SEC’s claims charging them as control persons for ITT’s fraud and other violations.
The court’s judgments, entered on July 6:
barred Modany and Fitzpatrick from serving as officers and directors of public companies for five years;
ordered Modany and Fitzpatrick to pay penalties of $200,000 and $100,000, respectively; and
enjoined each of them from controlling persons who violate antifraud and periodic reporting provisions of the federal securities laws.
Modany and Fitzpatrick also agreed to be suspended from appearing and practicing before the SEC as accountants. Pursuant to their agreement, they will be permitted to apply for reinstatement after five years.
The executives agreed to the settlements without admitting or denying the allegations contained in the Commission’s complaint.
The charges date back to May 2015 when the SEC first announced fraud charges against ITT Educational Services, Modany, and Fitzpatrick.
The Commission alleged that company and its two executives “fraudulently concealed from ITT’s investors the poor performance and looming financial impact of student loan programs that it financially guaranteed.” To induce others to finance the risky loans, ITT provided a guarantee that limited any risk of loss from the student loan pools.
According to the SEC’s complaint filed in the U.S. District Court for the Southern District of Indiana, the underlying loan pools had performed so abysmally by 2012 that ITT’s guarantee obligations were triggered and began to balloon. Rather than disclosing to its investors that it projected paying hundreds of millions of dollars on its guarantees, ITT and its management took actions to create the appearance that the company’s exposure to these programs was much more limited.
The ensuing 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.
Andrew Ceresney, then-director of the SEC’s Division of Enforcement, said that: “Modany and Fitzpatrick should have been responsible stewards for investors” but instead, “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.”