For Profit College Operator ITT under Fraud Charges by the SEC

The Securities and Exchange Commission (SEC) filed civil fraud charges against the national for-profit college operator ITT Educational Services (ITT).

The operator and CEO Kevin Monday, as well as financial officer Daniel Fitzpatrick are found under charges since Tuesday. No action has been taken so far concerning the fraud allegations. Yet, company officials are hopeful that the situation will not change pending results of the court.

The charges filed by SEC refer to the company having hid the financial impact of two in-house student loan programs, financially guaranteed by ITT.

The two programs, known as „PEAKS” and „CUSO” were established after the collapse of the private student loan market. Both provided off-balance sheet loans to students at more than 130 campuses. In attracting financing of the loans, ITT proposed a guarantee against risk of losses.

Although private lenders had withdrawn from the market and banks had ceased their credit extending to students based on their reported high default rates, ITT decided to take the lead.

However, the student loan programs performed well under expectations, triggering ITT’s guarantee obligations. Allegedly, faced with the situation, the response of ITT Kevin Monday and Daniel Fitzpatrick was to design a cover-up, feeding investors misleading statements regarding the company projections of paying millions of dollars on the aforementioned guarantees.

SEC regards this as a fraud meant to hide the true extent of the financial impact. When the first statements regarding the financial consequences of the loan guarantees were released, ITT’s value dropped dramatically on the market. Now, with the federal lawsuit looming on the for-profit national college operator, ITT’s shares dropped by as much as 43.5 percent to a low 1.75 dollars.

ITT Educational Services is not the first for-profit college operator to take a plunge under federal lawsuits coupled with low student enrollment. Corinthian Colleges, the subject of another federal lawsuit has filed for bankruptcy. Career Education Corp. announced that it would close the Stanford-Brown schools. Other examples are speaking for the same trend.

ITT Educational Services boasts 130 campuses nationwide. It offers both bachelor level and master level programs in the areas of criminal justice, IT, nursing, business and others. However, as of March, enrollment dropped 16 percent. Overall, enrollment dropped 10 percent year to year.

Many wonder if ITT Educational Services will face the same fate as Corinthian Colleges, with the Education Department withdrawing its funding. So far, there was no statement from the Education Department sustaining this move. Nonetheless, spokesperson Denise Horn stated that ITT needed to provide the Education Department with a letter of credit for 80 million dollars. Its purpose is covering students under the circumstances that the company cannot cover federal student aid liabilities.

Image Source: turner.com