Two executives at ITT Educational Services, Inc. -- one of for-profit colleges' biggest operations with 57,000 students at more than 130 campuses in 38 states -- were charged with fraud yesterday by the Securities and Exchange Commission.
Former CEO Kevin Modany and current CFO Daniel Fitzpatrick hid the company's poor performance from investors and covered up the financial fallout of two ITT-guaranteed student loan programs, according to the SEC complaint.
The announcement comes at a bad time for the for-profit higher ed industry.
Less than three weeks ago, Corinthian Colleges, the focus of numerous federal and state investigations, said it was closing its doors. It's a move that could cost taxpayers more than $200 million in canceled student loans.
In the ITT case, the defendants are essentially accused of a cover-up.
Following the collapse of the private student loan market, federal officials say the two men and ITT's parent company, ITT Educational Services, Inc., created two in-house lending programs, "PEAKS" and "CUSO," as "off-balance sheet loans," meaning debts that weren't included on the company's balance sheet.
The defendants allegedly lured others to invest in the loans by providing a guarantee that limited investors' risk of loss.
But it was the poor financial performance of these lending pools that torpedoed the scheme. By failing to deliver the promised returns, ITT's loan guarantor obligations kicked in and started an implosion.
"Rather than disclosing to its investors that it projected paying hundreds of millions of dollars on its guarantees," the complaint reads, "ITT and its management took a variety of actions to create the appearance that ITT's exposure to these programs was much more limited."
For instance, the SEC alleges ITT never disclosed its practice of regularly making payments on delinquent accounts held by student lenders. This temporarily kept the PEAKS loans from defaulting and triggering tens of millions of dollars of guarantor payments.
Headquartered in Carmel, Indiana, with Minnesota campuses in Brooklyn Center and St. Paul, ITT and the two executives have close ties to Rep. John Kline, Minnesota's Most Reprehensible Congressman (TM).
According to the Center for Responsive Politics, which monitors money in politics, the trio has funneled tens of thousands of dollars into Kline's campaign coffers.
The center's data shows ITT Educational Services donated almost $15,000 to Kline's campaign committee last year. In 2012, the company supported Kline with more than $16,000 in donations.
Modany, whose ITT salary in 2009 was almost $7 million, cut a $1,300 check to Kline's political coffers last June. A year earlier, the former CEO donated $2,600 to the congressman.
Modany's executive compensation in 2012 was almost $9 million.
As the company's current CFO, Fitzpatrick, whose salaries in 2009-10 totaled nearly $3.5 million, was almost as generous, making two $1,000 donations to Kline's political war chest over the past two years.
According to the center's data, ITT has been one of Kline's most generous and loyal campaign contributors since he became the influential chairman of the House Committee on Education and the Workforce in 2010.
If Kline's relationship with ITT shows a lack of due diligence on the congressman's part, it's been an even worse investment for American taxpayers.
According to Sen. Tom Harkin's report on for-profit colleges, the company took in more than $1 billion in public monies via federal student loans and grants in 2010. That windfall of free money resulted in a $614 million profit. This despite the fact that roughly half of its students dropped out.
Moreover, ITT has long had problems staying out of trouble.
Last summer, mere weeks after Kline had cashed his ITT campaign contributions, the company was targeted by the Consumer Financial Protection Bureau for predatory lending.
In 2011, TV news investigations in Wisconsin showed evidence of widespread grade inflation, which was allegedly a way for ITT to increase federal student aid funding.
Six years earlier, the company agreed to pay California almost $750,000. The payout was the result of a lawsuit settlement, in which ITT was alleged to have inflated student grades in an effort to qualify for more state student aid.
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