College Operator Hid "Extraordinary Failure" Of Its Student Loans, SEC Alleges

The owner of ITT Technical Institute, as well as its CEO and CFO, have been accused of concealing the "extraordinary failure" of its student loan programs from investors.

The Securities and Exchange Commission has charged the for-profit college giant ITT Educational Services and its two top executives with fraud, saying the company "made various false and misleading statements and omissions" that concealed the "extraordinary failure" of two of its student loan programs from investors.

The news sent the troubled company into a financial tailspin, with its stock plummeting 36%. The stock is now down 98% from its high point in 2008, and the company is in disarray: its top executives, the subjects of the SEC charges, have announced plans to leave the company later this year, and it has yet to file its 2014 annual report, which was due in March.

It is also facing an ongoing investigation from the Consumer Financial Protection Bureau, which has accused it of running a predatory lending scheme. With the new charges, "Investors may well turn on ITT and send it into junk status," said Ben Miller, an analyst at the New America Foundation.

ITT owns ITT Tech, a nationwide chain of pricey technical schools (associate degrees start at $45,000) that enrolled some 50,000 students in 2014, and more than 80,000 at the company's peak in 2009. The SEC's complaint alleges that ITT's CEO Kevin Modany, and finance chief Daniel Fitzpatrick, conspired to conceal the failure of a pair of the company's student loan programs.

The loans, which the complaint alleges totaled some $440 million, were sold as securities to investors with a promise that if too many students defaulted, ITT would take on the payments to investors itself.

As has happened with many for-profit colleges, tens of thousands of ITT students defaulted on their loans, putting the company on the hook for the payments. The SEC alleges that Modany and ITT tried to hide the loan program's poor results—and the impending financial disaster that they would pose for the company—from investors.

That same pair of loan programs are the subject of the CFPB's lawsuit. At the time of that suit, the CFPB's director, Richard Cordray, alleged that ITT had "used high-pressure tactics to push many consumers into expensive loans destined to default."

If ITT's disarray causes the Education Department to cut off or delay the company's access to federal financial aid, the company could face bankruptcy. A clause in the company's agreement with its lenders would send the company into immediate default in the event of a financial penalty from the department. Trace Urdan, a former analyst with Wells Fargo, told BuzzFeed News last year that such a penalty was "an automatic game-over scenario."

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