On a chilly winter morning 16 months ago, federal investigators converged on ITT Educational Services Inc.'s Carmel headquarters and 10 of its 77 campuses, gathering documents in a high-profile raid that rattled investors and sent the company's shares into a free fall.
Now, the U.S. Attorney's Office in Houston, which obtained the search warrants authorizing the raid, acknowledges its sweeping criminal probe failed to turn up evidence that would justify charges against the company or its top brass.
The turnabout, while good news for the forprofit education company and its shareholders, is sparking questions in the investment and legal communities over whether investigators went overboard in the first place, unfairly tarnishing ITT's reputation.
"It suggested to me there was some serious wrongdoing when they sent all the troops up here to seize the documents with the search warrant," said Thomas W. Farlow, who chairs Locke Reynolds' White Collar Criminal Defense Group and is a former Marion County deputy prosecutor.
"I'm always concerned when I see the government use search warrants, as opposed to subpoenas, to find documents in public companies, because a search warrant is going to be a public affair," he added. "Were they responsible here? Hindsight suggests ... they may have been overreaching and not as careful as they should have been."
Added Trace Urdan, who follows ITT for Robert W. Baird & Co. in San Francisco: "There might have been an intermediate step available to them. I think it was a little over the top."
The company on June 24 received a letter from Chuck Rosenberg, acting U.S. attorney for the southern district of Texas, stating that the investigation "has not revealed evidence sufficient to continue the designation of ITT" or senior officers as targets or subjects.
While ITT CEO Rene Champagne said in a written statement that the government continues to look at "local issues at certain schools," analysts say Rosenberg's letter lifts the cloud of suspicion that has enveloped the company since the raid.
ITT would not make company executives available for interviews, and an official in the U.S. Attorney's Office in Houston declined to comment in detail, citing the continuing investigation.
However, Executive Assistant U.S. Attorney Nancy Herrera responded sharply to suggestions her office had gone overboard by launching the raid. She noted the search was authorized by a court, adding that she would not "speculate or comment on speculation of others not involved in the investigation."
The U.S. attorney at the time of the raid was Michael Shelby. He resigned this spring and is starting work with a Houston law firm in mid-July. He could not be reached for comment.
In his written statement, Champagne said that while ITT had not known about the investigation before the raid, the company has since been told it began three years ago and extended into nearly every area of operations.
"We cooperated fully with the investigation, producing more than 11 million pages of documents and making our key personnel available for interviews," he said. "Although it was a very exhaustive and expensive effort, the company had nothing to hide."
Analysts speculate the investigation was spawned by a spate of lawsuits filed by exemployees at ITT campuses in recent years charging company officials used false records to overstate graduation rates, placement rates and other performance measures.
Despite the public-relations nightmare the raid created, ITT has continued to pump out quarter after quarter of strong operating results. Even so, analysts say the company paid dearly, in terms of its share price and legal fees to defend itself.
In the weeks after the raid, ITT shares shed nearly half of their value, wiping $1.3 billion off the company's market value. While the stock has climbed back, it hasn't recovered all the lost ground. Shares late last week were fetching $53.88 each, 6 percent below the price the day before the raid.
Since the raid, the company has poured whopping sums into conducting an internal probe, responding to investigators, and defending itself against an avalanche of securities-fraud lawsuits filed in its wake.
In the first quarter, ITT socked away another $7.7 million for legal and investigative costs, bringing the total set aside to $32.8 million. ITT reported 2004 profit of $75 million, 17 percent below what it would have reported without the expenses.
Even with the criminal probe behind it, the company still may face additional legal costs, analysts says. ITT still must defend itself in the securities fraud cases, though the fizzling of the criminal probe may weaken those.
In addition, ITT continues to be under investigation by the California Attorney General's Office and by the Securities and Exchange Commission, which launched a civil inquiry in the days after the raid. However, analysts say, those probes do not pose nearly the threat to the company that the federal criminal investigation did.
The closing of the criminal probe "clearly removes a major element of legal/regulatory uncertainty and is evidence that these issues can be resolved without a Draconian outcome," Jerry Herman, an analyst with Legg Mason in Cleveland, said in a report.
Legal observers say they're not privy to why the U.S. Attorney's Office chose to gather information with a search warrant, rather than relying on subpoenas. While ITT probably would have felt compelled to disclose receiving subpoenas in public filings submitted to the SEC, doing so would have had a less unnerving effect on Wall Street.
Normally, investigators seek a search warrant only when they fear information otherwise would be destroyed or withheld. To receive a warrant, a prosecutor must go before a judge, explain what he wants to collect, and show probable cause a crime has been committed. In contrast, investigators don't need to show probable cause for subpoenas.
Because the raid cast such uncertainty over the company, analysts ran for cover. Typical was Mark Marostica, an analyst with Piper Jaffray, who wrote in a report at the time: "The sheer ferocity of [the] raid ... in our mind underscores the seriousness of the situation."
Farlow, the Indianapolis criminal defense attorney, said investigators the past few years seem to be using search warrants more often to obtain business records-perhaps because they've decided to play tougher in the wake of highprofile scandals at Enron Corp. and other companies.
Dennis Kinnaird, a former prosecutor who's now a criminal defense attorney in Los Angeles, said he couldn't pass judgment on whether the federal government went too far in the ITT case without knowing what investigators thought they had.
Kinnaird noted the investigation could have been far worse for ITT. He said government investigators typically conclude probes by saying nothing, leaving those under scrutiny dangling for years.
"The only thing that is really unusual to me is they gave such a strong letter, saying they were declining prosecution," he said. "That is relatively unprecedented. In the nearly 40 years I've been doing this, I certainly haven't gotten one."