Former ITT Educational Services Inc. CEO Kevin Modany has agreed to pay $200,000 and accept a five-year ban from serving as an executive of a public company to settle a Securities and Exchange Commission lawsuit accusing management of hiding the rapidly eroding financial condition of the now-defunct firm from investors.
Former ITT Chief Financial Officer Daniel Fitzpatrick agreed to pay $100,000 and accept the same ban under a separate settlement. Under the deals, neither man admitted wrongdoing.
The settlements came just before a trial that was scheduled to begin Monday morning and was expected to last two weeks.
The amounts the men agreed to pay are modest in the context of the ferociousness of legal battle that has been playing out between the two sides since the SEC filed its suit three years ago. Both sides rang up legal costs that no doubt far exceeded the amounts of the settlements.
For example, in a recent squabble over whether six expert witnesses should be permitted to testify, attorneys for the SEC and executives submitted 2,000 pages of filings and exhibits.
In a statement, Stephanie Avakian, co-director of the SEC’s Division of Enforcement, said: “Holding individuals accountable—particularly senior executives—is a critical focus of our enforcement program. These settlements, entered into on the eve of trial after years of litigation, reflect our commitment to this accountability.”
Attorneys for Modany, 51, and Fitzpatrick, 58, told Reuters that their clients were pleased to put the case behind them.
The SEC’s 56-page suit charged the pair with concealing from investors the “extraordinary failure” of two off-balance-sheet student loan programs ITT helped set up in 2009 after the financial crisis shut down the market for traditional private education loans.
The complaint alleged that, as loan defaults mushroomed at the for-profit education company, the pair “routinely misled” the company’s auditor, PricewaterhouseCoopers, on numerous fronts—including by not sharing internal projections that showed even bigger problems brewing—an omission that “helped to further the defendants’ fraudulent scheme.”
But attorneys for Modany and Fitzpatrick scoffed at the allegations, calling them “overreaching” and often “based on pure speculation.” “The SEC’s pleading approach followed the commonly known tactic of throwing as much mud as possible against the wall in the hope that some sticks,” a filing said.
In particular, the pair say they relied on an army of advisers for guidance on how to handle a range of sensitive issues, such as whether it was permissible for the company to make minimum payments on students’ loans to prevent them from sliding into default.
The SEC alleged in its suit that minimum payments ITT made had the effect of masking the company’s deteriorating financial condition, since it put off the need for the company to disclose that loans had gone bad and weren’t going to be repaid.
In a court filing, Modany and Fitzpatrick counter that both in-house and outside legal counsel reviewed ITT’s loan disclosures and earnings-call statements, without citing problems. Further, the men contend they were forthcoming with PricewaterhouseCoopers.
“Each quarter, PwC made ‘hundreds’ of requests for information from ITT, and in turn, ITT provided the requested information to PwC,” the filing says.
ITT dismissed its 8,000 employees and shut down its 130 ITT Technical Institutes in 38 states in September 2016—driven under by federal sanctions, including a prohibition against providing financial aid to new students. The government said it tightened the screws because it had “significant concerns about ITT’s administrative capacity, organizational integrity, financial viability and ability to serve students.”
In short, ITT was under unprecedented scrutiny over whether its expensive diplomas (a two-year associate’s degree ran about $45,000) were leaving students awash in debt while failing to properly prepare them for gainful employment.
Modany and Fitzpatrick appeared to have put the case to rest last year when they struck a settlement with SEC staff. But when the deal went before the SEC’s three commissioners, they turned it down, apparently concluding it was too lenient.
Because the deal wasn’t approved, terms weren’t disclosed. Since that rejection, the makeup of the commission has changed. It now has five members.
Modany still faces significant legal challenges. Last month, ITT’s bankruptcy trustee filed a $250 million lawsuit against Modany and eight of its former directors, charging that breaches of fiduciary duty and lapses in oversight led to the company’s demise.
The suit focuses on events from April 2016 to September of that year, when the company shut down. Fitzpatrick, who is not a defendant in that case, left ITT in July 2015.