On Tuesday May 12, 2015 the Securities and Exchange Commission (“SEC”) charged the CEO and CFO of ITT Educational Services Inc. (NYSE: ESI) with fraud. The company which runs a popular nationwide chain of for-profit technical colleges under the name ITT Technical Institute (“ITT Tech”) allegedly defrauded investors by materially misstating the financial performance of its student loan portfolio.
Allegedly, the company encouraged financial institutions to make inherently risky loans to ITT Tech students. In turn, ITT Tech would guarantee these loans thus transferring the risk onto itself. However, the SEC alleges that company executives did not fully disclose, and in fact materially misstated, the default risk ESI investors faced from this loan guarantee mechanism.
By 2012, the loan portfolio was performing so poorly that the loan guarantees were triggered. However, the SEC alleges that company executives again downplayed the severity of the situation. By 2014, the Department of Education placed ESI under formal review due to failure to submit financial aid compliance audits, leading to the firm’s outside auditor resigning.
For reference sake, technical degrees from the school range from $40,000 for an “Associate in Accounting” if taken online, to $95,000 for a “Bachelor in Information Systems and Cybersecurity” if taken at the company’s New Mexico location (ITT Educational Services 2014/15 Total Cost of Attendance Table). Over the years, the company has faced numerous lawsuits by former students and federal investigations over issues ranging from grade point average manipulation/inflation to coercive recruitment and predatory lending.