Problems continued to pile up for Daniel Webster College’s parent company Tuesday, as the Securities and Exchange Commission accused ITT Educational Services Inc. and two executives of fraud over their handling of massive student loan programs.

The SEC alleges that the national operator of for-profit colleges, which bought Daniel Webster College in 2009, fraudulently concealed the financial impact of two such programs that ITT had backed. It is seeking fines and restraining orders, and asks that the company and executives “disgorge any and all ill-gotten gains.”

ITT says it “vehemently” disagrees with the allegations, according to an Associated Press report published Tuesday.

The company’s stock fell 37 percent to an all-time low of $2.55 in afternoon trading. Shares had peaked at $133.75 in 2009.

The lawsuit, filed Tuesday, follows a separate suit filed in February by the Consumer Financial Protection Bureau against the national for-profit college chain. The CFPB alleges that ITT pushed students into high-cost private student loans even though ITT official knew the loans would likely end in default. The company denies that charge.

Neither lawsuit mentions Daniel Webster College.

ITT Educational Services operates 135 ITT Technical Institutes in 40 states.

Tuesday’s SEC complaint was filed in U.S. District Court in southern Indiana, where ITT is headquartered. It asks for a jury trial.

“By 2012, the loans made through these programs had performed so abysmally, with extremely high default rates, that ITT’s guarantee obligations began to balloon,” the suit claims. “Rather than disclosing the significant impact of these guarantee obligations to ITT’s investors, the defendants engaged in a series of deceptive acts to hide the poor performance of the student loan programs and their financial impact on ITT. The defendants also made numerous misstatements and omissions – in ITT’s public filings and in conference calls with financial analysts – that similarly concealed the condition of the student loan programs and ITT’s guarantee obligations.”

The lawsuit asks the court to fine the company and the two executives – CEO Kevin Modany and Chief Financial Officer Daniel Fitzpatrick – and make them “disgorge any and all ill-gotten gains.”

According to the lawsuit, ITT formed two student loan programs – called the PEAKS and CUSO programs – to provide “off-
balance sheet loans” for ITT students after the collapse of the private student loan market.

ITT provided a guarantee that limited any risk of loss from the student loan pools, but soon faced the payout of hundreds of millions of dollars on the guarantees.

“ITT and its management took a variety of actions to create the appearance that ITT’s exposure to these programs was much more limited. Over the course of 2014 as ITT began to disclose the consequences of its practices and the magnitude of payments that ITT would need to make on the guarantees, ITT’s stock price declined dramatically, falling by approximately two-thirds,” the lawsuit says.

“Modany and Fitzpatrick should have been responsible stewards for investors but instead, according to our complaint, they engineered a campaign of deception and half-truths that left ITT’s auditors and investors in the dark concerning the company’s mushrooming obligations,” Andrew J. Ceresney, director of the SEC’s Division of Enforcement, said in a press release.

Among other things, the SEC alleges that ITT made its own payments on delinquent student borrower accounts, temporarily keeping PEAKS loans from defaulting and triggering tens of millions of dollars of guarantee payments, without disclosing this practice. It also alleges various bookkeeping irregularities and says officials “misled and withheld significant information from ITT’s auditor.”

David Brooks can be reached at 594-6531, dbrooks@nashua
telegraph.com or @GraniteGeek.