SEC Charges ITT Educational Services Executives With Fraud, Peers Trading Lower

Shares of ITT Educational Services, Inc. ESI plunged more than 40 percent after the company received notice that the Securities And Exchange Commission will investigate fraud charges against the company's Chief Executive Officer Kevin Modany, and its Chief Financial Officer Daniel Fitzpatrick.

The SEC alleges that that the two executives fraudulently concealed from investors the poor performance and looming financial impact of two student loan programs that the company had financially guaranteed. The two programs, known as the "PEAKS" and "CUSO" programs providing off-balance sheet loans for students following the collapse of the private student loan market.

"Our complaint alleges that ITT's senior-most executives made numerous material misstatements and omissions in its disclosures to cover up the subpar performance of student loans programs that ITT created and guaranteed," said Andrew J. Ceresney, Director of the SEC's Division of Enforcement in a press release. "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."

The investigation alleges that ITT, along with its two senior executives made a number of false and misleading statements to hide the magnitude of ITT's guarantee obligations for the PEAKS and CUSO programs.

Peers Falling On The News

News of the SEC investigation has had a ripple effect across the entire sector.

Shares of American Public Education, Inc. APEI were trading lower by nearly 20 percent, and were hit harder than its peers. Shares of Lincoln Education Services Corp LINC were off by nearly 5 percent while shares of Strayer Education Inc STRA were lower by just over 2 percent.

Apollo Education Group Inc APOL, one of the largest for profit education institutions with a $1.82 billion market cap were trading lower by just over 2 percent.