It’s a tough job to defend your reputation when the public company you led has crashed into bankruptcy, leaving investors wiped out, thousands of employees jobless and tens of thousands of former customers feeling ripped off.
Such is the challenge confronting former ITT Educational Services CEO Kevin Modany and Chief Financial Officer Daniel Fitzpatrick, who are trying mightily to demonstrate in a federal lawsuit playing out in Indianapolis that, just because their company went up in flames doesn’t mean they committed fraud.
The case, brought by the Securities and Exchange Commission in 2015, is heating up in the wake of the commission’s decision over the summer not to accept settlement offers the two men signed in the spring. The unusual rejection—apparently a sign that commissioners viewed the terms (which weren’t publicly disclosed) as too lenient—sets the stage for a June 2018 jury trial.
The SEC’s blistering 56-page suit broadly charges that Modany and Fitzpatrick concealed 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 alleges that, as loan defaults mushroomed, 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.”