The U.S. Securities and Exchange Commission on Friday said it settled a lawsuit against two former ITT Educational Services executives accused of hiding the defunct for-profit college operator's actual financial condition from investors.
The settlements with former Chief Executive Officer Kevin Modany and former Chief Financial Officer Daniel Fitzpatrick came ahead of a trial scheduled for Monday in federal court in Indianapolis, Indiana.
The deal came after the SEC's commissioners took the rare step last year of rejecting an earlier proposed settlement negotiated between the defendants and the agency's staff.
Under Friday's settlements, both men agreed to be barred from serving as officers and directors of publicly-traded companies for five years. Modany and Fitzpatrick will also pay penalties of $200,000 and $100,000, respectively.
Modany and Fitzpatrick settled the lawsuit without admitting or denying the SEC's claims that they acted as so-called "control persons" for ITT's securities violations.
David Miller, Modany's lawyer, and Fredric Firestone, Fitzpatrick's lawyer, said both men were pleased to put the case behind them.
In 2015, the SEC sued Carmel, Indiana-based ITT, Modany and Fitzpatrick and accused them of fraudulently concealing from its investors potentially huge losses in two student loan programs that the for-profit college operator had guaranteed.
The SEC said that by 2012, the loans made through those programs were performing abysmally, with high default rates.
But instead of disclosing that it expected to owe hundreds of millions of dollars because its guarantee obligations had been triggered, ITT and its management took steps to make its exposure to the programs appear limited, the SEC said.
In 2016, the U.S. Department of Education banned ITT from enrolling new students who receive federal aid.
ITT subsequently announced it would shut its 137 technical college campuses in 39 states, which affected about 35,000 students. It filed for bankruptcy in September 2016.
The SEC settled its case against ITT in July 2017, after reaching agreements-in-principle two months earlier to resolve the charges against Modany and Fitzpatrick.
But in August 2017, SEC attorneys informed the court that the agency's commissioners had rejected the proposed settlements with Modany and Fitzpatrick.
Democratic Senators Dick Durbin of Illinois and Sherrod Brown of Ohio wrote to SEC Chairman Jay Clayton in June 2017 urging the SEC to permanently bar Modany from acting as an officer of a publicly traded company and to seek tough penalties against him and Fitzpatrick.
The case is SEC v. ITT Educational Services Inc et al, U.S. District Court, Southern District of Indiana, No. 15-00758.