ITT Educational Service Inc. (ESI) Plummets on Enforcement Action By SEC

Shares of Carmel, Indiana, based ITT Educational Service Inc. plummeted on Tuesday, against the backdrop of a mild decline in stocks overall. ITT's (ESI) stock fell 43.53%, losing $1.75 per share, to close at $2.27, on volume of 8,051,635 shares. The Securities and Exchange Commission filed an enforcement action against the company, alleging that the company, and two of its executives, misled investors about the impact of two failing student loan programs on the company's results.

Founded in 1946, ITT Educational Services, Inc. provides post-secondary degree programs across the US.
It offers accredited technology-based undergraduate and graduate degree programs to 57,000 students through its ITT Technical Institute and Daniel Webster College segments. The programs offered enable students to develop relevant career skills across a variety of careers. The company has 147 campuses located in 39 states, but offers programs in all 50 states through its online program offerings. The company's stock trades on the NYSE.

On Tuesday, the Securities and Exchange Commission (SEC) filed an enforcement action against ITT, as well as against two of its executives, alleging that the company misled investors about the impact that two failing student loan programs would have on the company's operating results.

The SEC is taking specific aim at loan programs created by ITT in 2009 and 2010 that made it easier for students to obtain financing in the midst of a more restrictive lending environment in the private lending market. In order to encourage third party lenders to finance the loans ITT offered financial guarantees in the event that loans began defaulting at a high level. The loans began performing poorly by 2012, when the SEC alleges that ITT failed to disclose the rising liability to its investors. Instead, the company and two of its executives made payments on behalf of borrowers who were at risk of default. The two executives have recently announced that they're leaving the company.

The Consumer Financial Protection Bureau (CFPB) sued the company in 2014 on charges that the company encouraged students to take on high-cost loans to attend the school, and that the loans were likely to default.

The announcement comes amid broader troubles in the for-profit college sector. Within the past few weeks, Corinthian Colleges filed for bankruptcy and closed its operations. Corinthian was also facing regulatory action, asserting that the company inflated both its graduation and job placement rates in an attempt to encourage students to take high cost loans to attend the program. Other for-profit operations are also closing campuses. Students enrolled in for-profit institutions account for 44% of defaults on federal student loans, though they represent only 11% of the student population overall.

The company has vowed that it will fight the allegations. "We vehemently disagree with the SEC's position and we are confident that the evidence does not support the SEC's claims, the company responded in a news release on its website, "We are eager to have the court clear our reputation that has been unnecessarily endangered by the SEC's action...Throughout the relevant time period, we repeatedly expanded our disclosures in an effort to present material information to investors... The company's robust record of consultation and deliberation rebuts any allegation of wrongdoing."

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Published on May 13, 2015
By Kevin Mercadante

Copyrighted 2016. Content published with author's permission.

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