SEC Commissioners Rejected Settlement with ITT Tech CEO
The U.S. Securities and Exchange Commission has rejected a proposed settlement of the SEC’s lawsuit against two former executives of the collapsed for-profit college company ITT Educational Services. In a court filing on August 11, SEC lawyers told the Court that “the Commission will not approve the proposed settlements” with former ITT CEO Kevin Modany and the company’s ex-chief financial officer Daniel Fitzpatrick. The lawyers wrote, “Following the settlement conference in this case, SEC counsel prepared a detailed written memorandum for review and comment by the various Offices and Divisions of the SEC. The settlement proposal was then presented to the Commissioners for consideration. As a result of that process, SEC counsel has been informed that the Commission will not approve the settlements.”
The SEC currently consists of three commissioners: Chairman Jay Clayton, appointed by President Trump; another Republican pick, Michael Piwowar; and a Democratic appointee, Kara Stein; there are two vacancies.
SEC commissioners rarely reject the recommendation of the commission’s enforcement division to settle cases. The Commissioners did approve a toothless settlement with the bankrupt company itself, filed in court on July 3.
The SEC’s refusal to settle with the ITT executives came after two Democratic senators, among others, raised questions and concerns about the possibility of the SEC reaching a weak settlement with them.
With Modany in charge, ITT Tech destroyed the financial futures of thousands of students across the country, just as surely as Hurricane Harvey has ravaged so many homes in the Gulf region.
Secretary of Education Betsy DeVos seems determined to return to a recent era when for-profit colleges got tens of billions from taxpayers without accountability, no matter how badly some companies in the industry abused students and ripped off taxpayers. Just this week, her department offered for-profit colleges an extra seat at the table for upcoming negotiations on how to dismantle Obama administration rules to protect students against predatory college abuses. As Politico first reported, DeVos also hired for the critical job of the head of the Department’s enforcement unit — in charge of investigating illegal conduct by schools — Julian Schmoke, a college administrator who apparently has no investigative experience but previously worked at for-profit DeVry University, which has been under investigation by multiple law enforcement agencies and last year paid $100 million dollars to settle a Federal Trade Commission lawsuit charging that it deceived students. DeVos’s top advisor on for-profit college issues, Robert Eitel, until recently worked at Bridgepoint Education, another predatory company facing multiple law enforcement probes.
Because DeVos seems to be signaling that for-profit colleges can go back to the same kind of predatory practices that characterized the notorious sham “university” once run by DeVos’s boss Donald Trump, because she is basically giving for-profit colleges everything they want, the industry has even tamped down its enormous lobbying budget.
But law enforcement efforts, both federal and state, are continuing against bad actors in the industry, of which there are many. The SEC’s decision this month underscores the importance of this work.
In May 2015, the SEC sued ITT, Modany, and Fitzpatrick for securities fraud, alleging that the company and the two executives concealed from investors “the poor performance and looming financial impact of two student loan programs that ITT financially guaranteed… Modany and Fitzpatrick should have been responsible stewards for investors but instead… 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.”
On May 16, 2017, following a settlement conference, the judge in the case, Mark J. Dinsmore of the U.S. District Court for the Southern District of Indiana, issued an order declaring, “A settlement has been reached in this action,” and directing the parties to draft a final order.
But on June 30, the SEC filed in court a settlement in the case with ITT only, not the executives. That settlement was virtually worthless: ITT, represented by the for-profit colleges’ favorite fraud-defense law firm, Gibson Dunn, paid no monetary fine and admitted no wrongdoing. ITT did agree not to violate federal securities laws going forward, but considering ITT doesn’t operate anymore, that was no promise at all.
At the same time, however, the SEC, Modany, and Fitzpatrick filed a report informing the judge that “the settlement documents have been finalized and, by June 30, 2017, were signed by Messrs. Modany and Fitzpatrick. SEC counsel has begun the process of recommending this settlement for approval by the SEC’s Commissioners.”
Yet on August 11, the SEC lawyers revealed that the commissioners had blocked the settlement, and yesterday, the SEC, Modany, and Fitzpatrick filed in court a joint status report indicating that they are still wrangling over witnesses and document requests. So, for now, the case is going forward.
On June 30 (apparently unaware that the SEC was filing settlement papers with ITT that very day), Senators Dick Durbin (D-IL) and Sherrod Brown (D-OH), both consistent champions for students abused by for-profit schools, had written to Clayton, the new chairman of the SEC, arguing that “justice demands that any outcome in this matter include the highest applicable civil money penalties and disgorgement of the ill-gotten gains with which Mr. Modany and Mr. Fitzpatrick have thus far absconded.” They also urged the the SEC to work with the Justice Department of Justice to determine whether the company or executives should face criminal charges.
Other members of Congress, and advocates for students, were delivering a similar message.
In early July, Senator Durbin submitted some written questions on the ITT lawsuit to Chairman Clayton, following his testimony before the Senate appropriations committee. The answers came back from Clayton in early August, just prior to the SEC filing that the Commission had rejected the settlement.
Clayton wrote to Durbin that the SEC case against Modany and Fitzpatrick “is ongoing.” He added, “During a court-ordered settlement conference, Modany and Fitzpatrick made settlement offers in the case filed against them. If approved by the Commission, the settlements will be submitted to the District Court for approval and entry of final judgments against Modany and Fitzpatrick.” But the July 3 and August 11 court filings, signed by SEC attorneys, said more than that Modany and Fitzpatrick had made settlement offers — it said that settlement documents have been finalized and that SEC lawyers had asked the commissioners to approve them.
Clayton’s answers to Durbin’s questions about the ITT case also stressed the chairman’s commitment to counter financial wrongdoing: “The SEC is committed to rooting out fraud and shady practices in our markets wherever they exist and to holding wrongdoers accountable where appropriate…. This is an area in which I have taken a particular interest, as I am hopeful that working with criminal authorities can help keep bad actors, particularly recidivists, away from our markets and investors who rely on the integrity of our markets.” (Durbin also asked Clayton about the SEC’s investigation of Bridgepoint Education, the company where DeVos advisor Eitel worked until recently; Clayton declined to respond, citing the confidentiality of Commission probes.)
Before ITT shut down its 130 campuses, with some 45,000 students, last September under the weight of numerous law enforcement probes and allegations of egregious abuses and gross mismanagement, it was receiving as much as $1.1 billion a year in taxpayer-funded student aid. (My own determination to fight abuses in this industry came in a single moment: the day in 2010 that I spent on Capitol Hill with former ITT employee Rashidah Smallwood, who was fired for refusing to follow orders to commit fraud.)
From 2007 to 2014, Kevin Modany got more than $36 million in total compensation. In January 2016, less than nine months before ITT closed, with the company mired in fraud charges, Modany received a $515,048 bonus.
Modany, who in 2015 made his former executive assistant his second wife, and whose now-abandoned ITT office sported “glossy wooden furniture … a 55-inch flat-screen TV mounted on the wall … a small gym with two treadmills, an elliptical trainer, a pull-up tower and silver free weights ranging from 5 to 70 pounds… a small bathroom with a shower … a Keurig coffeemaker and a Ninja blender… bags of pretzels and trail mix, and the refrigerator still chilled diet peach teas, low-calorie Gatorade, vitaminwater zero and a protein shake … a box of PJ’s Organics Skinny Low-Fat Chicken Burritos” — while ITT was getting nearly 90 percent of its revenue from US taxpayers — has, shamelessly, made a claim for cash in the ITT bankruptcy case, which is also pending in the Southern District of Indiana, seeking some $3.4 million in severance and deferred compensation.
But Modany and his ex-colleagues meanwhile face real trouble from Deborah Caruso, the federal bankruptcy trustee appointed in the case, who has indicated that she may sue Modany and Fitzpatrick, and, in May, demanded $50 million from former ITT board of directors members (or, really, ITT’s insurance company) for allowing abuses at the company.
Former ITT students are seeking to intervene in the ITT bankruptcy case, appropriately asking that they get at least some of their money back, ahead of guys like Modany.
The U.S. Consumer Financial Protection Bureau is pursuing a lawsuit that it filed in 2014 in the same Indiana courthouse, seeking $639 million over allegations that ITT used unfair and deceptive practices to coerce students into taking out high-interest private loans. New Mexico and Massachusetts also have lawsuits pending against the company.
Even if Betsy DeVos is prepared to gut her own department’s regulations and enforcement efforts, she cannot stop federal and state law enforcement agencies and officials of integrity from pursuing wrongdoing in the industry. Let’s hope that Jay Clayton and his fellow SEC commissioners hold their ground and carefully consider any future settlement proposal in this case or others involving predatory schools. Let’s hope they listen to student champions like Senator Durbin, or maybe even do some research (or just follow the links in this article) about the enormous harms that Modany and ITT Tech, and other for-profit college executives, did to thousands of veterans, single moms, immigrants, and others seeking a better life through education.
This article also appears on HuffPost.