ITT Tech CEO Is Sued For Serving Himself As Company Collapsed
Kevin Modany, the long-time CEO of the for-profit college chain ITT Tech, spent the months before the company’s collapse focused on increasing his financial take from the business and trying to preserve his reputation, rather than protecting ITT’s investors — let alone the interests of ITT students or of U.S. taxpayers, who have provided billions to the company over the years through federal student grants and loans. Members of the company’s board of directors, for the most part, deferred to the self-centered Modany. These actions resulted in a 2016 “free-fall bankruptcy” that left “no shareholder equity and billions of dollars in potential claims.”
These are the central assertions of a new $250 million lawsuit filed in Indiana federal court against Modany and eight former ITT Educational Services directors by Deborah Caruso, the court-appointed trustee for ITT’s Chapter 7 bankruptcy.
ITT Tech, based in Carmel, Indiana, shut down all of its 130 campuses, spread across 38 states, with some 40,000 students, in September 2016 under the weight of multiple federal and state law enforcement investigations and lawsuits and after the U.S. Department of Education had imposed stringent conditions on continued operations and then finally cut off student financial aid.
With Modany as CEO from 2007 to the bitter end in 2016 (he joined ITT in 2002 and was previously chief financial officer, chief operating officer, and president), the company had built a disgraceful record of deceptive recruiting and marketing, high prices, and underspending on education that left numerous students without careers but deep in debt.
Modany, whose 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 … a small bathroom with a shower … a Keurig coffeemaker and a Ninja blender” — while his company was getting nearly 90 percent of its revenue from US taxpayers — received some $5.4 million in total compensation from ITT from 2014 to 2016, plus use of a company car, tickets to sporting and theater events, and other pricey perqs, even as ITT was collapsing under his leadership.
Amazingly, Modany, who now bills himself as an “Independent Executive Management and Strategy Consultant,” is seeking another $5 million in the bankruptcy for compensation he believes the company still owes him.
Caruso’s lawsuit argues that Modany’s claim should be rejected and that money should flow in the opposite direction: out of Modany’s pocket, and those of ex-ITT directors, and into the hands of other ITT creditors.
Caruso’s complaint, filed on May 31 in the federal bankruptcy court in Indianapolis, charges that ITT, which received as much as $1.1 billion in a single year from U.S. taxpayers, had some $108.6 million on hand, and shareholder equity of $162 million, at the end of March 2016, yet closed and declared bankruptcy just five months later “without an orderly plan for winding down its operations or even providing for a teach-out of its 40,000 active students.” Caruso asserts that this “tragedy could have been avoided, or at a minimum, the damages could have been significantly reduced, if Defendants had fulfilled their fiduciary duties to ITT and its stakeholders, including creditors and active students.”
Caruso’s complaint charges that the ITT the directors yielded “crucial decision-making authority” to Modany even though “Modany was conflicted and could not be trusted to place ITT’s interests above his own personal interests, including his desire to retain control of ITT and the obvious incentive to maintain the benefits of his substantial compensation package.” Modany, Caruso’s complaint explains, “was eligible for ITT’s Senior Executive Severance Plan, which provided Modany with a handsome severance payment if certain conditions were met, one of which was that Modany not be terminated for cause. Modany was also concerned with the damage to his reputation and future employment prospects if he admitted to fraud or was forced to resign as ITT’s CEO.” Thus Modany, Caruso alleges, “selfishly focused on securing a strategic transaction that would trigger his severance payment and provide him continued employment or some other face-saving exit.” He was, Caruso charges, “obsessed about protecting his reputational interest.”
Caruso’s complaint asserts that ITT entered a “crisis period” in April 2016, when its accreditor, ACICS — which had long been asleep at the switch but now was under severe pressure from the Obama Department of Education to clean up its act – directed ITT to show cause why it should not lose its accreditation because of “public and widely-known allegations” about the poor quality of its teaching. Caruso charges that the ITT directors knew that ACICS, as well as state attorneys general and federal regulators, wanted the company to fire Modany — Modany even wrote to board executive chairman John Dean that their resignations were likely necessary because “it’s almost a certainty that we need to give these guys a dead body!” — yet they kept him in charge.
Caruso also alleges that Modany and the ITT directors violated their obligations by failing to effectively pursue efforts to sell the company’s schools. She alleges that Modany “pushed the board to pursue a sale of the company or its assets, but only on terms that were beneficial to Modany, personally.” Modany “did not want to enter a strategic deal in which he would not survive as CEO because he feared that the market would perceive him as being forced out by the SEC, AGs, the CFBP, ED or the Board.”
Thus Modany sought to rebuff one pair of suitors, U.S. Skills LLC and Thomas H. Lee Partners, pushing directors to break off negotiations by emailing, “the sooner we stop talking to these guys and wasting our time, resources and the globe’s oxygen supply the better!” Modany dismissed the approach of another potential acquirer, Genki Capital, as “wild ass fishing!”
On the other hand, Modany was, for a period, willing to entertain discussions with the faith-based non-profit Dream Center; according to the complaint, Modany spoke with the Department of Education “about a proposed deal with Dream Center Foundation (“DCF”), in which DCF would maintain control over ITT but would contract out for various services. Modany chose to pursue this transaction because DCF was willing to negotiate a side-deal with Modany that would have kept Modany involved as part of this transaction.” But after the Dream Center changed course and insisted that it would need to replace the ITT CEO as part of an acquisition deal, Modany rebuffed them as well.
The ITT board, according to Caruso, did nothing to make Modany behave responsibly regarding a potential sale. Board member Samuel Odle asked board chair Dean to set up a conference call with Modany to discuss the various options for selling the company. Dean reported back that Modany “declined the request.” Odle responded: “John you are his boss. How does he decline your request?” But Modany did decline, and remained in charge.
Dean, a Washington, DC, lawyer and lobbyist, received $1,890,920 in total compensation in 2014-2015 from the heavily taxpayer-funded ITT.
My own view at the time was that ITT schools, like those owned by Corinthian Colleges, were toxic assets — deceptive call centers and predatory student loan rackets tied to low-quality education programs — and that the sale and continued operation of those schools was against the interests of students and taxpayers, even if it might benefit company investors. Since then, we’ve seen the apparently well-meaning non-profit loan business ECMC try and fail to make a viable enterprise out of running the former Corinthian schools, and now, as we recently reported, the Dream Center’s new education branch, having failed to purchase the ITT campuses, instead bought the schools owned by another collapsing predatory chain, Education Management Corporation, and now seems to be trying to leverage its operation of those schools to make money for for-profit companies tied to Dream Center education executives.
But, of course, what Caruso is alleging is that Modany was scuttling the sale of the ITT schools not out of concern for students or taxpayers but only for himself.
Caruso also charges that Modany and the ITT board failed to secure a meaningful teach-out plan — a deal to allow students to resume studies at other schools — for the vast majority of ITT’s students.
Thus when ITT finally did shut down, it was sudden, and chaotic. After the Department of Education cut off ITT’s federal aid, as I noted at the time, the company engaged in some shocking passive-aggressive behavior that revealed its indifference to its students: It wiped clean its homepage, and reduced it to a single statement: “We are not enrolling new students.” This was a callous, and telling, display for a school that still had 40,000 students enrolled, but was always focused on new enrollments, or “starts,” rather than education. Those ITT students — veterans, single parents, and others — were soon left out in the cold.
Caruso also asserts that ITT handled its bankruptcy filing in a manner that squandered even more resources. The company failed to follow state law requirements that it provide copies of student records to relevant state agencies, which led to multi-million dollar litigation costs. In addition, the trustee says ITT’s negligence forced her to pay millions more for rent on property leased by the company while she had to pack up and store ITT assets there, including important student records.
The former ITT directors sued by Caruso include John Cozzi, a long-time managing director at the private equity firm AEA Investors LLC, whose holdings have included for-profit education businesses and whose investors have included Betsy DeVos. Raul Valdes Pages, a former for-profit college CEO and long-time industry consultant who is critical of industry practices, once told me that Modany “is Cozzi’s and Board’s puppet.”
Another long-time ITT board member was DC lobbyist and ex-congressman Vin Weber (R-MN), who served as a key lieutenant to then-Speaker of the House Newt Gingrich. Trump crony Gingrich himself has been a paid advocate for the for-profit college industry and its trade association, CECU.
Caruso’s lawsuit is not the only ongoing effort to hold Modany accountable. Modany and former ITT Tech chief financial officer Daniel Fitzpatrick face a separate federal fraud lawsuit in Indiana brought by the Securities and Exchange Commission. That case is set for trial on July 9, after the SEC commissioners last year took the unusual step of rejecting a settlement, reached by SEC lawyers, that they apparently viewed as too lenient toward the executives. The SEC lawsuit alleges that ITT, Modany, and Fitzpatrick 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.”
Modany seems like a prince. But he’s not the only one.
Spokespersons for the for-profit college industry would now have you believe that the era of troubling schools like ITT, and the heyday of greedy executives like Kevin Modany, is over, so the DeVos Department of Education and others making higher education policy needn’t concern themselves with cautionary tales like these. DeVos, who has hired former executives of predatory for-profit colleges to run policy at the Department, is proceeding as if such assurances are true, abandoning key accountability measures.
In recent testimony to the Department of Education’s advisory committee on accreditation, Steve Gunderson, the for-profit college industry’s chief lobbyist and another Newt Gingrich crony, asserted that the bad actors in his industry are “history.” In the long saga of education scams in this country, Gunderson wasn’t the first for-profit college industry representative to claim, after a period of scandal and reform, that the troubling schools were all gone. But his statement was false. Many predatory school operations, including big chains like Bridgepoint, Career Education Corp., the University of Phoenix, Kaplan (now called Purdue Global), CollegeAmerica, and Education Management Corp. (now Dream Center Educational Holdings) remain in the game. Gunderson’s assertion also conveniently ignored that the trade association he leads, CECU, once harbored as members, and failed to publicly criticize, ITT Tech, Corinthian, Bridgepoint, Career Education, Kaplan, Education Management, and other bad-behaving companies; CollegeAmerica is still a member.
In the same testimony, Gunderson addressed the charge that numerous for-profit schools were now in the process of converting to non-profit status in order to avoid the additional regulations and scrutiny imposed on for-profits in the wake of industry scandals. Gunderson insisted that instead that these schools were converting to non-profits because:
The incessant opposition to our sector’s very existence by some people has convinced these families that own these schools — especially the next generation, that they want no part of it. They’re not going to go into it and I could name schools for you which I won’t do because I think it puts them in a non-fair position of attack by our opponents. But I know schools where the younger generation has refused to join or enter that school operation and for that school to survive and continue, their only option is to convert to a non-profit status.
That sounds like a great explanation until you learn that these are not all small mom and pop family companies — there is no Mr. and Mrs. Bridgepoint, or Mr. and Mrs. EducationManagement, or Mr. and Mrs. GrandCanyon, and no children of those families running them. These are giant corporations that have been raking in billions from taxpayers, and they have engineered conversions to faux non-profit operations so they can keep making big money while aiming to escape the regulations and stigma that their own bad behavior spurred.
So Steve Gunderson’s credibility regarding the state of his industry is about on par with Kevin Modany’s concern for others.