ITT Tech Directors Get Away With It, But Modany Still Faces Claims
An Indiana federal judge has let the directors of collapsed, disgraced for-profit college ITT Tech off the hook, rejecting claims from the company’s bankruptcy trustee that the board’s failure to fire CEO Kevin Modany breached their fiduciary duties.
But U.S. District Court Judge James Patrick Hanlon rejected Modany’s own effort to escape liability, ruling that the trustee, Deborah Caruso, can proceed with her claim that Modany unlawfully put his self-interest above the company when he refused to consider offers to sell the business that required him to step down.
Judge Hanlon found in an opinion released Wednesday that Modany knew that state and federal law enforcement agencies were refusing to settle their claims against ITT Tech unless he resigned or was fired. Yet Modany, who risked losing a big severance payment if he was terminated for cause, resisted. The judge found that Caruso had presented sufficient facts to indicate “that Mr. Modany pursued a strategy designed to maximize his compensation and allow him to remain as CEO and acted with a purpose other than ITT’s best interests.”
An example cited by Judge Hanlon was Modany’s negotiations with one potential ITT buyer, the Los Angeles-based non-profit Dream Center. Modany did pursue these discussions when Dream Center was not insisting that Modany disappear. But when Dream Center changed its mind and demanded a new CEO, Modany rejected their terms. (Dream Center eventually purchased the schools of another predatory chain, EDMC, leading to disastrous results for them as well as for students and taxpayers.)
At the same, however, Hanlon found that the board members’ actions, including their refusal to force out Modany and their decision to keep him in charge of the effort to sell the company, constituted reasonable business judgment, rather than bad faith or negligence. “While firing Mr. Modany may have appeased the government regulators, the lack of continuity and loss of Mr. Modany’s institutional knowledge would undoubtedly have created other problems for ITT,” Judge Hanlon concluded.
The ITT board, according to Caruso’s complaint, did nothing to make Modany behave responsibly regarding a potential sale.
Caruso charged that the ITT directors knew that the school’s accreditor 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.
ITT board member Samuel Odle asked 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.
Other former ITT directors whom Caruso sued included 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 said 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.) Last September, Weber quit his lobbying job at Mercury Public Affairs amid discussion of the work he did alongside disgraced, now imprisoned Trump aide Paul Manafort to lobby for Ukrainian interests, but three months later Weber rejoined Mercury.
Under the controlling Delaware law, corporate directors are held to a lower standard of accountability than officers like Modany, which made it easier for the ITT board members to escape from the lawsuit.
It’s a good example of why businesses incorporate in Delaware. And it’s a disgraceful example, because these directors were paid big fees, mostly with taxpayer money, and they allowed ITT Tech to systematically deceive, abuse, overcharge, and under-educate students, leaving many deep in debt and without the careers they sought.
ITT Tech, based in Carmel, Indiana, was receiving as much as $1.1 billion annually from taxpayer-funded student grants and loans. In September 2016, it suddenly shut down all of its 130 campuses, spread across 38 states, with some 40,000 students, under the weight of multiple federal and state law enforcement investigations and lawsuits, including from the Department of Justice, Consumer Financial Protection Bureau, Securities and Exchange Commission, and some 20 state attorneys general, and after the U.S. Department of Education had imposed stringent conditions on continued operations and then finally cut off student financial aid. Also, in April 2016, ITT’s accreditor, ACICS, had demanded that the school show cause why its accreditation should not be revoked, putting at risk the company’s eligibility to receive federal student aid.
ITT filed for Chapter 7 bankruptcy the same month it shut down its schools.
The SEC’s lawsuit against ITT, Modany, and ex-chief financial officer Daniel Fitzpatrick alleged that the company and 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.” In July 2018, after the SEC commissioners took the rare step of rejecting a settlement the SEC staff had reached with Modany and Fitzpatrick, they agreed to a slightly better, but still very weak, settlement with the two former executives, imposing penalties of $200,000 and $100,000, respectively, and barring each from serving as officers or directors of public companies for five years.
In August 2019, the company settled for $60 million the CFPB’s claim that ITT pushed students into the company’s own high-interest private loans.
The bankruptcy trustee’s $250 million lawsuit against Modany and the board of directors, filed in 2018, alleged that their actions resulted in a “free-fall bankruptcy” that left “no shareholder equity and billions of dollars in potential claims.”
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,” was seeking another $5 million in the bankruptcy for compensation he believes the company still owes him. Caruso’s complaint argued 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. In this week’s ruling, Judge Hanlon allowed Caruso’s claim for “equitable subordination” — to put Modany’s claims below those of other creditors — to go forward.