Carmel-based ITT Educational Services Inc. says it will fight what it calls “unfounded” charges levied by the U.S. Securities and Exchange Commission. The SEC has announced fraud against the company, its chief executive officer and chief financial officer. The commission accuses ITT of establishing “off-balance sheet” loan programs that were concealed from investors following the fall of the private student loan market. May 12, 2015

News Release

CARMEL, Ind. – ITT Educational Services, Inc. is deeply disappointed in the U.S. Securities and Exchange Commission's mistaken decision to bring an enforcement action against the company.

We vehemently disagree with the SEC's position and we are confident that the evidence does not support the SEC's claims. We are eager to have the court clear our reputation that has been unnecessarily endangered by the SEC's action.

The SEC takes issue with ESI's handling and disclosure of complex accounting issues that arose several years ago. Throughout the relevant time period, we repeatedly expanded our disclosures in an effort to present material information to investors. We also repeatedly conferred with outside experts, as well as our outside, registered independent auditor. We shared extensive information with these experts to confirm that our accounting treatment was reasonable and appropriate. The company's robust record of consultation and deliberation rebuts any allegation of wrongdoing.

The company has fully cooperated during the SEC's investigation, and has engaged in extended discussions with the SEC's Office of the Chief Accountant. The SEC's disagreement with the company's reasonable approach to the complex accounting issues at the heart of this matter would have been more appropriately handled in other ways and certainly should never have reached this stage. Unfortunately, the SEC's Enforcement Division chose to bring this unfair case.

ESI has additionally reached out to the U.S. Department of Education, accrediting agencies and appropriate state regulatory authorities to ensure they understand the company's legal and financial position. We look forward to helping ensure that they have all of the information necessary to inform their judgment, and to share the basis for our strong views about the misguided and inappropriate nature of the SEC's action. We would expect any regulator would refrain from taking any action against the company, and thereby against our students and employees, until we have had our day in court.

ESI is a financially responsible company, committed to dedicating the necessary resources to our defense while keeping the highest priority of the company clear: assisting students in their efforts to complete their education and obtain work in their chosen field of employment.

ESI and our more than 10,000 employees are exceptionally proud of the work we have done to benefit more than one million students over the last 45 years, and we fully intend to continue our mission of improving students' lives through the pursuit of high-quality, career-focused education.

About ITT Educational Services, Inc.

ITT Educational Services, Inc. (NYSE: ESI) provides technology-oriented undergraduate and graduate degree programs through its accredited postsecondary institutions, ITT Technical Institutes and Daniel Webster College, to help students develop skills and knowledge that they can use to pursue career opportunities in a variety of fields. It owns and operates more than 130 ITT Technical Institutes and Daniel Webster College. ITT/ESI serves approximately 50,000 students at its campuses in 39 states and online. Through the Center for Professional Development @ ITT Technical Institute, ITT/ESI provides short-term information technology and business learning solutions for career advancers and other professionals. Headquartered in Carmel, IN, ITT/ESI has been actively involved in the higher education community since 1969 and can be found online at www.ittesi.com.

Source: ITT Educational Services Inc.

May 12, 2015

News Release

WASHINGTON, D.C. – The Securities and Exchange Commission today announced fraud charges against ITT Educational Services Inc., its chief executive officer Kevin Modany, and its chief financial officer Daniel Fitzpatrick.

The SEC alleges that the national operator of for-profit colleges and the two executives fraudulently concealed from ITT's investors the poor performance and looming financial impact of two student loan programs that ITT financially guaranteed. ITT formed both of these student loan programs, known as the “PEAKS” and “CUSO” programs, to provide off-balance sheet loans for ITT's students following the collapse of the private student loan market. To induce others to finance these risky loans, ITT provided a guarantee that limited any risk of loss from the student loan pools.

According to the SEC's complaint filed in the U.S. District Court for the Southern District of Indiana, the underlying loan pools had performed so abysmally by 2012 that ITT's guarantee obligations were triggered and began to balloon. Rather than disclosing to its investors that it projected paying hundreds of millions of dollars on its guarantees, ITT and its management took a variety of actions to create the appearance that ITT's exposure to these programs was much more limited. Over the course of 2014 as ITT began to disclose the consequences of its practices and the magnitude of payments that ITT would need to make on the guarantees, ITT's stock price declined dramatically, falling by approximately two-thirds.

“Our complaint alleges that ITT's senior-most executives made numerous material misstatements and omissions in its disclosures to cover up the subpar performance of student loans programs that ITT created and guaranteed,” said Andrew J. Ceresney, Director of the SEC's Division of Enforcement. “Modany and Fitzpatrick should have been responsible stewards for investors but instead, according to our complaint, 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.”

The SEC's complaint alleges that ITT, Modany, and Fitzpatrick engaged in a fraudulent scheme and made a number of false and misleading statements to hide the magnitude of ITT’s guarantee obligations for the PEAKS and CUSO programs. For example, ITT regularly made payments on delinquent student borrower accounts to temporarily keep PEAKS loans from defaulting and triggering tens of millions of dollars of guarantee payments, without disclosing this practice. ITT also netted its anticipated guarantee payments against recoveries it projected for many years later, without disclosing this approach or its near-term cash impact. ITT further failed to consolidate the PEAKS program in ITT's financial statements despite ITT's control over the economic performance of the program. ITT and the executives also misled and withheld significant information from ITT’s auditor.

The SEC's investigation has been conducted by Zachary Carlyle, Jason Casey, and Anne Romero with assistance from Judy Bizu. The case has been supervised by Laura Metcalfe, Reid Muoio, and Michael Osnato of the Complex Financial Instruments Unit. The litigation will be led by Nicholas Heinke, Polly Atkinson, and Mr. Carlyle.

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