U.S. Sec. & Exch. Comm'n v. ITT Educ. Servs., Inc.

• Decision Date: 23 March 2018
• Docket Number: No. 1:15–cv–00758–JMS–MJD,1:15–cv–00758–JMS–MJD
• Citation: 303 F.Supp.3d 746
• Parties: UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. ITT EDUCATIONAL SERVICES, INC., Kevin M. Modany, and Daniel M. Fitzpatrick, Defendants.
• Court: U.S. District Court — Southern District of Indiana

303 F.Supp.3d 746

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.ITT EDUCATIONAL SERVICES, INC., Kevin M. Modany, and Daniel M. Fitzpatrick, Defendants.

No. 1:15–cv–00758–JMS–MJD

United States District Court, S.D. Indiana, Indianapolis Division.

Signed March 23, 2018

Polly Atkinson, Zachary T. Carlyle, Nicholas Heinke, US Securities and Exchange Commission, Denver, CO, for Plaintiff.

ITT Educational Services, Inc., pro se.

David I. Miller, Matthew R. Ladd, Morgan, Lewis & Bockius LLP, New York, NY, Eric W. Sitarchuk, Ryan P. McCarthy, Morgan, Lewis & Bockius LLP, Philadelphia, PA, Philip A. Whistler, Thomas Eugene Mixdorf, Ice Miller LLP, Alan S. Brown, Bryan S. Strawbridge, Frost Brown Todd LLC, Indianapolis, IN, Steve Korotash, Morgan, Lewis & Bockius LLP, Dallas, TX, Alison L. Nadel, Fredric D. Firestone, Irene A. Firippis, James M. Commons, Michael A. Ungar, McDermott Will & Emery LLP, Washington, DC, for Defendants.

ORDER

Hon. Jane Magnus–Stinson, Chief JudgePlaintiff United States Securities and Exchange Commission (the "SEC") initiated this litigation against ITT Educational Services, Inc. ("ITT"), Kevin Modany, and Daniel Fitzpatrick in May 2015, alleging that Defendants violated various federal securities laws in connection with two student loan programs created by ITT for ITT students. Specifically, the SEC alleges that when the loan programs exhibited high default rates and ITT's guarantee obligations increased, Defendants engaged in various deceptive acts to conceal the condition of the loan programs and the impact on ITT's financial condition. The SEC and ITT reached a settlement, but claims against Mr. Modany and Mr. Fitzpatrick remain pending. Both the SEC on the one hand, and Mr. Modany and Mr. Fitzpatrick on the other, have filed Motions for Partial Summary Judgment, [Filing No. 225; Filing No. 227], which are now ripe for the Court's decision.

I. STANDARD OF REVIEW

A motion for summary judgment asks the Court to find that a trial is unnecessary because there is no genuine dispute as to any material fact and, instead, the movant is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(a). As the current version of Rule 56 makes clear, whether a party asserts that a fact is undisputed or genuinely disputed, the party must support the asserted fact by citing to particular parts of the record, including depositions, documents, or affidavits. Fed. R. Civ. P. 56(c)(1)(A). A party can also support a fact by showing that the materials cited do not establish the absence or presence of a genuine dispute or that the adverse party cannot produce admissible evidence to support the fact. Fed. R. Civ. P. 56(c)(1)(B). Affidavits or declarations must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant is competent to testify on matters stated. Fed. R. Civ. P. 56(c)(4). Failure to properly support a fact in opposition to a movant's factual assertion can result in the movant's fact being considered undisputed, and potentially in the grant of summary judgment. Fed. R. Civ. P. 56(e).

In deciding a motion for summary judgment, the Court need only consider disputed facts that are material to the decision. A disputed fact is material if it might affect the outcome of the suit under the governing law. Hampton v. Ford Motor Co. , 561 F.3d 709, 713 (7th Cir. 2009). In other words, while there may be facts that are in dispute, summary judgment is appropriate if those facts are not outcome determinative. Harper v. Vigilant Ins. Co. , 433 F.3d 521, 525 (7th Cir. 2005). Fact disputes that are irrelevant to the legal question will not be considered. Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

On summary judgment, a party must show the Court what evidence it has that would convince a trier of fact to accept its version of the events. Johnson v. Cambridge Indus. , 325 F.3d 892, 901 (7th Cir. 2003). The moving party is entitled to summary judgment if no reasonable fact-finder could return a verdict for the non-moving party. Nelson v. Miller , 570 F.3d 868, 875 (7th Cir. 2009). The Court views the record in the light most favorable to the non-moving party and draws all reasonable inferences in that party's favor. Darst v. Interstate Brands Corp. , 512 F.3d 903, 907 (7th Cir. 2008). It cannot weigh evidence or make credibility determinations on summary judgment because those tasks are left to the fact-finder. O'Leary v. Accretive Health, Inc. , 657 F.3d 625, 630 (7th Cir. 2011). The Court need only consider the cited materials, Fed. R. Civ. P. 56(c)(3), and the Seventh Circuit Court of Appeals has "repeatedly assured the district courts that they are not required to scour every inch of the record for evidence that is potentially relevant to the summary judgment motion before them," Johnson , 325 F.3d at 898. Any doubt as to the existence of a genuine issue for trial is resolved against the moving party. Ponsetti v. GE Pension Plan , 614 F.3d 684, 691 (7th Cir. 2010).

"The existence of cross-motions for summary judgment does not ... imply that there are no genuine issues of material fact." R.J. Corman Derailment Servs., LLC v. Int'l Union of Operating Eng'rs , 335 F.3d 643, 647 (7th Cir. 2003). Specifically, "[p]arties have different burdens of proof with respect to particular facts, different legal theories will have an effect on which facts are material; and the process of taking the facts in the light most favorable to the non-movant, first for one side and then for the other, may highlight the point that neither side has enough to prevail without a trial." Id. at 648.

II. BACKGROUND

The following factual background is set forth pursuant to the standard discussed above. The facts stated are not necessarily objectively true, but as the summary judgment standard requires, the undisputed facts and the disputed evidence are presented in the light most favorable to "the party against whom the motion under consideration is made." Premcor USA, Inc. v. American Home Assurance Co. , 400 F.3d 523, 526–27 (7th Cir. 2005).

A. The Defendants

ITT was a for-profit higher education company whose stock was registered with the SEC and quoted on the New York Stock Exchange. [Filing No. 1 at 5; Filing No. 33 at 2.]¹ Mr. Modany was ITT's Chief Executive Officer ("CEO") since 2007, and chairman of its Board of Directors since 2008. [Filing No. 1 at 5–6; Filing No. 33 at 3.] Mr. Modany served as ITT's President and Chief Operating Officer ("COO") from 2005 to 2007, and was Chief Financial Officer ("CFO") from 2003 to 2005. [Filing No. 1 at 6; Filing No. 33 at 3.] Mr. Fitzpatrick was ITT's CFO, principal accounting officer, and Executive Vice President since April 2009. [Filing No. 1 at 6–7; Filing No. 33 at 3.] Both Mr. Modany and Mr. Fitzpatrick played a role in ITT's disclosure process, including editing portions of, and reviewing, signing, and certifying ITT's periodic filings. [Filing No. 1 at 6–7; Filing No. 1 at 26; Filing No. 1 at 31; Filing No. 1 at 34; Filing No. 33 at 3–4; Filing No. 33 at 13; Filing No. 33 at 15–17.]

B. The PEAKS Program

In 2010, ITT formed the Program for Education Access and Knowledge student loan program (the "PEAKS Program"). [Filing No. 1 at 1; Filing No. 1 at 9.] It was structured as a trust (the "PEAKS Trust") that raised funds by issuing senior debt to institutional investors (the "PEAKS Noteholders"). [Filing No. 1 at 9.] The PEAKS Trust received the cash flows generated by payments on the student loans and used those funds to pay the principal and interest of the senior debt, and other fees and expenses. [Filing No. 1 at 9.] A student loan servicer collected payments on the student loans. [Filing No. 1 at 9.]

ITT made certain guarantees related to the PEAKS Program, including all of the principal and interest payments on the PEAKS senior debt, other financial obligations of the PEAKS Trust, and maintaining a "parity ratio" between the PEAKS Trust's assets (the value of the loans made to ITT's students) and liabilities (the senior debt owed to the PEAKS Noteholders). [Filing No. 1 at 9.] If ITT failed to make the required guarantee payments on time, the PEAKS Noteholders could force ITT to immediately pay the entire amount of principal and interest remaining on the senior debt in advance of the 2020 maturity date. [Filing No. 1 at 10.]

C. The CUSO Program

In 2009, ITT launched the Credit Union Service Organization student loan program (the "CUSO Program"). [Filing No. 1 at 10.] The CUSO Program involved a group of credit unions, acting through a Credit Union Service Organization ("CUSO"), making a total of approximately $141 million in private loans to ITT students. [Filing No. 1 at 10.] Loans made in each year of the CUSO Program were aggregated into one of three annual loan pools. [Filing No. 1 at 10.] ITT and the CUSO entered into a risk sharing agreement whereby if more than 35% of the loans in any of the three annual pools defaulted, ITT guaranteed payment of the principal, interest, and fees on any loans that defaulted over the 35% threshold (the "risk share threshold"). [Filing No. 1 at 10.] Once ITT's guarantee obligation was triggered for one of the CUSO loan pools, ITT could either pay the monthly payments due on defaulted loans over the threshold (a minimum payment), or discharge its total future obligation by immediately paying the outstanding principal plus some additional interest. [Filing No. 1 at 10–11.]

D. The Allegedly Fraudulent Scheme

From the end of 2011 through the end of the third quarter of 2012, loans through the PEAKS Program and the CUSO Program were defaulting at high rates. [Filing No. 1 at 12.] At the same time, ITT's financial performance and stock price were declining due to, among other issues, decreasing enrollment at ITT. [Filing No. 1 at 12.] In October 2012, ITT received a demand for a PEAKS guarantee payment of more than $8 million due to the parity ratio...