Professionalism/Dan Graves and ITT Educational Services

ITT Technical Institute (or simply ITT Tech) was a for-profit technical institute with 130 campuses nationwide[1]. It was founded in 1969 as a response to the Higher Education Act. The Higher Education Act increased federal money given to universities and included low-interest loans for students[2]. ITT profited by purposefully recruiting students who were not qualified to attend traditional college, but would qualify for federal financial aid. A 2014 senate investigation into ITT Tech's practices eventually led to the company declaring bankruptcy. ITT Tech was wholly owned and operated by ITT Educational Services.

Dan Graves was a recruitment representative for ITT Technical Institute. With Susan Newman, another ITT Tech representative, Graves filed a lawsuit against the company in 1999 on behalf of the US government[3]. Graves claimed that ITT Tech had an incentive salary structure that paid recruiters commission based on earnings from each student recruited. Graves argued this practice should disqualify ITT Tech from receiving compensation through the Higher Education Act. Following years of litigation, Graves' lawsuit was dismissed in 2004.

ITT Tech Financial and Recruitment BehaviorEdit

ITT Tech charged relatively high prices compared to their community college competitors. The school charged an average of $45,000 for an associates degree and $77,000 for a bachelor's degree[4]. The bulk of their revenue came from federal financial aid funds, with an estimated 70% of the ITT Tech's money gained in 2015 was from federal financial aid funds, and they had the industry's highest rate of loans go into default in student's first two years of attending the school.

ITT Tech looked to target prospective students who might think their institute was their only option. Recruiters were told to use a so-called "Pain Funnel" where they were encouraged to ask progressively more hurtful questions[5]. This tactic was used to guilt students into enrollment. The institute also ensured a seamless enrollment process when students did decide to attend the school. In some instances, one signature could get a student both into a school and applied for federal financial aid.

The institute did not allocate much of their resources back into improving their school. Instead, a significant portion of the profits went into paying recruiters commission and upper management relatively high salaries. In 2009, "ITT CEO Kevin Modany received $7.6 million in compensation, more than 22 times as much as the president of Indiana University at Bloomington."[5] As a result, some companies would blacklist potential employee's with ITT Tech diplomas on their resume.

1999 Lawsuit & Dan GravesEdit

Dan Graves was a recruitment representative for ITT Technical Institute, hired in 1999. As a recruitment representative he was earning between 5 and 10% commission from each student that enrolled through him. Earning commission from students incentivized Graves and other recruiters to enroll as many students as possible, with no regard to whether or not they should be enrolled. For precisely this reason, the Higher Education Act prohibits participating organizations from using this incentive-based pay structure known as "incentive compensation". This should have disqualified ITT from the Higher Education Act loan and student aid programs.

Dan Graves and fellow recruitment representative Susan Newman, hired in 1998, filed a lawsuit against ITT and its auditing agency PricewaterhouseCoopers (PwC) in 1999, claiming that ITT had been improperly certified to comply with the Higher Education Act. This claim relied on the fact that ITT had not disclosed its incentive compensation pay system, and PwC had failed to notice and disclose it as well. Graves and Newman no longer worked for ITT as of February 2000 [6]. The case was unsealed on May 30, 2001.[7]

Higher Education Act Title IV Student AidEdit

Higher Education Act Title IV loans are backed by the US Department of Education. If a student defaults on their debt, the lender is reimbursed by a guaranty agency, and that guarantor is then reimbursed by the Department of Education. If recruiters at ITT are incentivized to take on any student with no regard to how well they are able to pay off their loans, ITT would effectively defraud the US government. For this reason, HEA forbids incentive compensation. Even today, it remains difficult to track education loans, and it is ballooned in size to nearly 10% of the US national debt.[8] Approximately 45 million people have student loan debt.[9]

Bankruptcy of Computer Learning CentersEdit

Computer Learning Centers (CLC) was a for-profit education company very similar to ITT Tech. In late 2000, the Department of Education cited incentive compensation violations very similar to the case brought by Graves and Newman. As a result, CLC was fined $187 million and filed for bankruptcy less than two weeks later. The Department of Education was blamed by CLC investors for shutting down a legitimate business, leading DoED officials to reconsider their view on compensation violations.[4] In 2002, then Deputy Secretary of Education William D. Hansen concluded that "the preferable approach is to view incentive compensation prohibition as not resulting in monetary loss to the department."[10] This memo was rescinded in 2015. [11]

Graves Lawsuit OutcomeEdit

Following the change of opinion of the Department of Education regarding incentive compensation, the Texas Southern District court dismissed the case in 2003. Graves appealed, and the decision of the district court was upheld. Graves appealed again the United States Supreme Court, but certiorari was not granted. Graves' team saw this is as "an institutional failure by the government and a complete abdication of responsibility to enforce the Higher Education Act."[4]

Post-Lawsuit InvestigationsEdit

The Graves Lawsuit wasn't a total loss. During and following the case, various investigations were opened. In 2002, the US Department of Justices filed a statement of interest in the case.[7] According to court filings from a separate case, the California attorney general and the US Securities and Exchange Commission both launched investigations in 2002 looking into falsified grades and attendance records for financial aid qualification.[12] The California AG investigation resulted in a fine of $750k,[12] while the SEC investigation did not yield any penalties. In 2004, following the statement of interest, the DOJ started an investigation into student financial aid fraud, money laundering, and racketeering.[12] This investigation was eventually abandoned.

Senate InvestigationEdit

The Senate Health, Education, Labor, and Pensions (HELP) committee investigated ITT Tech in 2014. [13] The committee found that the school used a recruitment technique called the "Pain Funnel" and "Pain Puzzle" to emotionally manipulate potential students into enrolling. The investigation revealed that the school fraudulently reported income sources to fit federal regulations. Through a complex system of Wall Street investors and private banks loans called the ITT PEAKS program, the school was able to report federal funding as non-federal funding, violating the 90/10 rule. The investigation also revealed that ITT Tech used federal funding to set up a scholarship given to nearly every student, which contributed to the fraudulent 90-10 quotient. ITT Tech also hid its high loan default rate by labelling defaulting borrowers under "forbearance" and "deferment". Both the high default rate and high 90-10 quotient make ITT ineligible for federal funding under the HEA.

Demise and AftermathEdit

ITT Tech was disqualified from Higher Education Act aid programs on August 25, 2016. Less than two weeks later on September 6, ITT Tech filed for bankruptcy. All 130 campuses were shutdown, and nearly 8,000 employees lost their jobs. Although ITT gave students "temporary credits" (essentially a type of grant) before shutting down, debt collectors were still pursuing the students.[14] The "temporary credits" were converted into high-interest, private loans that students were likely to default on, leading to additional charges against ITT.[15] The Consumer Financial Protection Bureau forced credit lenders to cancel private loans given to former ITT Tech students[16], but this does not help with students' federal loans and other damages.

In 2018, ITT Tech settled and forgave the debt of 750,000 former ITT students. The settlement also refunded an additional $3 million that had been paid by students to the school and gave affected students a $1.5 billion claim against ITT. [14]

In September 2018, Deborah Caruso, the trustee of ITT's bankruptcy, filed a claim against the Department of Education and ITT lenders for $250 million[17]. This suit, mainly focusing on the fraudulent ITT PEAKS lending program, claims:

"ITT’s PEAKS Loan Program was a for-profit education version of the sub-prime mortgage lending catastrophe, in which students rather than new homeowners were the victims. For the benefit of ITT insiders and Defendants, the PEAKS Loan Program allowed ITT to defraud students and evade regulators, while shielding the fruits of ITT’s fraud from claims of students through a complicated structure involving multiple trusts and a circuitous flow of funds between ITT and Defendants."[17]

The suit resulted in a $600,000 payout. [18]

Generalizations and Chapter ImprovementsEdit

Dan Graves showed that sometimes the government and regulatory agencies can fail: he pointed out fraud and lost his job. Even though his work spawned investigations, none of them were able to stop the fraudulent behavior until 2016. This case should act as a demonstration that sometimes ethical risks fail in the short term, but there are usually lasting effects that will lead to an overall success later on. In this case it took 17 years.

This is also somewhat evident in the aftermath of the shutdown of ITT. The Department of Education has failed former ITT students, processing federal debt forgiveness requests very slowly, only 33 out of about 16,000 as of November 2018, requiring students to seek compensation through private means.[14]

There are several ways this chapter can be improved. Different for-profit educational organizations, including both fraudulent and legal, should be investigated, especially the case of CLC that led to the change of opinion by the Department of Education. This would lend important perspective on the ethics of incentive compensation and would show if this behavior is unique to ITT and CLC, or if the practice is or was common.

ReferencesEdit

  1. "United States Securities and Exchange Commission form 10-K". https://www.sec.gov/Archives/edgar/data/922475/000119312516504396/d129120d10k.htm. 
  2. "The Legislation: Higher Education Act". http://acsc.lib.udel.edu/exhibits/show/legislation/higher-education-act. 
  3. "How Whistleblowing Closed ITT Tech’s Doors". https://auorgcomm.wordpress.com/2016/10/27/how-whistleblowing-closed-itt-techs-doors/. 
  4. a b c Morgenson, Gretchen. "A Whistle Was Blown on ITT; 17 Years Later, It Collapsed". https://www.nytimes.com/2016/10/23/business/a-whistle-was-blown-on-itt-17-years-later-it-collapsed.html. 
  5. a b Nunez, Michael. "How ITT Tech Screwed Students and Made Millions". https://gizmodo.com/how-itt-tech-screwed-students-and-made-millions-1786654315. 
  6. "US Ex Rel. Graves v. ITT Educational Services, Inc., 284 F. Supp. 2d 487 (S.D. Tex. 2003)". https://law.justia.com/cases/federal/district-courts/FSupp2/284/487/2562016/. 
  7. a b Docket of case 4:99-cv-03889 USA, et al v. ITT Educational Serv, et al
  8. US Department of Education (November 27, 2018). "Prepared Remarks by U.S. Secretary of Education Betsy DeVos to Federal Student Aid’s Training Conference". https://www.ed.gov/news/speeches/prepared-remarks-us-secretary-education-betsy-devos-federal-student-aids-training-conference. 
  9. "Student Debt Continues to Rise". 18 July 2018. https://www.pgpf.org/blog/2018/07/the-facts-about-student-debt. Retrieved 2 May 2020. 
  10. Hansen, William (October 30, 2002). "Enforcement of the statutory prohibition on payment of incentive compensation by postsecondary institutions". https://www.hmbr.com/wp-content/uploads/2015/06/Hansen-Incentive-Compensation-Memo.pdf. 
  11. Mitchell, Ted (June 2, 2015). "Enforcement policy for violations of incentive compensation prohibition by institutions participating in student aid programs". https://www.republicreport.org/wp-content/uploads/2015/07/Memo-Mitchell-to-Runcie.pdf. 
  12. a b c "Case 1:04-cv-00380-DFH-TAB". http://securities.stanford.edu/filings-documents/1030/ESI04-01/2004819_r01c_04cv0380.pdf. 
  13. "ITT Tech Senate Investigation". https://www.help.senate.gov/imo/media/for_profit_report/PartII/ITT.pdf. 
  14. a b c Douglas-Gabriel, Danielle. "ITT Tech students score victory in bankruptcy settlement". https://www.washingtonpost.com/education/2018/11/28/itt-tech-students-score-victory-bankruptcy-settlement/. 
  15. "ITT Trustee, CFPB, and States Settle with Private Lender to Eliminate Millions in Debt". June 14, 2019. http://www.legalservicescenter.org/category/predatory-lending-clinic/project-on-predatory-student-lending/itt-bankruptcy/. 
  16. "CFPB lawsuit". https://files.consumerfinance.gov/f/documents/cfpb_student-CU-connect-cuso-llc_stipulated-final-judgment-order_2019-08.pdf. 
  17. a b "Caruso Lawsuit filing". https://www.insidehighered.com/sites/default/server_files/media/ITT%20filing.pdf. 
  18. "Caruso Lawsuit Verdict". https://omnimgt.com/CMSVol2/pub_47137/688472_2874.pdf.