| Commitments and Contingencies | 12. Commitments and
Contingencies
As part of our normal operations, one of our insurers issues surety
bonds for us that are required by various education authorities
that regulate us. We are obligated to reimburse our insurer for any
of those surety bonds that are paid by the insurer. As of
September 30, 2015, the total face amount of those surety
bonds was approximately $21,000. As of September 30, 2015,
approximately $2,293 of letters of credit that we had caused to be
issued to our workers’ compensation insurers and one of our
state regulatory agencies were outstanding.
Our institutions’ failure to submit their 2013 audited
consolidated financial statements and the 2013 compliance audits of
their administration of the Title IV Programs in which they
participate (“Compliance Audits”) to the ED by the due
date resulted in sanctions imposed by the ED on our institutions
that included, among other things, our institutions having to
submit a letter of credit payable to the ED. We caused the ED
Letter of Credit in the amount of $79,708 to be issued on
October 31, 2014. The term of the ED Letter of Credit ends on
November 4, 2019. As of September 30, 2015, the total
amount of the outstanding letters of credit that we had caused to
be issued was $82,001.
The ED Letter of Credit provides that the ED may draw on the ED
Letter of Credit upon certification by the ED that the drafted
funds will be used for one or more of the following purposes:
• to pay refunds of institutional or
non-institutional charges owed to or on behalf of current or former
students of our institutions, whether our institutions remain open
or have closed;
• to provide for the
“teach-out” of students enrolled at the time of closure
of our institutions; and
• to pay any liabilities owing to the
ED arising from acts or omissions by our institutions, on or before
the expiration of the ED Letter of Credit, in violation of
requirements set forth in the HEA, including the violation of any
agreement entered into by our institutions with the ED regarding
the administration of Title IV Programs.
Claims and Contingencies .
The following table sets forth the amounts and where our recorded
liability related to our claims and contingencies were included on
our Condensed Consolidated Balance Sheets as of the dates
indicated:
As of September 30, As of December 31, 2014 As of September 30, 2014
Other current liabilities $ 42,054 $ 14,976 $ 14,494
Other liabilities 588 598 0
Total $ 42,642 $ 15,574 $ 14,494
The following table sets forth the activity with respect to our
recorded liability related to our claims and contingencies in the
periods indicated:
Three Months Ended Nine Months Ended
2015 2014 2015 2014
Balance at beginning of period $ 13,995 $ 126,074 $ 15,574 $ 125,880
Increases (decreases) from:
Additional accruals:
CUSO RSA 0 2,019 0 2,019
Other (1) 32,901 11,603 44,455 27,816
Payments, other (2) (4,254 ) (8,532 ) (17,387 ) (21,804 )
Payments under the CUSO RSA 0 (3) (1,809 ) (4) 0 (3) (4,556 ) (4)
Elimination of CUSO RSA accrual (5) 0 (114,861 ) 0 (114,861 )
Balance at end of period $ 42,642 $ 14,494 $ 42,642 $ 14,494
(1) Consists of accruals for legal fees
and settlement amounts.
(2) Consists of payments for legal and
other contingencies.
(3) We consolidated the CUSO in our
consolidated financial statements as of September 30, 2014 and, as
a result, we eliminated from our consolidated financial statements
the amount of payments under the CUSO RSA that we made following
the CUSO Consolidation. See below under “–
Guarantees – CUSO RSA
(4) Consists of payments made under the
CUSO RSA.
(5) As a result of the CUSO
Consolidation, in the three and nine months ended September 30,
2014, we eliminated from our consolidated financial statements the
contingent liability related to the CUSO RSA that we had previously
recorded.
In connection with estimating our recorded liability for claims and
contingencies as of September 30, 2015, December 31,
2014 and September 30, 2014, we considered whether additional
losses for claims and contingencies were reasonably possible, could
be estimated and might be material to our financial condition,
results of operations or cash flows. As with any estimate, as facts
and circumstances change, the recorded liability and estimated
range of reasonably possible losses could change significantly.
With respect to legal proceedings, we determined that we cannot
provide an estimate of the possible losses, or the range of
possible losses, in excess of the amount, if any, accrued, for
various reasons, including but not limited to some or all of the
following:
• there are significant factual issues
to be resolved;
• there are novel or unsettled legal
issues presented;
• the proceedings are in the early
stages;
• there is uncertainty as to the
likelihood of a class being certified or decertified or the
ultimate size and scope of the class;
• there is uncertainty as to the
outcome of pending appeals or motions; and
• in many cases, the plaintiffs have
not specified damages in their complaint or in court filings.
We may resolve certain federal and state income tax matters
presently under examination within the 12 months immediately
following the date of this filing. As of September 30, 2015,
we estimated that it was reasonably possible that unrecognized tax
benefits, excluding interest and penalties, could decrease in an
amount ranging from $0 to $10,100 in the 12 months immediately
following the date of this filing due to the resolution of those
matters.
We have presented settlements and legal and professional fees
related to certain lawsuits, investigations and accounting matters
as a separate line item in our Condensed Consolidated Statements of
Income. A portion of the amounts included in this line item
represent expenses for various lawsuits, investigations and
accounting matters that we believe are not representative of those
normally incurred in the ordinary course of business. Certain of
those lawsuits and investigations are described in detail, below.
The expenses for the accounting matters included in this line item
related primarily to:
• services relating to accounting for
the Private Education Loans in the three and nine months ended
September 30, 2015; and
• the audit work performed in
connection with the assessment of the consolidation of the PEAKS
Trust in the three and nine months ended September 30,
2014.
In addition, a portion of the amounts included in this line item
for the three and nine months ended September 30, 2015
included our estimate of the amount of the loss that we believe is
probable in order to settle certain lawsuits against us. We
recognized a loss of $29,900 for the settlement of the New York
Securities Litigation, the Indiana Securities Litigation and the
Gallien Litigation (each defined and described in detail below),
offset by $25,000 for the recovery from insurance for the New York
Securities Litigation and the Indiana Securities Litigation. Our
Condensed Consolidated Balance Sheet as of September 30, 2015
included $29,900 in Other current liabilities for the settlement of
these lawsuits and $25,000 in Prepaid expenses and other current
assets for the recovery from insurance for the New York Securities
Litigation and the Indiana Securities Litigation. As of the date of
the filing of this report, agreements have been executed by us, the
plaintiffs and our insurance carriers for the settlement of the New
York Securities Litigation and the Indiana Securities Litigation
(the “Settlement Agreements”) for an aggregate of
$29,500, of which $25,000, per the Settlement Agreements, will be
paid to the plaintiffs by our insurance carriers. On
November 2, 2015, the plaintiffs in the New York Securities
Litigation and Indiana Securities Litigation filed the Stipulation
and Agreement of Settlement documents and related exhibits with the
courts and moved, along with other things, for the courts to
preliminarily approve the settlements. The settlements of the New
York Securities Litigation and Indiana Securities Litigation remain
subject to the approval of the courts.
Guarantees. PEAKS Guarantee and Purchase
Obligation
We concluded that we were required to consolidate the PEAKS Trust
in our consolidated financial statements beginning on
February 28, 2013. See Note 6 – Variable Interest
Entities, for a further discussion of the PEAKS Consolidation. As a
result, the assets and liabilities of the PEAKS Trust have been
included on, and all intercompany transactions have been eliminated
from, our Condensed Consolidated Balance Sheets as of
September 30, 2015, December 31, 2014 and
September 30, 2014. While we no longer record a contingent
liability for the PEAKS Guarantee on our Condensed Consolidated
Balance Sheet beginning on February 28, 2013, our obligations
under the PEAKS Guarantee remain in effect.
Year-To-Date 2015 and Projected Future PEAKS Guarantee
Payments
The estimated amount and timing of future payments and recoveries
with respect to the PEAKS Guarantee discussed above and elsewhere
in this report are only estimates, are based on numerous
assumptions and are subject to change. As with any estimate, as
facts and circumstances change, the estimated amounts and timing
could change. We made a number of assumptions in preparing the
estimates, which assumptions may not be correct. The assumptions
included, among other things, the following:
• the repayment performance of the
PEAKS Trust Student Loans, the proceeds from which will be used to
repay the PEAKS Senior Debt and to pay the fees and expenses of the
PEAKS Trust, and the performance of which also affects the
Asset/Liability Ratio;
• the fact that those loans will
consist of a large number of loans of individually immaterial
amounts;
• the fact that the interest rate on
the PEAKS Senior Debt is a variable rate based on the LIBOR plus a
margin; and
• the amount of fees and expenses of
the PEAKS Trust, much of which is based on the principal balance of
the PEAKS Trust Student Loans.
PEAKS Program Payments in 2014
• the $40,000 payment we made in March
2014 pursuant to the PEAKS Letter Agreement, which is considered to
be a payment under the PEAKS Guarantee;
• the payments totaling approximately
$51,700 that we made from July 2014 through September 2014 to
satisfy our obligation under the PEAKS Guarantee with respect to
the increased minimum required Asset/Liability Ratio in prior
periods;
• payments totaling approximately
$64,900 that we made from October 2014 through December 2014 to
satisfy our obligations under the PEAKS Guarantee with respect to
the increased minimum required Asset/Liability Ratio in current and
prior periods;
• payments totaling approximately
$2,700 that we made from March 2014 through September 2014 to
satisfy our obligations under the PEAKS Guarantee with respect to
interest owed on the PEAKS Senior Debt and administrative fees and
expenses of the PEAKS Trust; and
• Payments on Behalf of Borrowers of
approximately $1,800 that we made in January 2014.
See also “– PEAKS Program and CUSO RSA Payments
in Certain Periods,
CUSO RSA
Pursuant to the CUSO RSA, we are required to maintain collateral to
secure our guarantee obligation in an amount equal to a percentage
of the outstanding balance of the private education loans disbursed
to our students under the CUSO Program. As of September 30,
2015, December 31, 2014 and September 30, 2014, the
total collateral maintained in a restricted bank account was
approximately $8,600. This amount was included in Collateral
deposits on our Condensed Consolidated Balance Sheets as of each of
those dates. The CUSO RSA also requires that we comply with certain
covenants, including that we maintain certain financial ratios
which are measured on a quarterly basis and that we deliver
compliance certificates on a quarterly basis setting forth the
status of our compliance with those financial ratios. If we are not
in compliance with those covenants at the end of each fiscal
quarter, we are required to increase the amount of collateral
maintained in the restricted bank account to a predetermined
amount, until the end of a succeeding quarter at which we are in
compliance with those covenants. The predetermined amount is based
on the percentage of the aggregate principal balance of the private
education loans made under the CUSO Program that exceeds a certain
percentage as of the end of each fiscal quarter.
Under the CUSO RSA, we have the right to elect to make Discharge
Payments with respect to private education loans made under the
CUSO Program that have been charged off. The effect of a making a
Discharge Payment related to a private education loan is to reduce
the aggregate amount that we may have to pay under our guarantee
obligations with respect to that loan. We have claimed as an offset
against amounts owed to us under the Revolving Note amounts that
would have the effect of discharging our obligations with respect
to certain charged off loans under the CUSO RSA. In addition, in
the nine months ended September 30, 2015 and the year ended
December 31, 2014, we made Discharge Payments to the CUSO.
Making Discharge Payments results in us paying amounts to the CUSO
in advance of when a guarantee payment would be due, which would
negatively impact our liquidity in a particular period, but results
in us paying a lesser amount than we otherwise would have been
required to pay under our guarantee obligation in future periods
under the CUSO RSA. See Note 6 – Variable Interest Entities,
for a further discussion of Discharge Payments.
We concluded that we were required to consolidate the CUSO in our
consolidated financial statements beginning on September 30,
2014. See Note 6 – Variable Interest Entities, for a further
discussion of the CUSO Consolidation. As a result, the assets and
liabilities of the CUSO have been included on, and all intercompany
transactions have been eliminated from, our Condensed Consolidated
Balance Sheets as of September 30,
2015, December 31, 2014 and September 30, 2014.
While we no longer record a contingent liability for the CUSO RSA
on our Condensed Consolidated Balance Sheet beginning on
September 30, 2014, our obligations under the CUSO RSA remain
in effect.
CUSO RSA Amendments.
On March 17, 2015, we entered into a Fifth Amendment to the
CUSO RSA with the CUSO (the “Fifth Amendment to CUSO
RSA”). The Fifth Amendment to CUSO RSA provides that we were
not required to comply with certain financial ratio covenants under
the CUSO RSA that we otherwise would not have been in compliance
with from June 30, 2013 through: (i) March 31, 2015
related to our debt service ratio, and (ii) December 31,
2015 related to our current ratio. Additionally, the Fifth
Amendment to CUSO RSA provides that for any fiscal quarter end in
which the CUSO (or its owned or managed assets) are consolidated
into our financial statements that the financial covenant and
persistence percentage provisions and the corresponding compliance
certificate requirements will be based on our relevant quarterly
and annual reports that we file with the SEC, but excluding the
effects of any such consolidation. Further, any financial
statements for periods ending prior to March 17, 2015 that we
were required to deliver to the CUSO, but had not delivered as of
that date, were required to be delivered to the CUSO on or before
May 31, 2015. In lieu of an increase in the required
collateral under the CUSO RSA, we made a payment of $2,709 to the
CUSO on March 19, 2015 pursuant to the Fifth Amendment to CUSO
RSA, which payment was considered a Discharge Payment under the
CUSO RSA.
On June 8, 2015, we entered into a Sixth Amendment to the CUSO
RSA (the “Sixth Amendment to CUSO RSA”) with the CUSO.
The Sixth Amendment to CUSO RSA provides that:
• the period of time during which we
are not required to comply with the debt service ratio covenant
under the CUSO RSA is extended through March 31, 2016;
• the period of time during which we
are not required to comply with the current ratio covenant under
the CUSO RSA is extended through March 31, 2016;
• we are not required to comply with
the average persistence percentage covenant under the CUSO RSA as
of the end of each fiscal quarter ending March 31, 2015
through March 31, 2016;
• we make a payment of $6,544 to the
CUSO, which payment is considered a Discharge Payment under the
CUSO RSA;
• at our option, we may defer the
payment of any amounts otherwise becoming due by us under the CUSO
RSA between June 8, 2015 and December 31, 2015, which
payments must be made by us on or before January 4, 2016;
and
• the payments deferred by us will not
bear interest, unless we do not pay such amounts by January 4,
2016, in which case any portion of any deferred payments remaining
unpaid as of that date will accrue interest at the rate of
12.5% per annum, from the date such deferred payment would
otherwise have been due absent the deferral provided in the Sixth
Amendment to CUSO RSA.
We made the $6,544 Discharge Payment on June 10, 2015, which
had the effect of reducing the amount of Regular Payments that we
otherwise would have had to make in 2015 by approximately $2,000.
The reason for the provision in the Sixth Amendment to CUSO RSA
that permits us to defer to 2016 the payment of any amounts
otherwise becoming due between June 8, 2015 and
December 31, 2015 is because without such deferral, we believe
that we would exceed the limitation under the Financing Agreement
on amounts that we can pay in 2015 under the CUSO RSA and the PEAKS
Guarantee. We deferred the full amount of the payments due in June
2015 through September 2015 under the CUSO RSA, which totaled
approximately $3,402. Based on current information and assumptions,
we believe that we will likely defer to January 2016 all of the
payments that otherwise would have become due under the CUSO RSA
between October 1, 2015 and December 31, 2015, which we
estimate will total approximately $2,911. Recoveries of charged-off
loans received by the CUSO from June 2015 through September 2015
and due to us were approximately $468 and were not paid to us. We
believe that recoveries of charged-off loans received by the CUSO
between October 1, 2015 and December 31, 2015 that are
due to us will be approximately $311 and will not be paid to us. We
expect to utilize those recovery amounts to offset against amounts
that we pay under the CUSO RSA in January 2016. See the table below
for additional information regarding our projections of the
estimated amounts and timing of our future payments under the CUSO
RSA.
Year-To-Date 2015 and Projected Future CUSO RSA Payments
Period Estimated Estimated Estimated Estimated
October 1 through December 31, 2015 $ 0 (1) $ 0 $ 0 (2) $ 0 (1)(2)
Year ended December 31, 2016 20,415 (1) 0 (2,255 ) (3) 18,160 (1)(3)
Year ended December 31, 2017 14,916 0 (1,535 ) 13,381
Years ended December 31, 2018 and later 0 74,427 (1,560 ) 72,867
Total $ 35,331 $ 74,427 $ (5,350 ) $ 104,408 (4)
(1) This amount assumes that, pursuant to
the Sixth Amendment to CUSO RSA, we elect to defer to 2016 all
additional CUSO RSA payments that otherwise would have become due
in 2015 after June 8, 2015, which we estimate will be
approximately $6,313.
(2) This amount excludes $779 of
recoveries from charged-off loans that we have estimated were or
will be received by the CUSO between June 8, 2015 and
December 31, 2015 and owed to us, which we expect to offset
against amounts paid by us under the CUSO RSA in 2016.
(3) This amount reflects
(a) recoveries from charged-off loans that we have estimated
will be received by the CUSO between June 8, 2015 and
December 31, 2015 and owed to us, which we expect to offset
against amounts paid by us under the CUSO RSA in 2016, and
(b) recoveries from charged-off loans that we estimate will be
received by the CUSO, owed to us and offset against amounts paid by
us in 2016.
(4) The estimated amount of future
payments under the CUSO RSA assumes that an offset that we made in
2013 of certain payment obligations under the CUSO RSA against the
CUSO’s obligations owed to us under the Revolving Note will
not be determined to have been improper. See “–
PEAKS Program and CUSO RSA Payments in Certain
Periods
We believe that the vast majority of the $74,427 of estimated
payments projected to be payable by us after 2017 will be paid in
2018, net of any recoveries that we offset. The estimated future
payment amounts and timing related to the CUSO RSA assume, among
other factors, that we do not make any Discharge Payments in 2015,
2016 or 2017 (other than the Discharge Payments made in March 2015
pursuant to the terms of the Fifth Amendment to CUSO RSA and in
June 2015 pursuant to the terms of the Sixth Amendment to CUSO RSA)
and do make Discharge Payments to the fullest extent possible in
2018 and later years. If we do not make the Discharge Payments as
assumed in 2018 and later years, we estimate that we would make
approximately $98,255 of Regular Payments in 2018 through
approximately 2026. Of this amount, approximately $14,250 to
$17,000 would be paid annually in each of 2018 through 2021, and
approximately $33,900, in the aggregate, would be paid in 2022
through 2026.
The estimated amount and timing of future payments and recoveries
with respect to the CUSO RSA discussed above are only estimates,
are based on numerous assumptions and are subject to change. As
with any estimate, as facts and circumstances change, the estimated
amounts and timing could change. We made a number of assumptions in
preparing the estimates, which assumptions may not be correct. The
assumptions included, among other things, the following:
• the repayment performance of the
private education loans made under the CUSO Program;
• the timing and rate at which those
private education loans will be paid;
• the changes in the variable interest
rates applicable to those private education loans;
• the amounts and timing of collections
in the future on those private education loans that have been
charged off; and
• our ability to utilize the available
options for payment of our obligations under the CUSO RSA.
CUSO RSA Payments in 2014.
• Regular Payments of $7,028;
• a Discharge Payment of $2,577 that we
made pursuant to the Fourth Amendment to CUSO RSA; and
• $466 in recoveries from charged-off
loans that were owed to us from the CUSO and that we applied to
reduce the amount payable by us to the CUSO pursuant to our offset
right.
In the year ended December 31, 2014, the CUSO did not remit to
us $475 of recoveries from charged-off loans that were owed to us.
See also “– PEAKS Program and CUSO RSA Payments
in Certain Periods
PEAKS Program and CUSO RSA Payments in Certain
Periods
Three Months
Ended Nine Months
Ended
Type of Payment 2015 2014 2015 2014
Guarantee:
PEAKS Program $ 4,856 $ 52,517 $ 25,313 $ 94,318
CUSO RSA Regular Payments 0 (1) 1,809 (2) 3,840 (3) 4,556 (2)
CUSO RSA Discharge Payments 0 0 9,253 0
Payments on Behalf of Borrowers 0 0 0 1,832
Total $ 4,856 $ 54,326 $ 38,406 $ 100,706
(1) As described above, we deferred
payment of $2,574 of Regular Payments, that otherwise would have
been due during this period, to January 2016. In addition, the
amount of the recoveries of charged-off loans received by the CUSO
during this period that are due but have not been paid to us and
that we expect to offset against these Regular Payments was
$351.
(2) This amount is net of $156 of
recoveries from charged-off loans owed to us that we offset against
amounts owed by us under the CUSO RSA.
(3) This amount is net of $521 of
recoveries from charged-off loans owed to us that we offset against
amounts owed by us under the CUSO RSA. In addition, we deferred
payment of $3,402 of Regular Payments, that otherwise would have
been due during this period, to January 2016. We also expect to
utilize the amount of recoveries of charged-off loans received by
the CUSO during this period that has not been paid to us, which
totaled approximately $468, to offset against amounts that we
expect to pay under the CUSO RSA in January 2016.
Excluding the recoveries of charged-off loans received by the CUSO
between June 2015 and September 2015, the CUSO did not remit to us,
and we did not offset payments under the CUSO RSA, for the
following amounts of recoveries from charged-off loans that were
owed to us:
• $0 in the three and nine months ended
September 30, 2015;
• $0 in the three months ended
September 30, 2014; and
• $475 in the nine months ended
September 30, 2014.
The amounts of recoveries from charged-off loans that were owed to
us by the CUSO, but not paid or offset, as of September 30,
2015, December 31, 2014 and September 30, 2014, were
not recorded in our consolidated financial statements, since those
amounts were intercompany transactions that were eliminated from
our financial statements as a result of the CUSO Consolidation.
In the three and nine months ended September 30, 2015 and
2014, we did not offset any amounts owed by us under the CUSO RSA
against amounts owed to us by the CUSO under the Revolving Note. In
the first quarter of 2013, we notified the CUSO that we had
determined that the CUSO was in default of its obligations to us
under the agreement pursuant to which the Revolving Note was issued
and, as a result of that default, all amounts under the Revolving
Note were immediately due and payable. We also notified the CUSO
that we would not make payments under the CUSO RSA until we
received credit for the full amount due us under the Revolving
Note, based on the provisions of the CUSO Program documents that
allow us to set off amounts owed by us under the CUSO RSA against
amounts owed to us by the CUSO under the Revolving Note. At that
time, the outstanding amount of the Revolving Note due to us was
approximately $8,200, representing principal and accrued
interest.
In response to our notification, the CUSO denied that it was in
default and refused our demand to immediately pay the Revolving
Note in full. As a consequence, over the period from February 2013
through August 2013, we offset our then current payment obligations
under the CUSO RSA and the amount of Discharge Payments we elected
to make during that period against all of the CUSO’s
obligations owed to us under the Revolving Note (the
“Offset”).
We understand that the CUSO’s position is that the Offset was
improper, because it has not defaulted and, even if it had
defaulted, the assets of the CUSO against which we could offset or
exercise our other remedies were limited. We further understand the
CUSO’s position to be that, because the Offset was improper,
we are in default under the CUSO RSA. In April 2013, the CUSO
notified us that it had taken control of the restricted account
containing the cash collateral that we deposited to secure our
obligations under the CUSO RSA (the “Collateral”). To
our knowledge, the CUSO has taken no further action related to the
Collateral. We believe that our good faith exercise of our right of
offset provided for in the CUSO Program documents does not
constitute an event of default under the CUSO RSA, and that the
CUSO’s seizure of control of the restricted account
containing the Collateral constitutes an additional default by the
CUSO. We cannot assure you, however, that the Offset will
ultimately be determined to have been proper. In the event of a
default by us under the CUSO RSA related to the Offset, we may be
required to pay to the CUSO approximately $9,900 net of
approximately $1,049 of recoveries from charged-off loans that are
owed, but have not been paid, to us. If, instead, the CUSO was to
withdraw Collateral in that amount from the restricted bank
account, we would be required to deposit that amount of cash in the
account to maintain the required level of Collateral.
Litigation
On December 22, 2008, we were served with a qui tam action
that was filed on July 3, 2007 in the United States District
Court for the Southern District of Indiana by a former employee
(“relator”) on behalf of herself and the federal
government under the following caption: United States of America
ex rel. Debra Leveski v. ITT Educational Services, Inc. et seq
• treble the amount of unspecified
funds paid to us for federal student grants;
• treble the amount of unspecified
default payments, special allowance payments and interest received
by lenders with respect to federal student loans received by our
students;
• all civil penalties allowed by law;
and
• attorney’s fees and costs.
A qui tam action is a civil lawsuit brought by one or more
individuals (a qui tam “relator”) on behalf of the
federal or state government for an alleged submission to the
government of a false claim for payment. A qui tam action is always
filed under seal and remains under seal, until the government
decides whether to intervene in the litigation. Whenever a relator
files a qui tam action, the government typically initiates an
investigation in order to determine whether to intervene in the
litigation. If the government intervenes, it has primary control
over the litigation. If the government declines to intervene, the
relator may pursue the litigation on behalf of the government. If
the government or the relator is successful in the litigation, the
relator receives a portion of the government’s recovery.
On August 8, 2011, the district court granted our motion to
dismiss all of the relator’s claims in the Leveski Litigation
for lack of subject-matter jurisdiction and issued a judgment for
us. On February 16, 2012, the relator in the Leveski
Litigation filed a Notice of Appeal with the 7 th th th th
We have defended, and intend to continue to defend, ourselves
vigorously against the allegations made in the complaint.
On March 11,
2013, a complaint in a securities class action lawsuit was filed
against us, one of our current executive officers and one of our
former executive officers in the United States District Court for
the Southern District of New York under the following caption:
William Koetsch, Individually and on Behalf of All Others
Similarly Situated v. ITT Educational Services, Inc., et al. Massachusetts Laborers’ Annuity Fund, Individually and on
Behalf of All Others Similarly Situated v. ITT Educational
Services, Inc., et al. In re ITT
Educational Services, Inc. Securities Litigation
• our failure to properly account for
the 2007 RSA, CUSO RSA and PEAKS Program;
• employing devices, schemes and
artifices to defraud;
• making untrue statements of material
facts, or omitting material facts necessary in order to make the
statements made, in light of the circumstances under which they
were made, not misleading;
• making the above statements
intentionally or with reckless disregard for the truth;
• engaging in acts, practices, and a
course of business that operated as a fraud or deceit upon lead
plaintiffs and others similarly situated in connection with their
purchases of our common stock;
• deceiving the investing public,
including lead plaintiffs and the purported class, regarding, among
other things, our artificially inflated statements of financial
strength and understated liabilities; and
• causing our common stock to trade at
artificially inflated prices and causing the plaintiff and other
putative class members to purchase our common stock at inflated
prices.
The putative class period in this action is from April 24,
2008 through February 25, 2013. The plaintiffs seek, among
other things, the designation of this action as a class action, an
award of unspecified compensatory damages, interest, costs and
expenses, including counsel fees and expert fees, and such
equitable/injunctive and other relief as the court deems
appropriate. On July 22, 2014, the district court denied most
of our motion to dismiss all of the plaintiffs’ claims for
failure to state a claim for which relief can be granted. On
August 5, 2014, we filed our answer to the second amended
complaint denying all of the plaintiffs’ claims. Plaintiffs
filed their motion for class certification on March 27, 2015.
On June 16, 2015, to facilitate the parties’ efforts to
resolve this action by mediation, the court entered a stipulation
and order providing for a three-month stay of all proceedings. On
September 14, 2015, the court extended the stay by an
additional two months.
Following a mediation which began in the third quarter of 2015, the
parties came to an agreement in principle to settle the New York
Securities Litigation. On November 2, 2015, the parties in the
New York Securities Litigation entered into a Stipulation and
Agreement of Settlement (the “New York Settlement”) to
resolve the action in its entirety. Under the terms of the New York
Settlement, we and/or our insurers would ma |
