Is ITT in Trouble?

My esteemed Fool colleague Rich Duprey has taken more than a few shots at the legal profession in recent months (for instance, take a look at this, this, and that). Well, lawyers and policemen are hereditary enemies, so I guess I can't fault Rich for getting in a dig or two when he can. But consider also these fateful words from "Lawyers Add Salton Wounds" back in June: "Protecting shareholders from legitimate fraud, misfeasance, malfeasance, and nonfeasance... is one thing. Feeding at the trough because your investment went south and you lost money, is another."

So it was with some amusement that I noted the name of the lead plaintiff in a recent amended lawsuit filed against ITT Educational Services (NYSE: ESI  ) . Drumroll please... the "City of Austin Police Retirement System." And what complaint, might one inquire, do the good constables of Austin have against ITT? Ahem. Among other things: "In the wake of the revelation of the federal investigation by the Department of Justice, the price of ITT common stock fell...33%..."

While I'm tempted to chuckle at the irony, though, the other new charges contained in this lawsuit are no laughing matter. According to the complaint, 12 former ITT employees have already been interviewed and provided detailed information on illegal actions by ITT executives, ranging from inflating enrollment figures by counting nonenrolled students as enrolled and double-counting other students to falsifying student grades and post-graduation employment figures. All with the aim of maintaining the company's academic accreditation and securing government loans and grants for ITT students' tuition. The complaint further alleges specific instances in which company management was informed of the illegal acts and other instances in which management ordered that they be performed.

Now, it's worth emphasizing that the charges made in a civil complaint are not yet proven. Yet it is common knowledge among lawyers that you simply do not put allegations that you cannot prove in a complaint. Complaints are usually bare-bones affairs, and lawyers draft them as broadly as possible to make easier their ability to prove their case come trial time. The starkly precise facts alleged in this complaint, therefore, make it clear that the plaintiffs' lawyers think their case pretty much incontrovertible -- and that bodes very badly for ITT and its shareholders.

Moreover, if the offenses alleged against ITT typify the business practices of other companies in this industry -- even one or two others -- there is a real danger that the stocks of all the for-profit educators will become tarnished. Thus, the situation with ITT bears careful monitoring also by investors in such corporate peers as Apollo Group (Nasdaq: APOL  ) , Corinthian Colleges (Nasdaq: COCO  ) , Career Education (Nasdaq: CECO  ) , DeVry (NYSE: DV  ) , Laureate Education (Nasdaq: LAUR  ) , and Strayer (Nasdaq: STRA  ) .

Fool contributor Rich Smith owns no interest in any of the companies mentioned in this article.


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