by T. GormanPosted on Posted in SECActions

The SEC charged another investment professional with fraud and self-dealing. SEC v. Ahmed, Civil Action No. 3:15-cv-00675 (D. Conn. Filed May 5, 2015). Defendant Iftikar Ahmed is an investment professional who was a partner at Oak Investment Partners, a multistage venture capital firm. It advises several funds, each of which invests investor funds in various entities. Those investors range from individuals to institutions and pension funds.

As a general partner at Oak Investment Mr. Ahmed identified and recommended investment opportunities for the funds advised by the firm. Part of his duties included specifically recommending the purchase of securities and advising on the price. He also managed investments he recommended.

Beginning in October 2013, and continuing through the end of 2014, Mr. Ahmed recommended that Oak Investment funds make significant investments in three companies:

Chinese e-commerce firm: In August 2014 Mr. Ahmed recommended an investment in a Chinese e-commerce company whose shares were held by an offshore firm. Although he knew, according to the complaint, that the shares were being offered at $1.5 million, he recommended that the fund pay a price which was $2 million more – that is, $3.5 million. To support the recommendation Mr. Ahmed made false representations regarding the finances of the firm. The fund purchased the shares for $3.5 million. Mr. Ahmed arranged for the purchase price to be wired to Iftikar Ali Ahmed Sole Prop, a claimed business with a BVI bank account where the seller was supposed to be located. In fact the firm’s bank account listed the address of Mr. Ahmed’s Connecticut residence. Later the $2 million was transferred to a personal bank account in the name of Mr. Ahmed and his wife.

Asia based joint venture: A second recommendation was made at the end of 2014. In this instance Mr. Ahmed arranged for an Oak Investment fund to purchase the shares of an Asia-based joint venture from its two partners. Although the offering price was $2 million, the fund was told by Mr. Ahmed that it was $20 million. Again he made false representations regarding the finances of the joint venture to support his claim. Mr. Ahmed then made arrangements for the payment to be wired in two installments, one of $2 million and a second of $18 million. The latter was to go to the BVI based partner and transferred to the partnership. Again the funds were wired to Iftikar Ali Ahmed Sole Prop. The funds were never transferred to the partnership. Mr. Ahmed had purported deal documents e-mailed to an Oak Investment employee showing the deal closed.

E-commerce firm: In late 2013 Mr. Ahmed made the first of two recommendations regarding the purchase by an Oak Investment fund of shares in an e-commerce company. At the time of the recommendations a substantial portion of those shares were owned by I-Cubed, a firm initially owned by Mr. Ahmed and later his wife. Initially, Mr. Ahmed recommended a $25 million purchase. He did not disclose his interest in the firm. Later he advised the fund to purchase additional shares of the e-commerce company directly from I-Cube. Although his firm purchased those shares in late 2012 for $2 million he advised the fund to pay $7.5 million. His interest in I-Cube was not disclosed.

The complaint alleges violations of Exchange Act Section 10(b), Securities Act Section 17(a) and Advisers Act Sections 206(1), 206(2), 206(3) and 206(4). The case is pending. See Lit. Rel. No. 23260 (May 13, 2015).

Tagged with: , ,

by T. GormanPosted on Posted in SECActions

Student loans, and the debt burdening many students at graduation, is an important political topic. It is not generally a subject for the Securities and Exchange Commission. Nevertheless, at the center of is most recent enforcement action is an educational institution that was forced to restate its financial statements as a result of delinquent pools of student loans it held off the books but which had been guaranteed. SEC v. ITT Educational Services, Inc., Civil Action No. 15-cv-00758 (S.D. Ind. Filed May 12, 2015).

Named as defendants are: ITT Educational, a higher education company with over 50,000 student whose shares are trade on the NYSE; Kevin Modany as ITT’s CEO; and Daniel Fitzpatrick, the firm’s CFO.

Most of ITT’s revenue is generated by tuition. Students generally pay that tuition with federal and state student loans. Historically students relied on traditional private education loans. In 2008 and 2009 ITT tried to secure a new source of private loans for its students but failed. The firm then used a temporary credit system for students that required loans.

In 2009 ITT formed two private student loan programs known as PEAKS and CUSO. PEAKS was structured as a trust that sold securities to investors. It used the funds to make over $300 million in loans to ITT students. The CUSO student loan program was funded by a group of credit unions organized by ITT. It made about $141 million in loans to ITT students. Guarantees were extended by ITT to mitigate the risk. If the students defaulted on their loans ITT could be liable for significant guarantee payments.

PEAKS and CUSCO were designed to enable ITT to avoid reporting on their finances. Both were variable interest entities or VIEs. Under GAAP a company must consolidate the financial results of a VIE if its directs the activities that most significantly impact the economic performance of the entity. For PEAKS and CUSCO that activity was loan underwriting and performance. ITT did not, however, consolidate the financial results of the two entities – ITT shareholders were not furnished with direct information about the two programs.

By 2012 the loans in the programs had extremely high default rates. ITT’s guarantee obligations increased. To conceal the poor performance of the two loan programs, and its impact on ITT, the firm and Messrs. Monday and Fitzpatrick used various devices. For example, they created the Payments on Behalf of Borrowers or POBOB program. Under this program the company made payments on behalf of student borrowers who failed to make timely payments. This had the effect of temporarily delaying defaults. Public filings did not mention this program. Rather, those filings made it appear that the student loans were performing well.

Another approach used to conceal the impact of the defaulting loans was “netting.” Under this approach the near term PEAKS guarantee payments ITT projected making were netted against potential future recoveries that were not projected to be realized for years. The disclosed amount was thus millions of dollars lower than the more than $100 million in near term payments ITT was projected to make. The PEAKS program was not consolidated into ITT’s financial statements despite having the kind of control that required such action.

For CUSO the defendants only made the minimum guarantee payments. This was a practice “akin to making minimum payments on a high interest credit card . . .” according to the complaint. Messrs. Modany and Fitzpatrick also concealed important information about the PEAKS and CUSO programs form the auditors. That included internal projections about future guarantee payments and other matters.

The scheme unraveled in early 2014. The auditors began to discover previously undisclosed information about the programs. Eventually ITT was required to restate its financial statements to consolidate PEAKS for periods beginning in the first quarter of 2013 and to reclassify and disclose the timing for CUSO liabilities. In March 2014 ITT paid $40 million to settle claims by PEAKS program participants tied to the firm’s circumvention of the guarantees through the POBOB program. Overall ITT paid millions of dollars on the guarantees because of poor loan performance.

The complaint alleges violations of Exchange Act Sections 10(b), 13(a), 13(b)(2), 13(b)(5) and control person liability under 20(a) and Securities Act Section 17(a) and a failure to reimburse under SOX 304. The case is pending.

Tagged with: ,