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ITT Educational Services Accused of Defrauding Investors

March 11 (Bloomberg) -- ITT Educational Services Inc. was sued by investors who accuse the for-profit college of making misstatements about its private student-loan program, which was the subject of a subpoena from U.S. regulators.

Investors said in a complaint filed today in federal court in Manhattan that ITT’s shares dropped after the company revealed in February that it had received the subpoena.

The company failed to properly account for a 2009 risk-sharing agreement which helped it establish the private student-loan program, the investors alleged.

The stock “traded at artificially inflated prices” from April 2010 to Feb. 25, 2013, lawyers for the plaintiffs said in the complaint. “After the above revelations seeped into the market, the company’s shares were hammered by massive sales, sending them down 86 percent,” from an April 2010 high of $112.69, according to the complaint.

Carmel, Indiana-based ITT said in a Feb. 22 filing that the Securities and Exchange Commission demanded documents related to “actions and accounting” for the loan programs, which helped students pay for education costs that weren’t covered by public funding sources. The following Monday, on Feb. 25, ITT fell 17 percent to $15.53 a share in trading in New York.

Federal and state investigators have been probing for-profit colleges’ recruitment practices and students’ debt loads after leaving school. ITT said in the filing that it was cooperating with the SEC.

Lauren Littlefield, a spokeswoman for ITT, didn’t immediately respond to a call seeking comment on the investor lawsuit.

The college, which specializes in technical fields, offers degree programs to about 73,000 students at locations 39 states, as well as online programs in 48 states, according to the suit.

The case is Koetsch v. ITT Educational Services Inc., 13-cv-01620, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Christie Smythe in Brooklyn at csmythe1@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net UNH US <Equity>

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