In re ITT Educational Services, Inc. Securities Litigation, 34 F. Supp. 3d 298

Background

ITT, a for‑profit college, relied on private student loans; three Risk Sharing Agreements (RSAs) required ITT to cover lender losses above set default thresholds. Sallie Mae’s RSA had a 24% threshold.
Student loan defaults rose sharply during the putative class period (Apr 24, 2008–Feb 25, 2013); Sallie Mae demanded payment by Feb–Mar 2011 and later sued, leading to a $46M settlement announced Jan 4, 2013.
Plaintiffs allege defendants (CEO Modany and CFO Fitzpatrick) made repeated statements minimizing RSA exposure, saying liabilities were immaterial, reserves adequate, and they were pursuing new third‑party loan programs.
Plaintiffs claim those statements were false or misleading because defendants knew defaults were rising, had access to default data, failed to reserve under GAAP, and faced government inquiries.
Defendants moved to dismiss under Rule 12(b)(6); the Court applied Twombly/Iqbal pleading rules plus the PSLRA/Rule 9(b) scienter requirements and allowed some claims to proceed while dismissing others.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Modany’s July 21, 2011 statement that ITT was "not projecting" cash payments on the Sallie Mae RSA was false and made with scienter	Plaintiffs: Modany knew Sallie Mae had already demanded payment and thus the statement was false; scienter can be inferred from demand, internal data, and meetings	Defendants: Sallie Mae had only requested money (not yet owed); any understatement was forward‑looking or immaterial	Court: Survives dismissal — plausible that statement was false when made and scienter adequately pleaded for this statement
Whether repeated statements that RSA liabilities were immaterial / reserves adequate were false and made with scienter	Plaintiffs: Defendants had detailed default data, attended default meetings, used default management tactics, violated GAAP; together these facts raise a strong inference of scienter	Defendants: At worst optimistic forecasting; disagreement with hindsight and safe‑harbor for forward‑looking statements	Court: Some statements actionable — plaintiffs pleaded a sufficient circumstantial case that at least by the time Sallie Mae demanded payment defendants should have known liability; claims proceed for portions where scienter is plausible
Whether statements about being "hopeful" or "cautiously optimistic" about securing a new RSA were false	Plaintiffs: Market for loans was drying up and there was effectively no chance of a new RSA	Defendants: Statements were truthful statements of ongoing negotiations (term sheet was signed); forward‑looking and not proven false	Court: Dismissed these claims — plaintiffs failed to allege the statements were false when made
Loss causation for alleged misstatements	Plaintiffs: Corrective disclosures (e.g., Jan 4, 2013 admission of $46M Sallie Mae payment and $71M charge; Oct 25, 2013 bad‑debt increase) caused stock drops	Defendants: Stock declines not necessarily tied to the particular alleged misstatements	Court: Adequate pleading of loss causation for surviving misstatements based on alleged corrective disclosures

Key Cases Cited

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (plausibility pleading standard)
Ashcroft v. Iqbal, 556 U.S. 662 (apply plausibility to complaints; accept well‑pleaded facts)
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (PSLRA scienter: strong inference must be cogent and at least as compelling as nonfraudulent inference)
Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (loss causation requires proximate causal link between misrepresentation and economic loss)
Rombach v. Chang, 355 F.3d 164 (fraud claims require particularity; must plead why statements were false)
Slayton v. Am. Exp. Co., 604 F.3d 758 (distinguishes scienter standards for forward‑looking statements vs statements of present fact)
S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98 (recklessness in securities context; motive/opportunity analysis)