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ITT Educational Services Inc. Message Board

  • thedeathrace thedeathrace Feb 28, 2013 11:41 AM Flag

    What to think regarding the SEC subpoena for records relating to 2009 RSA and PEAKs programs

    I have been thinking about the SEC subpoena that got the market all in a tizzy over ESI shares this week. Here are observations and thoughts.

    1. The SEC did not issue a subpoena for the 2007 RSA. Why not? Because the 2007 RSA got settled with SLM and ESI has no obligations left there. If the SEC thought that there had been wrong doing or bad accounting there, they should have issued a subpoena for that too.

    2. The 2009 RSA and PEAKs are still active, although ESI took write downs in q4 2012 on their guarantees exposure on them.

    3. The write downs on the 2009 RSA and the PEAKs program were significant in that they were large enough to handle the majority of future student loan defaults. But, the 2009 RSA and PEAKs programs had not previously indicated to ESI that the defaults on those student loans were causing obligations to ESI related to the ESI guarantees. The older 2007 RSA had previously issued claims to ESI under their guarantees and ESI had reserved for such. The 2009 RSA and PEAKs programs are newer, so the defaults should be lower than thise for the 2007 RSA. Now that does not mean that the 2009 RSA and PEAKs defaults were not going to increase to the 2007 RSA levels. It just means that the progrmas were not so old and the exact default levels were still developing. Because the 2009 RSA and the PEAKs programs were young versus, the 2007 RSA, ESI had not reserved as much for them, if anything at all, and loan experience had not definitely shown that the 2009 RSA and the PEAKs programs would end up like the 2007 RSA.

    4. After seeing the 2007 RSA situation and seeing the ESI share price under pressure, I am guessing that management decided to clear the deck. If the company does not clear the decks, the negative overhang sits on top of the share price for the next year or longer, until the situation is cleared up. The short sellers would complain then that there are still issues with ESI's 2009 and PEAKs programas, etc.

    4. When ESI decided to clear the decks on the 2007 RSA, it made sense to also clean up the others (the 2009 RSA and PEAKs) too. This sets the stage for ESI going forward with a clean deck and removes a big negative as it pertains to the shares. It also takes reduces the strength of the short sellers as complaining about something that has already been taken care of gets you nowhere. In response to this, the short sellers went to the SEC.

    5. The short sellers went to the SEC and said "look at these sudden unexpected large write downs on the 2009 RSA and PEAKs. ESI had not indicated through the buildup of 2012 reserves that these programs were having trouble. How could they go from being ok to having to face a large write down. You need to investigate." This is like the short sellers asking to get paid twice on the same theme. ESI shares are already down because of the RSA and PEAKs programs (and also weak industry conditions), somthiing that the shorts were correct about. But now that the reserves have been taken, having hte SEC come in after the fact is an attempt to make money twice on an old used story.

    6. It makes sense for ESI to set up reserves for the 2009 RSA and PEAKs in advance of actual claims. Attack the potential problem early and get it taken care of. The 2007 RSA experience gave ESI the guidelines under which they could infer how the 2009 RSA and the PEAKs programs were going to eventually look like. So this is where ESI took the write-off levels to.

    So, what becomes of this SEC look into the 2009 RSA and PEAKs program. What are they going to find? I don't think that they will find much of anything other than the above. The SEC will question ESI about why they took such large reserves so early in the 2009 RSA and PEAKs programs. The SEC will ask if ESI had any control over these student loans - the answer is no based on ESI's SEC filings.

    Even if the SEC were to make some claim re the 2009 RSA and te PEAKs prgroms, what would they say?

    a. You should have taken reserves earlier? But how is that clear unless the entity in control of the loans submits a claim relating to ESI's guarantee.

    b. You took too many reserves on the 2009 RSA and Peaks programs as the lending authority in control had not yet asked you for guarantee payments based on student loan defaults.

    c. The 2009 RSA and PEAKs programs should have been put on your balance sheet (note: ESI has clearly stated in its SEC filings that the accounting standards and treatment indicated that the 2009 RSA and PEAKs were off-balance sheet items to ESI. I am sure that ESI's auditors signed off on this. These programs have been in place starting with the first 2007 RSA. So it has been 5 years that the auditors have been looking at these things.

    All these SEC investigations into the education companies has come up with nothing. The education space is super highly regulated at many levels. There already is a government lending group looking at ESI'd private student loan plans (ie the 2007 and 2009 RSAs and the PEAKs program). There is not been a word about anything amiss there at all. This will all pass, although the SEC announcement hurt the shares and put a halt tot the upward momentum for the moment.

    The more important issue are profits and valuation. With company estimates at $3.50 - $4.00 and the RSAs and PEAKS programs write-downs taken, we have a very low bar to jump, I believe.

    Sentiment: Strong Buy

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    • What do you make of that law firm being hired to investigate ESI after the SEC subpoena disclosure? Is it longs trying to clear up the SEC mess or is it shorts trying to drum up a lawsuit? Seems like there is a lot of manipulation going on here. If the SEC is a puppet to some big money, I would like an investigation of THEM!

      Sentiment: Buy

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