Put buying does not necessarily mean that the person buying the puts expects a stock to go down. They might be woriied that a stock they like MIGHT go down so first they buy puts (as cheaply as you can) and then let the stock drift down to the put strike price (if you can) before buying. That way you can buy the stock but still have the puts as insurance in case you are wrong.
I've used this strategy with ESI and have (obviously) made more money with the puts than the stock.
Bottom Line: Large put buying can also mean large stock buys!
You never really know.
"Operating expenses in the 3 months ended March 31, 2015 will decrease more than the projected year-over-year decline in revenue"
From the Form 12b-25 Filing:
"As discussed above, the Registrant has not completed its consolidated financial statements for the three months ended March 31, 2015, and therefore the Registrant does not yet have certainty regarding the significance of any changes in results of operations from the same prior year period. Based on current information and its preliminary assessment, however, the Registrant believes that revenue in the three months ended March 31, 2015 will decrease compared to the three months ended March 31, 2014, primarily due to a 6.8% decrease in total student enrollment as of December 31, 2014 compared to December 31, 2013, and, to a lesser extent, a 10.4% decrease in total student enrollment as of March 31, 2015 compared to March 31, 2014. The Registrant also believes that its operating expenses for the three months ended March 31, 2015 compared to the same prior year period will decrease more than the projected year-over-year decline in revenue."
will drag on for years. Ho hum. Just another big pay day for the lawyers.
the SEC has known about the loan payments for over a year or more. I guess we now know why the Wall Street banks get away with ripping off the public for so long. The SEC takes long naps.
The SEC says that "The company allegedly covered up the losses from student-loan defaults by making payments on delinquent accounts to avoid triggering millions in guarantee payments."
So the bad boys at ESI made payments to the loan accounts of students who couldn't pay them themselves. They actually helped students who were having trouble paying their loans!
That's very nice of them.
Of course they did it for evil business reasons. They didn't want to trigger millions in guarantee payments.
To me, THIS SOUNDS LIKE A GOOD BUSINESS DECISION that had the side effect of helping students pay their loans!
Was there a clause in the guarantee payment contract that SPECIFICALLY said they couldn't make payments for delinquent students???
What a bad, bad, company!!!
Maybe it will go BK but the fraud was committed by Modany and Fitzpatrick. They should pay but the rest of the employees should not. Of course the SEC doesn't give a #$%$ about the honest ones. They just want to look tough.
The new management and Deloitte probably informed the SEC of the fraud. ESI might get a fine but the SEC would really like to nail Modany and Fitzpatrick. This is not a going out of business event.
Maybe ESI won't have a financial impact from these charges
You're not the only one who didn't see this coming. Here's what BofA said a year ago in June 2014:
"In a report published Wednesday, Bank of America analyst Sara Gubins reiterated a Neutral rating on ITT Educational Services (NYSE: ESI), but lowered the price target from $22.00 to $19.00."
In the report, Bank of America noted, “After the close, ITT announced plans to consolidate prior PEAKS third-party loans onto its balance sheet. On 6/18/14, the Office of the Chief Accountant of the SEC informed ITT that it should have consolidated PEAKS on balance sheet from the time it had the substantive unilateral right to replace the servicer, or 2/28/13 as determined by ITT's audit committee. In turn, the company will restate financial statements starting from 1Q13. The company expects to take a $65-75mn pre-tax charge in 1Q13 as a result.”
I agree that ESI should reinvent itself before the Gainful Employment Rule kicks their butt. Still, ESI cannot be declared INELIGIBLE for Federal Funds for at least 2 years so they have time. They should be addressing BOTH the PEAKS issue and the Gainful Employment Rule as quickly as possible.
I still think there's a chance the Gainful Employment Rule will be overturned at some point. Here's what the DOE admitted when they issued the Rule.
“The Department has since conceded that there was no reasoned basis for its loan repayment rate test, admitting that it ‘has found no expert studies or industry practice,’ nor any other alternative support or arguments in support of a threshold."
I'd really like to see a judge overturn it sooner rather than later.
Note also that "several Members of Congress accused the Department of bad faith.”
By the way, COCO completely ignored the DOE when the DOE requested info. ESI has been more forthcoming and cooperative with the DOE. ESI also is in constant communication with the SEC in order to make sure the PEAKS consolidation goes smoothly. I believe most of the delay is getting input and feedback from the SEC.
By the way, here's an update on the CFPB and ESI lawsuit:
"April 15, 2015 ITT Educational Services has asked a U.S. appeals court to review the for-profit college operator's constitutional challenge to the Consumer Financial Protection Bureau, stepping up a dispute over the financial watchdog's legal status.
The notice of appeal, filed on Wednesday, April 8th, 2015 by lawyers at Ice Miller and Gibson Dunn & Crutcher, is ITT's latest effort to fend off a 2014 enforcement action by the bureau, which charged the company with unfair and abusive practices for allegedly pressuring students to take out predatory loans."
One other headline of note was the fine that the DOE said COCO had to pay for misrepresentation:
"The U.S. Education Department fined Corinthian Colleges Inc., the for-profit education chain, $30 million for misrepresenting job-placement rates to current and prospective students."
In the unlikely event that the DOE fined ESI, it good to know that it probably won't be greater than $30 million. ESI has enough cash to pay a $30 million fine but of course they would probably appeal and drag out any payment of a fine for as long as possible.
Here's an additional quote from CECO's closure announcement:
"The majority of the teach-outs are expected to be complete by 2017 and any remaining teach-outs are expected to be complete by 2018. Excluding restructuring charges, these initiatives are expected to be accretive to 2015 earnings."
To me this says just what I suspected. They are not just closing the campuses because of the Gainful Employment Rule. They are closing the campuses because they are unprofitable.
To answer your question, I say yes, ESI will close any campuses, schools, or programs that are unprofitable. The writing is on the wall concerning new enrollment. It will continue to decline because of the strong economy. It may stabilize at some point for the technology programs because there is still high demand for technology workers and these jobs pay well. It makes sense to consolidate and reduce costs while enrollment is declining.
Any punitive action (INELIGIBLE) from the Gainful Employment Rule is still more than 2 years away because a school has to FAIL the Gainful Employment Rule in at least 2 consecutive years out of 3. The rule hasn't even been approved yet because it's still being litigated in court.
The firing of the greedy CEO and CFO and the hiring of Deloitte and the firing of the incompetent Price Waterhouse are good moves designed to show the DOE that ESI is serious about making changes.
The big difference between COCO and ESI is that ESI has been compliant to DOE requests for info and COCO was obviously an essentially criminal organization that had a lot to hide.
I think most of ESI's misery is coming from the PEAKS and 2009 issues but I believe a lot of that will be resolved relatively soon. The release of Q3 2014 earnings shows that ESI and Deloitte have a good idea of what needs to be done to release Q4 2014 and full year 2014 earnings. I'd like to see Q1 2015 earnings sometime before the end of July.
Here's some recent news that provides perspective on what going on with for profit companies:
"Career Education Corp. CECO, -9.84% will begin immediately winding down operations at 14 of its Sanford-Brown College and Institute campuses, a process that could take at least 18 months, to give students a chance to complete their programs, according to a news release from the company. The move is part of a larger restructuring; the company is trying to sell other colleges so that it’s ultimately left with just its Colorado Technical University and American InterContinental University campuses."
"The Education Management Corp. EDMC, -4.39% also said Wednesday that it will close 15 of its Art Institute campuses over the next couple of years. About 5,400 students attend the campuses slated for closure, Chris Hardman, an EDMC spokesman, wrote in an email to MarketWatch. Hardman added that the campuses will continue to offer courses and other services until the last student has graduated."
Both of these schools are positioning themselves the same way. They are getting rid of programs like Art where students can't get good paying jobs. They are sticking with technology, business, and health programs so students who graduate can get higher paying jobs that enable them to pay their debts. It's all about conforming to the (assumed) upcoming Gainful Employment Rule. ( I still think it's possible that a fair judge will throw out the Gainful Employment Rule as illegal or arbitrary.)
The benefit for ITT is that they will also try to conform to the Gainful Employment Rule but will have a much easier time of it since their main programs, Information Technology, Business, Electronics Technology, and Drafting and Design are already areas where students can find decently high paying jobs. The other advantage for ITT is that the economy is creating hundreds of thousands of jobs per month. ITT still has a Criminal Science program that I expect will be shut down.
The Gainful Employment Rule may impact ESI but it won't impact ESI for a least a couple of years and maybe longer.
What is the Gainful Employment Rule?
From the DOE website: "To maintain title IV eligibility, gainful employment programs will be required to meet minimum standards for the debt vs earnings of their graduates."
What are the Minimum Standards?
There are 4 levels: Pass, Zone, Fail, and Ineligible
Pass: Programs whose graduates have annual loan payments less than 8% of total earnings OR less than 20% of discretionary earnings.
Zone: Programs whose graduates have annual loan payments between 8% and 12% of total earnings OR between 20% and 30% of discretionary earnings.
Fail: Programs whose graduates have annual loan payments greater than 12% of total earnings AND greater than 30% of discretionary earnings.
Ineligible: Programs that fail in 2 out of any 3 consecutive years OR are in the zone for 4 consecutive years.
The most important level is the INELIGIBLE level. The FASTEST way a program can be declared INELIGIBLE is if the program fails 2 years in a row.
So what are my conclusions?
1) Not all programs will fail. The technology related programs will fail least because of the higher salaries in tech.
2) NO PROGRAM WILL FAIL for at least the next 2 years.
3) ESI has time to adjust to the new rules.
4) In Nov. 2014, a lawsuit was filed in U.S. District Court for the District of Columbia on Thursday,and the Association of Private Sector Colleges and Universities asked a judge to strike down the rule, claiming that the Department of Education does not have the authority to set debt-to-earnings standards. This lawsuit will effectively delay implementation of the Rule and the Rule MAY be overturned.