Sterling Bancorp, parent company to Sterling Bank & Trust, pleaded guilty to one count of securities fraud for filing false securities statements in relation to its 2017 initial public offering and its 2018 and 2019 annual filings, the Justice Department said Wednesday.
The Southfield, Michigan-based bank’s guilty plea, which must be accepted by the court, comes with a requirement to pay $27.2 million in restitution and a term of probation through 2026, the DOJ said.
“For years, Sterling originated residential mortgages that were rife with fraud to pad its bottom line and then lied about these loans in its IPO and subsequent public filings, defrauding unwitting investors,” said Assistant Attorney General Kenneth Polite Jr. of the Justice Department’s criminal division. “This proposed guilty plea reflects the nature and seriousness of the wrongdoing and demonstrates the Department of Justice’s commitment to protecting the integrity of our public markets, holding corporations accountable for their criminal misconduct, and compensating victims for their losses.”
Between 2011 and 2019, Sterling’s Advantage Loan Program provided loans to customers without requiring the submission of typical loan documents, such as tax return, according to the DOJ. What was required, though, was a minimum 35% down payment and higher rates and fees than competitors, the DOJ said.
Leading up to its IPO, Sterling encouraged loan officers to increase the volume of ALP originations to increase revenue through both origination fees and interest payments, the department alleged.
In a prepared statement Wednesday, Sterling CEO Thomas O’Brien, who was hired by the company’s board of directors in 2020 to lead remediation efforts, called the securities fraud charge “serious” and a matter the board “considered long and hard.”
“In the end, we concluded that the long-running fraud in the origination of residential mortgage loans under the ALP was undeniable and was known to the founder and certain former members of senior management at the time of going public, and that it was crucial to the long-term benefit of the Company and its shareholders to accept the charge from the DOJ and finally resolve this matter,” O’Brien said.
Encouraged by Sterling leadership in the last decade, the bank’s loan officers “falsified, caused to be falsified, and concealed various information from the Bank’s Underwriting Department and Quality Control Department that the loan officers believed would delay or prevent the Bank from originating loans under the ALP,” the DOJ said Wednesday.
This led to Sterling originating ALP loans and extending credit to borrowers who would not have qualified for such products based on Sterling’s underwriting guidelines, the DOJ said. It also artificially inflated the bank’s revenue, the department said.
Sterling went public in 2017, and its 2017 SEC Form S-1 contained materially false and misleading statements that touted ALP loans as sound, the DOJ said. Following its IPO, the fraud continued, and its 2018 and 2019 SEC Form 10-K filings also included materially false and misleading statements about the ALP, the department said.
Sterling’s fraud resulted in a nearly $70 million loss to non-insider victim-shareholders, the DOJ said.
“Bank holding companies that engage in fraud to deceive the public and regulators must be brought to justice for their actions,” Mark Bialek, inspector general for the Federal Reserve Board of Governors and Consumer Financial Protection Bureau, said Wednesday.
Sterling remains under investigation by Securities and Exchange Commission related to the ALP, but the company said it believes that probe will not yield an enforcement action.
The SEC did not return a request for comment.
The DOJ said it would not seek a criminal fine, with an eye toward ensuring Sterling pays the maximum amount it can to victims. The DOJ determined that any higher amount was “reasonably likely to threaten the continued viability of the Company, which may expose the Company’s shareholders to a further risk of loss.”
The DOJ credited Sterling for its cooperation, including the termination of all employees engaged in ALP fraud and an overhaul of the bank’s residential lending department, internal audit function, compliance function, and Bank Secrecy Act/anti-money laundering function.
Sterling also created an enterprise risk management function and permanently ended the ALP.
The bank’s board of directors has been “unflinching in its support of the pursuit of full remediation and never withheld the necessary resources to support the investigations,” O’Brien said.