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Sterling Bancorp Inc. To Plead Guilty to $69M Securities Fraud

Keith Griffin
Mar 16, 2023
Cash and gavel

DOJ says bank’s residential mortgages were ‘rife with fraud.’

Sterling Bancorp, based in Michigan, has agreed to plead guilty to securities fraud for filing false securities statements relating to its 2017 initial public offering (IPO) and its 2018 and 2019 annual filings. Sterling will pay more than $27.2 million in restitution to its non-insider victim-shareholders.

As a result of Sterling’s fraud, the total loss to Sterling’s non-insider victim shareholders was nearly $70 million. The DOJ can’t seek more due to the department’s Inability to Pay Guidance that determined any payment exceeding approximately $27.2 million is reasonably likely to threaten the continued viability of the company, which may expose its shareholders to further risk of loss.

“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 A. Polite Jr. of the DOJ’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.”

The largest portion of the bank’s loan portfolio was composed of residential mortgage loans. In or around 2011, the bank established a residential mortgage loan program known as the Advantage Loan Program (ALP). Between 2011 and 2019, the bank’s employees and agents originated at least $5 billion in ALP loans. 

The DOJ said in its complaint that Sterling Bank touted the ALP’s flexible documentation requirements and fast underwriting and closing capabilities. The program required a minimum 35% down payment and charged higher rates and fees than generally were available elsewhere in the market, but it did not require submission of typical loan documentation, such as an applicant’s tax returns or payroll records.

“Today’s announcement ends the long-running uncertainty around the DOJ’s investigation. In the last few days, the settlement conversations gathered steam, and the result is the announcement from the government on its findings and the terms of the settlement. Sterling Bancorp, Inc. is pleading guilty to one count of securities fraud resulting from false and misleading statements and/or omissions in various public securities filings from the 2017 IPO through 2019,” said Thomas M. O’Brien, chairman, president, and CEO, who was hired in 2020 to lead the company’s remediation and turnaround efforts. “This is a serious charge and one that the company’s board of directors 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.”

In connection with loans originated through the ALP, and with the knowledge and encouragement of Sterling’s founder and certain members of senior management, the DOJ said the bank’s loan officers falsified, caused to be falsified, and concealed various information from Sterling’s underwriting and quality control departments that the loan officers believed would delay or prevent the Bank from originating loans under the ALP.

The false information that the loan officers included and caused to be included in ALP applications was ultimately transmitted to, and relied upon by, the Bank’s Underwriting Department and caused the Bank to originate ALP loans and extend credit to borrowers who otherwise would not have qualified for credit from the Bank based upon the underwriting guidelines. These fraudulent loans directly increased the Bank’s revenue through fees and interest associated with the origination of the fraudulent loans.

In or around October 2017 – while Sterling was artificially inflating its revenue through the ALP – Sterling went public. In connection with its IPO, Sterling’s 2017 SEC Form S-1 contained materially false and misleading statements that touted the soundness of the ALP loans. In truth, the ALP was rife with fraud.

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