The U.S. Department of Justice (DOJ) announced this week that it has secured a commitment from Southfield, Michigan-based Sterling Bancorp, Inc. to plead guilty for filing false securities statements in a $69 million securities fraud case that stems from its 2017 initial public offering (IPO) and its annual filings in 2018 and 2019.
The violations of law were directly related to mortgage loans originated by the company, which were “rife with fraud” and used to “pad its bottom line” in a manner that deceived and defrauded investors, according to Assistant Attorney General Kenneth A. Polite, Jr.
“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,” Polite said in the DOJ’s announcement in the case.
In 2011, Sterling started its residential mortgage program, the Advantage Loan Program (ALP), which originated roughly $5 billion worth of loans between 2011 and 2019. Requirements included a minimum down payment of 35% and higher rates and fees than other lenders in the market, and the ALP did not require the submission of supporting documents, such as an applicant’s payroll records or tax returns.
The DOJ said that ahead of Sterling’s IPO, the company’s senior management, including its founder, encouraged loan officers to increase the company’s volume of ALP loans to increase revenue from origination fees and interest payments. Per the DOJ, some of the company leaders encouraged LOs to falsify and/or conceal information from underwriters that could have delayed or prevented the origination of certain ALP loans.
The fraud continued after the IPO, according to the announcement, and the total loss to Sterling’s non-insider victim-shareholders was nearly $70 million.
Thomas M. O’Brien, Sterling’s chairman, president and CEO, was hired by Sterling’s board of directors in 2020 to lead remediation and turnaround efforts. He said that the company is prepared to turn the corner following this agreement.
“This is a serious charge and one that the company’s board of directors considered long and hard,” O’Brien said in a statement. “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 also said that some of the company’s former leaders bear a degree of accountability on the matter.
“We accept this outcome as a fair settlement of the damage done to non-insider victim-shareholders,” O’Brien said. “We trust that accountability for certain individuals should be forthcoming, and we certainly hope that such accountability will recognize the significant damage they did to Sterling and its shareholders during their tenure.”