Southfield-based Sterling Bancorp to plead guilty to $69M securities fraud

Mark Hicks

A Southfield-based bank holding company has agreed to plead guilty to securities fraud in filing false securities statements, the U.S. Department of Justice announced Wednesday.

Sterling Bancorp Inc., the holding company for its subsidiary, Sterling Bank and Trust F.S.B., made the statements relating to its 2017 initial public offering as well as 2018 and 2019 annual filings, federal officials said in a statement.

“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.”

Sterling is slated to pay more than $27 million in restitution and "further enhance its compliance program and internal controls related to securities law compliance," according to a news release from the bank, which has branches in San Francisco, Los Angeles, Seattle, New York and Southfield.

Under the plea agreement, which still must be accepted by the court, Sterling also will be required to serve a probation term through 2026 and submit to enhanced reporting obligations, officials said Wednesday.

“Today’s announcement ends the long running uncertainty around the DOJ’s investigation of the company,” said Thomas O’Brien, Sterling’s chairman, president and CEO, who was hired in 2020 to lead the company’s remediation efforts. “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.”

The plea relates to Sterling’s residential mortgage loan program, the Advantage Loan Program. The bank originated at least $5 billion in loans through the program from 2011-19, according to the government.

The program catered to Asian borrowers in San Francisco, Los Angeles, New York and Seattle, prosecutors said.

“The 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,” the DOJ said Wednesday.

“… 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.”

The fraud continued after the Sterling IPO and resulted in a total loss of nearly $70 million to the bank’s non-insider victim-shareholders, according to the release.

“Bank holding companies that engage in fraud to deceive the public, and regulators must be brought to justice for their actions,” said Inspector General Mark Bialek of the Board of Governors of the Federal Reserve System and Consumer Financial Protection Bureau. “I commend our agents and their federal law enforcement partners for their hard work and persistence, which ultimately led to today’s announcement.”

In the Sterling statement Wednesday, O’Brien said: “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.”

Sterling noted it paid a $6 million civil penalty last year through a consent order with the Office of the Comptroller of the Currency to resolve a probe related to the ALP.

The plea agreement does not resolve ongoing litigation between the bank and Scott Seligman, the founder of Sterling Bank & Trust and a minority owner of the San Francisco Giants, Crain’s Detroit Business reported Wednesday.

Former Sterling Bank & Trust executive YiHou Han pleaded guilty in a criminal case in 2021 to bank and wire fraud conspiracy in federal court in Detroit. Han allegedly handled at least 1,288 Advantage Loan Program mortgage loans representing about $683.5 million in credit extended by the bank.

Han’s criminal case mirrors allegations contained in a securities class-action lawsuit filed by the Oklahoma Police Pension and Retirement System against Sterling.

The lawsuit accused the company of misleading investors about the Advantage Loan Program, claiming it was underwritten and complied with federal laws designed to prevent money laundering and other financial crimes. False and misleading statements artificially inflated the company's stock price, according to the lawsuit.

Sterling on Wednesday said the DOJ considered the $12.5 million it paid to settle that suit when considering the plea agreement.

The DOJ said the company also “received credit for its cooperation with the department’s investigation and engaged in extensive remedial measures, including terminating employees involved in the ALP fraud, such that through terminations and resignations, more than 100 officers and employees left the bank; completely overhauling the bank’s senior management, including terminations of former senior management; overhauling the Bank’s residential lending department, internal audit function, compliance function, and Bank Secrecy Act/Anti-Money Laundering function, and creating an enterprise risk management function; permanently ending the ALP; hiring a new chairman, chief executive officer and president; increasing the number of independent directors on the company’s board of directors; and implementing a new business model to reduce its risk profile.”