Sterling Bancorp pleaded guilty to falsifying securities statements and will pay approximately $27.2 million in restitution, the Department of Justice (DOJ) announced.
Sterling avoided a criminal penalty in the case, as the DOJ opted to focus the payment total on restitution without threatening the viability of the bank’s operations, the agency said in a press release Wednesday.
The bank falsified securities documents prior to and following a 2017 initial public offering (IPO) to make it appear it had strong revenue, according to the DOJ. At the time, the bank’s residential loan program, “Advantage Loan Program,” served as its primary loan product and was marred by fraudulent applications. The continuing deficiencies in the program, ALP, caused the bank to falsify filings with the Securities and Exchange Commission (SEC) through 2019, the DOJ said.
Sterling remains under investigation by the SEC. The bank was fined $6 million by the Treasury Department’s Office of the Comptroller of the Currency in September regarding ALP’s deficiencies.
The details: ALP, launched in 2011, charged higher rates and fees but did not require customers to submit tax records and other documents lenders need to determine someone’s ability to repay a loan. The program generated $5 billion in loans, the DOJ said.
Prior to the 2017 IPO, Sterling’s loan officers stepped up their loan originations, essentially padding the bank’s revenues. With the knowledge of the bank’s founder and some senior managers, loan officers falsified and concealed information from the bank’s underwriting department and quality control department that might have raised red flags about loaning to customers.
More than 200 senior managers and employees participated in, condoned, or willfully ignored the fraud, the DOJ said.
As a result of the scheme, noninsider shareholders lost more than $69 million, the agency said in the plea agreement, filed in U.S. District Court for the Eastern District of Michigan.
Sterling pleaded guilty to one count of securities fraud.
Compliance ramifications: The DOJ applied a formula to determine the fine Sterling should pay, taking into consideration the money shareholders lost as a result of the scheme, the number of personnel involved, and other factors.
The final penalty was calculated at approximately $56.2 million. But Sterling successfully argued it could not afford both the penalty and the restitution fee. The DOJ agreed to permit Sterling to forgo the penalty and pay restitution.
The agency gave Sterling full credit for cooperation, noting the bank engaged in extensive remedial measures. Sterling met the DOJ’s minimum compliance program enhancement and reporting requirements, so the agency did not require it to retain an independent compliance monitor.
Its remediation included firing senior managers, officers, and employees involved in the fraud and overhauling its residential lending department.
It also updated its internal audit, compliance, and anti-money laundering functions and created an enterprise risk management program. Sterling ended the ALP, hired a new chief executive officer and president, and made most of its directors independent.
Sterling’s CEO and chief risk officer were required to sign a compliance agreement with the DOJ as part of the plea agreement.
Company response: “In the end, [the board] 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,” said Sterling CEO Thomas O’Brien in a statement. “[I]t 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.
“While, as the DOJ currently notes, the fraud was conceived with the knowledge and deception of ‘the founder and certain former members of senior management,’ the company bears its own degree of accountability for their misdeeds. We accept this outcome as a fair settlement of the damage done to noninsider victim shareholders. 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.”
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