Sterling in Michigan pleads guilty to securities fraud

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Sterling Bancorp in Southfield, Michigan, pled guilty to securities fraud, conceding it filed false statements tied to its 2017 initial public offering and its annual regulatory filings the following two years.

The legal issue was linked to Sterling's tarnished Advantage Loan Program, or ALP. The company discontinued the low-documentation mortgage product in late 2019 after discovering alleged fraud and firing several employees.

The $2.5 billion-asset thrift holding company of Sterling Bank and Trust F.S.B. said in a press release after markets closed Wednesday that it entered a plea agreement with the U.S. Department of Justice. It pled guilty to one count of securities fraud and agreed to pay $27.2 million in restitution to shareholders. It also agreed to further enhance its compliance program and internal controls.

The financial penalty required Sterling to revise its 2022 financial results. It reported a full-year 2022 loss of $14.2 million. The company, which previously reported full-year net income of $4 million, said the guilty plea ended a years-long DOJ investigation.

"This is a serious charge and one that the company's board of directors considered long and hard," Sterling Chairman and CEO Thomas O'Brien, who was hired in 2020 to lead the company's turnaround efforts, said in the release. "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."

Scott Seligman founded Sterling Savings and Loan Association, a predecessor bank, in 1984.

"We have done our best to right the wrongs of the past and atone for those serious wrongs," O'Brien added.

In a separate press release, DOJ officials said that, between 2011 and 2019, Sterling originated at least $5 billion in ALP loans and touted their flexible documentation requirements and fast underwriting. 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 the submission of typical loan documentation such as tax returns or payroll records.

Even so, under pressure to bolster revenue leading up to and following the IPO, the DOJ said Sterling loan officers falsified documents and concealed information from the bank's underwriting teams, and they did so with the knowledge and encouragement of Sterling's founder and certain members of senior management.

Sterling's agreement with the DOJ does not end ongoing litigation between the bank and Seligman.

The bank, in a suit filed in the U.S. District Court for the Eastern District of Michigan last year, is seeking to claw back millions of dollars in dividends and other payments from the former CEO, claiming he masterminded the fraudulent loan program. Seligman has denied the allegations, and he filed a countersuit in 2022.

Separately, Sterling's O'Brien addressed fallout from the failures this month of Silicon Valley Bank in California and Signature Bank in New York.

The market "always quickly focuses on the rest of the industry trying to figure who, if anyone, is next. I want to reassure all our constituents that … Sterling continues to maintain a very strong capital position and a high ratio of liquid assets to total assets compared to the industry. As our investors know, we took great pains to drastically increase liquidity in 2020 so that we could face whatever might come out of the repercussions from the Advantage Loan Program," he said in the release.

"We also have no balance sheet exposure to crypto asset-related companies or startup/early-cycle technology companies," O'Brien added. "I am further pleased to note that deposit levels in the first quarter of 2023 have remained relatively stable, and I am not aware of any significant deposit outflows in the past week. All in all, I am very confident in our financial resiliency."