On March 15, 2023, the Department of Justice (“DOJ”) announced that Michigan-based bank Sterling Bancorp, Inc. (“Sterling”) agreed to plead guilty to securities fraud for allegedly filing false statements relating to its 2017 initial public offering (“IPO”) and 2018 and 2019 annual financial reports. As part of its guilty plea, Sterling agreed to pay fines totaling $69 million, including $27.2 million in restitution to non-insider stockholders.
In its filings and press release, the DOJ alleged that Sterling’s loan officers originated a large number of fraudulent residential mortgages through its Advantage Loan Program (“ALP”) at the behest of top executives and that Sterling subsequently made misleading statements about the strength of the ALP and these fraudulent mortgages in connection with its IPO. According to the DOJ, Sterling engaged in a concerted effort to artificially inflate its revenue leading up to the company’s 2017 IPO by circumventing ALP’s standard underwriting process. In order to generate more loans leading up to the IPO, Sterling loan officers falsified and/or concealed key information from the bank’s Underwriting Department, including borrowers’ income, debt, job titles, employment history, gift litters, and interview narratives, that the loan officers believed would delay or stop the origination of loans. At the same time, Sterling continued to make public statements in its IPO offering circular and 2018 and 2019 SEC S-1 filings regarding the efficacy of its underwriting process, including touting the value of its “disciplined and conservative … approach,” explaining that the “program required a minimum 35% down payment and charged higher rates and fees then generally were available elsewhere in the market,” all of which the DOJ alleged made Sterling a strong asset for investors.
Sterling discontinued ALP in March 2020 after its circumvention of its underwriting standards became public. The DOJ alleged that in total, Sterling’s non-insider shareholders suffered losses of $69,075,714 or $4.58/share as a result of the alleged securities fraud.
Some of Sterling’s senior leadership—a former managing director of residential lending and two former loan officers—pleaded guilty to related charges of conspiracy to commit bank fraud and wire fraud in 2021. In public statements, the DOJ cited the “seriousness of the wrongdoing,” and in particular, the knowledge and encouragement of Sterling’s founder and certain members of senior management as justifying criminal charges against the corporation. As part of the plea agreement, the DOJ sought sentencing enhancements under U.S.S.G. § 2B1.1 for both sophisticated means and the involvement of ‘high-level personnel.’ However, DOJ also recommended the bank receive cooperation credit for its effort to cooperate with the investigation since the misconduct came to light.
While it is not apparent how the DOJ’s recent guidance related to corporate enforcement, discussed here
, applied to this long-running matter, Sterling’s guilty plea reflects the reality that corporations will likely still face criminal charges going forward when serious aggravating factors, such as involvement by senior executives in long-running schemes, are present.