U.S. bank pleads guilty to securities fraud

While the Department of Justice (DoJ) said the firm’s misconduct caused almost US$70 million in shareholder losses, it decided that “any payment exceeding approximately $27.2 million is reasonably likely to threaten the continued viability of the company, which may expose the company’s shareholders to a further risk of loss.”

Additionally, the DoJ agreed not to seek a criminal fine to maximize the shareholder restitution in the case.

The allegations relate to the bank’s residential mortgage loan program, established in 2011, which didn’t require typical loan documentation such as tax returns or payroll records, but charged higher rates and fees.

According to the DoJ, in order to boost mortgage originations under the program in the lead-up to Sterling Bancorp’s IPO, loan officers — with the knowledge of the bank’s senior management — falsified or hid information from the underwriting department that they believed could have prevented mortgages from being approved.

That misconduct led to loans to borrowers who wouldn’t have otherwise qualified being approved, boosting the bank’s revenues.

Amid this effort to inflate revenues, the bank went public. As a result, the DoJ alleged the bank’s regulatory filings “contained materially false and misleading statements that touted the soundness of the [program’s] loans. In truth, the [program] was rife with fraud.”

The fraud continued after the bank’s IPO, the DoJ said, noting that subsequent regulatory filings also contained false and misleading statements about the mortgage program.

“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. in a release.

As part of the plea agreement, the bank agreed to fully cooperate with U.S. authorities, and the DoJ said the bank received credit for cooperation and for its remediation efforts, which included terminating more than 100 employees and officers involved with the misconduct; overhauling senior management, residential lending, compliance and audit functions; and creating a new risk-management function.

The bank also revamped its governance, increasing the number of independent directors on its board and hiring a new chairman, president and CEO.

“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,” said Thomas O’Brien, the bank’s new chairman, president and CEO, in a release.

“We accept this outcome as a fair settlement of the damage done to non-insider 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,” he said.

O’Brien said the board considered the decision to plead guilty “long and hard.”

“In the end, we concluded that the long-running fraud in the origination of residential mortgage loans under the [program] 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,” he said.

In 2022, the bank also agreed to pay a US$6-million penalty to the Office of the Comptroller of the Currency (OCC) to resolve allegations that it engaged in unsafe practices and violated various statutes. It also paid US$12.5 million to settle a shareholder class action.

The bank remains under investigation by the U.S. Securities and Exchange Commission, but Sterling said it believes that “the SEC’s investigation will not result in an enforcement action against the company.”