U.S. Department
of Justice
United States v. Sterling Bancorp, Inc.
PENDING CRIMINAL DIVISION CASES
United States v. Sterling Bancorp, Inc.
Court Docket No.: 5:23-CR-20174-JEL-APP
Court Assigned: This case is assigned to United States District Judge Linda V. Parker, United States District Court for the Eastern District of Michigan, 221 W. Lafayette Blvd. Detroit, MI 48226.
Latest Updates: On July 19, 2023 Sterling Bancorp, Inc. was sentenced according to the terms of the plea agreement, including 36 months of probation, and was ordered to pay within 30 days $27,239,000.00 in restitution to non-insider victim-shareholders who were defrauded. As detailed in the Court’s July 21, 2023 Joint Restitution Order, the Court will appoint a Special Master to make findings of fact and recommendations to the Court regarding: (a) the non-insider victim-shareholders and entities entitled to restitution, and (b) the restitution amounts to which these individuals and entities are entitled. The Special Master will establish, oversee, and administer a restitution fund established for the benefit of the non-insider victim-shareholders (“the Restitution Fund”).
On April 19, 2023, Sterling Bancorp Inc. entered a guilty plea.
On March 15, 2023, Sterling Bancorp, Inc., a Michigan-headquartered bank holding company entered into a corporate resolution and agreed to plead guilty to securities fraud for filing false securities statements relating to its 2017 initial public offering (“IPO”) and its 2018 and 2019 annual filings.
According to a signed plea agreement that was publicly filed in court, Sterling Bancorp, Inc. (the “Company”) was the holding company for its wholly owned subsidiary, Sterling Bank & Trust F.S.B. (the “Bank,” or collectively, “Sterling”). Sterling—with branches located in San Francisco and Los Angeles, California; Seattle, Washington; New York, New York; and Southfield, Michigan—completed an IPO in 2017, and the Company’s stock began trading on the NASDAQ, a national securities exchange, under the ticker symbol “SBT.”
The largest portion of the Bank’s loan portfolio was composed of residential mortgage loans. The Advantage Loan Program (“ALP”) was a residential mortgage loan program established by the Bank in or around 2011. Between 2011 and 2019, the Bank’s employees and agents originated at least $5 billion in ALP loans. 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.
In the lead-up to the IPO, Sterling’s loan officers were encouraged to increase the volume of ALP loan originations to increase the Bank’s revenue through origination fees and interest payments. The Bank’s Underwriting Department maintained internal underwriting guidelines that governed the loan approval process for the ALP. The underwriting guidelines required loan officers to obtain various documents from the borrower and the borrower’s employer. In addition to collecting these documents, loan officers were supposed to calculate the borrower’s debt-to-income ratio. The debt-to-income ratio was a personal-finance measure that compared the amount of debt a borrower had to the borrower’s overall income and was used to measure the borrower’s ability to manage monthly mortgage payments. Taken together, the various documents obtained from the borrower and the borrower’s employer, and related information, were critical to completing certain mortgage application forms and assessing the creditworthiness of a borrower’s application.
In connection with loans originated through the ALP,the Bank’s loan officers falsified, caused to be falsified, and concealed various information from the Bank’s Underwriting Department and Quality Control Department that the loan officers believed would delay or prevent the Bank from originating loans under the ALP.
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.
In or around October 2017—while Sterling was artificially inflating its revenue through the ALP—Sterling went public. In connection with its IPO, Sterling’s 2017 SEC Form S-1 contained materially false and misleading statements regarding the ALP that touted the soundness of the ALP loans. In truth, the ALP was rife with fraud.
After Sterling’s IPO, the ALP fraud continued. In its 2018 and 2019 SEC Form 10-K filings, Sterling reiterated a series of materially false and misleading statements about the ALP. As a result of Sterling’s fraud, the total loss to Sterling’s non-insider victim-shareholders was nearly $70 million.
Under the terms of the plea agreement, which must be accepted by the court, Sterling Bancorp, Inc. will plead guilty to one count of securities fraud. Sterling Bancorp, Inc. will also be required to serve a term of probation through 2026, submit to enhanced reporting obligations to the department, and pay more than $27 million in restitution to its non-insider victim-shareholders. The department considered a range of factors outlined in the department’s Inability to Pay Guidance and determined 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. Accordingly, to ensure that the maximum amount of the Company’s funds is paid to restitution, the department has agreed not to seek a criminal fine in this case.
A number of relevant considerations contributed to the department’s criminal resolution with Sterling, including the nature and seriousness of the offense and the pervasiveness of the misconduct at the most senior levels of the Company. Sterling 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.
As part of Sterling’s plea agreement, Sterling agreed to cooperate fully with the United States in all matters relating to the conduct covered by the plea agreement and other conduct under investigation by the United States, to self-report violations of U.S. federal criminal law, and to continue to implement a compliance and ethics program designed to effectively detect and deter violations of U.S. securities laws throughout its operations.
Relatedly, three individuals previously pleaded guilty in connection with the underlying ALP fraud. YiHou Han, 39, of San Francisco, California, Hao Liang “Frank” Hu, 48, of Chino Hills, California, and Amy Lu, 33, of Brea, California, have each pleaded guilty. Han pleaded guilty to one count of conspiracy to commit bank fraud and wire fraud, Hu pleaded guilty to one count of conspiracy to commit bank fraud and wire fraud, and Lu pleaded guilty to one count of conspiracy to commit bank fraud and wire fraud. Han and Hu each face a maximum sentence of 30 years in prison, and Lu faces a maximum sentence of five years in prison; each are awaiting sentencing. A federal district judge will determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.
For more information about the corporate resolution in this case, please see below:
Press Release - March 15, 2023
Plea Agreement
Criminal Information - March 16, 2023
Judgment - July 21, 2023
Restitution Order - July 21, 2023
Victim Impact Statement: If you would like to submit a Victim Impact Statement, you may do so by mailing the Victim Impact Statement below (or a letter to the court) to: Victim Witness Unit, U.S. Department of Justice, Criminal Division, Fraud Section, 10th & Constitution, NW, Bond Building, Room 4416, Washington, D.C. 20530. You also may submit the Victim Impact Statement via email at VictimAssistance.fraud@usdoj.gov or by fax at: (202) 514-3708.
The information on this website will be updated as new developments arise in the case. If you have any questions, please call the Victim Assistance Line toll-free at (888) 549-3945 or email us at VictimAssistance.fraud@usdoj.gov.
Presumption of Innocence: It is important to keep in mind that a criminal complaint is merely an allegation, and defendants are presumed innocent until proven guilty and that presumption requires both the court and our office to take certain steps to ensure that justice is served.
Crime Victims’ Rights Act and Right to Retain Counsel: The Crime Victims’ Rights Act (18 U.S.C. § 3771) applies only to victims of the counts charged in federal court, and thus individuals may not be able to exercise all of these rights if the crime of which the individual is a victim was not charged. Section 3771(c)(2) of this Act requires that we advise you that you have the right to retain counsel. Although the statute specifically sets forth your right to seek advice of an attorney with regard to your rights under the statute, there is no requirement that you retain counsel. The Government may not recommend any specific counsel, nor can the Government (or the Court) pay for counsel to represent you. Government attorneys represent the United States.
If you elect to obtain counsel to represent your interests, please have your attorney notify this office in writing at: U.S. Department of Justice, Criminal Division, Fraud Section, 10th & Constitution Avenue, NW, Bond Building, 4th Floor, Washington, DC 20530, Attention: Victim Witness Unit; fax: (202) 514-3708; or email: VictimAssistance.fraud@usdoj.gov. If you elect not to retain counsel to represent your interests, you do not need to do anything.
Plea Agreements: Please be aware that many criminal cases are resolved by plea agreement between the Department of Justice and the defendant. You should also know that it is not unusual for a defendant to seek to negotiate a plea agreement shortly before trial is scheduled to begin. Plea agreements can be made at any time and as late as the morning of trial, leaving little or no opportunity to provide notice to you of the date and time of the plea hearing. If the court schedules a plea hearing in this case, we will use our best efforts to notify you of available information as soon as practicable. If you want to inform the prosecutor of your views regarding potential plea agreements, or any other aspect of the case, please contact the prosecutor assigned to this case or call the Victim Assistance Line toll-free at (888) 549-3945 or email us at VictimAssistance.fraud@usdoj.gov.