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 Judith E. Levy, United States District Court for the Eastern District of Michigan, 221 W. Lafayette Blvd. Detroit, MI 48226.
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 will be 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
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.email@example.com or by fax at: (202) 514-3708.
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