Sterling Bancorp Inc., the thrift holding company for Sterling Bank and Trust FSB in Southfield, announced March 15 that the company entered into a plea agreement with the U.S. Department of Justice (DOJ).
The agreement resolves the DOJ’s investigation of the bank and company relating to the bank’s former residential loan product, marketed as the Advantage Loan Program (ALP), and related matters.
Under the plea agreement, the company has agreed to plead guilty to one count of securities fraud primarily relating to disclosures with respect to the ALP contained in the company’s 2017 IPO registration statement and its immediately following annual reports on Form 10-K filed in March 2018 and 2019. It has also agreed to pay $27,239,000 in restitution and further enhance its compliance program and internal controls related to securities law compliance.
This resolution releases the company, as well as the bank, from further prosecution for securities fraud and underlying mortgage fraud in the ALP.
The plea agreement is subject to court approval.
The company also revised its unaudited financial results for its fourth quarter and year that ended Dec. 31, 2022, which will be reflected in its annual report on Form 10-K that is expected to be filed today.
Based on the estimated financial impact of the plea agreement, the company reported a net loss of $14.2 million for the full year 2022 and $18.4 million for the fourth quarter of 2022. The revised net income reflects an increase in the provision (recovery) for contingent losses, net to $18.2 million for the three months and year ended Dec. 31, 2022.
The company’s and the bank’s compliance with their regulatory capital requirements was not materially affected. The payment of the restitution is expected to be funded in part from a dividend to be paid by the bank to the company, subject to applicable regulatory requirements and regulatory nonobjection.
“Today’s announcement ends the long-running uncertainty around the DOJ’s investigation of the company,” says Thomas M. O’Brien, chairman, president, and CEO of Sterling, who was hired by the company’s board of directors in 2020 to lead the company’s remediation and turnaround efforts. “In the last few days, the settlement conversations gathered steam, and the result is the announcement from the government on its findings and the terms of the settlement.
“Sterling Bancorp Inc. is pleading guilty to one count of securities fraud resulting from false and misleading statements and/or omissions in various public securities filings from the 2017 IPO through 2019.
“This is a serious charge and one that the company’s board of directors considered long and hard. 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.”
In entering into the plea agreement, the DOJ noted that the company, through its founder and certain members of its former senior management and loan officers, knew that it regularly originated loans through the ALP based on false and inadequate due diligence; that the former loan program constituted a significant part of the company’s revenues; and that the company nevertheless engaged in its initial public offering, making false statements regarding the ALP.
O’Brien says, “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.
“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.”
The DOJ acknowledged the company’s voluntary disclosure of the ALP fraud to the OCC following the company’s internal investigation as well as the company’s voluntary disclosure of all relevant facts known to it over the course of the DOJ’s investigation.
The company also provided to the DOJ all relevant facts known throughout the company’s ongoing internal investigation. In doing so, the company received full credit for cooperation under the U.S. Sentencing Guidelines and also received credit for cooperation pursuant to DOJ’s guidelines.
In determining an appropriate financial resolution, the DOJ also took into account the company’s $6 million civil money penalty paid to the OCC, the $12.5 million payment made to settle the shareholder class action captioned Oklahoma Police Pension and Retirement System v. Sterling Bancorp Inc. et al., and the company’s inability to pay the full amount of fines and restitution that were called for under the Sentencing Guidelines or dictated by the amount of loss to non-insider victim-shareholders.
The company agreed as part of the plea agreement not to seek a tax deduction for the restitution payment.
The DOJ further acknowledged that the company has enhanced and has committed to continuing to enhance its compliance program and internal controls. Based on the foregoing, the DOJ determined that an independent compliance monitor is not necessary for the company.
Although the company and the bank remain under investigation by the Securities and Exchange Commission (SEC) related to the ALP, the company currently believes that the SEC’s investigation will not result in an enforcement action against the company.
“On behalf of the company and its board of directors, we are sincerely grateful for the support of our public shareholders throughout this difficult process. We have done our best to right the wrongs of the past and atone for those serious wrongs. We can now focus on developing a strategy that allows Sterling to capitalize on forthcoming opportunities,” O’Brien says.
Company management scheduled a conference call for March 16 at 1 p.m. to discuss the plea agreement. For more information, visit sterlingbank.com.