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    United States Attorney's Office
    Central District of California

    Thom Mrozek
    Public Affairs Officer

    (213) 894-6947
    thom.mrozek@usdoj.gov



    Return to the 2010 Press Release Index
    Release No. 10-022

    February 1, 2010

    FORMER PRESIDENT OF INLAND EMPIRE MORTGAGE COMPANY SENTENCED TO 13 YEARS IN FEDERAL PRISON IN FRAUD SCHEME THAT LED TO NEARLY $30 MILLION IN LOSSES AT H.U.D.

    RIVERSIDE, California – The former president of Mortgage One Corporation in Hesperia was sentenced this afternoon to 13 years in federal prison for defrauding the United States Department of Housing and Urban Development and private lenders by fraudulently obtaining hundreds of federally insured loans and selling those mortgages to private lenders in a scheme that caused tens of millions of dollars in losses to the federal housing agency.

    John Richard Varner, 56, of Hesperia, was sentenced to 156 months in prison by United States District Judge Virginia A. Phillips. In addition to the prison sentence, Judge Phillips ordered Varner to pay $29,749,239 in restitution.

    Last April, following a nearly four-week trial, a federal jury convicted Varner of
    one count of conspiracy to defraud HUD, one count of bank fraud and two counts of subscribing to false income tax returns. Varner was the fifteenth defendant convicted in relation to the scheme. Varner and co-defendant Richard Elroy Giddens, 69, of Riverside, were at the center of the fraud that was run out of Mortgage One Corporation, which was based in Hesperia, and M-1 Capital Corporation, which was based in Riverside and Rancho Cucamonga. Giddens, the former CEO of Mortgage One, pleaded guilty to the same charges Varner was convicted of at trial and in September 2009 was sentenced to 78 months in federal prison.

    From 1997 until 2002, Mortgage One and M-1 Capital were in the business of approving, funding and then selling home mortgage loans, typically obtaining mortgage insurance on the loans from the Federal Housing Administration, which is an agency within HUD. Mortgage One and M-1 Capital obtained FHA mortgage insurance for their loans without HUD review due to their status as HUD-approved Direct Endorsement Lenders. They obtained and kept Direct Endorsement Lender status by submitting false documents, including bogus audits, to HUD.

    Varner and his co-defendants defrauded HUD by submitting fraudulent loan application documents in order to qualify the loans for FHA insurance. The loans went to borrowers who either did not meet the FHA requirements to qualify for the mortgages or were only “straw buyers.” Mortgage One and M-1 Capital sold the funded loans to banks, such as the FDIC-insured Firstar Bank, N.A. and Chase Manhattan Mortgage Corporation, using the same fraudulent documents.

    As a result of the scheme, HUD lost $23,628,857 on 905 fraudulent loans, and a total of $29,638,011 when interest paid by HUD during the foreclosure and resale process is included.

    Varner was found guilty of filing false tax returns for the years 1999 and 2000 when he failed to report income that he used for personal expenses such as a Corvette, a $153,000 RV, jewelry and more than $150,000 deposited into a personal investment account.

    In sentencing papers, prosecutors argued that Varner’s testimony at trial last year “consisted of a series of breathtaking lies that appeared designed to shift responsibility for defendant's crimes to others and to mislead the jury about the true facts.” For example, Varner “denied knowingly approving fraudulent loan applications, despite testimony from numerous brokers that they discussed the fraud in the loan files and [Varner] indicated they should continue to submit the fraudulent loan files,” according to court documents that concluded Varner “gave blatantly false testimony.” At this afternoon’s sentencing hearing, Judge Phillips agreed with prosecutors, finding that Varner’s testimony “was knowingly untruthful on a number of points.”

    The case against Varner and his co-defendants is the result of an investigation by the Federal Bureau of Investigation, HUD's Office of Inspector General, and IRS-Criminal Investigation. The investigation received assistance from the Social Security Administration's Office of Inspector General.

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    Release No. 10-022
    Return to the 2010 Press Release Index