<a href="http://www.ocregister.com/ocregister/homepage/abox/article_1751932.php"></a>
<a href="http://www.ocregister.com/ocregister/homepage/abox/article_1751932.php">Mortgage swindler gets prison</a>
Prosecutors say the Newport Beach man, who got 57 months, continued to profit while awaiting sentencing in $9 million fraud case.
By JOHN GITTELSOHN
THE ORANGE COUNTY REGISTER
<p>Kenneth C. Ketner of Newport Beach was sentenced to 57 months in federal prison Monday and ordered to repay banks $9.27 million he swindled in a mortgage fraud scheme.</p>
<p>The money helped Ketner buy a Lido Island waterfront home, a $250,000 Ferrari and a yacht he christened the "Aquaholic," according to civil, criminal and bankruptcy court filings.</p>
<p>Ketner, 58, was supposed to have been drummed out of the mortgage business in 2001, when his company lost its state real estate license. But Ketner, who was indicted for criminal fraud in 2005, continued to make a living from the mortgage business, according to defense and prosecution court documents. </p>
<p>"I have no one to blame for these tragedies except myself," Ketner said Monday, choking back tears as he read a statement to U.S. District Court Judge James V. Selna. "I know from the deepest part of my heart I will never be involved again in anything illegal in any way."</p>
<p>Ketner said he has turned his life around – sobered up, joined Alcoholics Anonymous, become the benefactor of a New Orleans church devastated by Hurricane Katrina, and taken responsibility for his wrongdoing.</p>
<p>But prosecutors argued that Ketner's turnaround came only in response to the threat of prison.</p>
<p>"He has continued to engage in fraud, not just past conduct that led to this indictment, not just past the indictment, but to this very day," Assistant U.S. Attorney Andrew Stolper told the court Monday.</p>
<p>Ketner has not been charged with any offenses subsequent to the fraud scam that ended in 2001. But federal law enforcement officials said his case illustrates the lack of consumer protection in California's mortgage industry – even from someone who pleaded guilty to mortgage fraud. </p>
<p>"Ken Ketner has admitted to taking advantage of all of the weaknesses available in the mortgage industry to defraud related parties, from lenders to borrowers, all for his own personal benefit," said Peter Norell, head of the FBI's white collar crimes unit in Santa Ana. "These types of frauds are serious and worthy of allocating resources to investigate because it hurts everyone involved and takes advantage of those seeking the American 'dream' of homeownership."</p>
<p>Ketner currently works as a partner in Danbury Consultants, "a company that markets mortgages by direct mail," according to an April 9 filing by Sheila Balkan, a criminologist hired by the defense to argue for a mild sentence. </p>
<p>Selna did not address Ketner's right to earn money from mortgage-related businesses during or after his prison term, which is scheduled to begin Aug. 27. </p>
<p>Ketner's former business partner, Michael Cardwell of Phoenix, said Ketner has been doing "consulting work," but has not been directly involved in writing mortgages.</p>
<p>"He's not – he can't be – in the business," Cardwell said. "As liberal from a licensing standpoint as California is, there are still background checks." </p>
<p>The California Department of Real Estate, which regulates most licensed mortgage brokers, employs 175 auditors and other enforcement staff to police more than 500,000 licensed real estate agents and brokers – fewer than one per 2,800 licensees. </p>
<p>"Clearly, given the numbers, we're more reactive and we need people to let us know what's going on," said Tom Pool, a spokesman for the Department of Real Estate.</p>
<strong>
<p>A Ponzi scheme</p>
</strong>
<p>Ketner's former company, Mortgage Capital Resource, specialized in issuing second mortgages used by borrowers to consolidate debt, giving them access to lower interest rates and tax benefits – all perfectly common and legal. </p>
<p>In 2001, Ketner was sued in federal court in Santa Ana by Household Commercial Finance, an Illinois bank that extended a $20 million line of credit to Mortgage Capital for home loans. Instead of using borrowers' money to fund the loans, Household Commercial alleged, Ketner personally pocketed more than $9 million to buy investment property, cars and boats, to support his family as well as a person described by federal prosecution documents as his "asexual mistress."</p>
<p>Ketner settled the suit, but never made a $5 million payment that was part of the settlement agreement, said Household Commercial's attorney, Carlos Solis. The Department of Real Estate revoked Mortgage Capital Resource's license in 2001 after Ketner refused to allow an examination of the company's account books.</p>
<p>Federal prosecutors began investigating Ketner in 2000, but the case got put aside for nearly two years after 9/11, Stolper said. He was indicted in 2005 on 16 counts of fraud and pleaded guilty last August to two counts of mail and wire fraud.</p>
<p>In his sentencing brief, Stolper wrote that Ketner "created a Ponzi scheme, except that instead of using new investors' money to pay back old investors, defendant was using new loan money to make good on old loans. Like all Ponzi schemes, defendant's collapsed under its own weight."</p>
<strong>
<p>After Mortgage Capital</p>
</strong>
<p>Ketner and his wife, Cheryl, filed for bankruptcy in 2001, selling the Lido Island home, their cars and boats. They moved to a home at 22 Cape Danbury inside a gated Newport Beach community, according to voting records and court documents. </p>
<p>In arguments to support a harsh sentence for Ketner, prosecutors presented evidence that he concealed his ties to mortgage companies behind a network of businesses and intimate friends to avoid paying debts, including $600,000 in U.S. income taxes. </p>
<p>Prosecutors have not charged Ketner – or any of his associates – with additional crimes. Selna sentenced Ketner based solely on his fraud scheme at Mortgage Capital Resource.</p>
<p>In pre-sentencing documents, the prosecution alleged Ketner runs two consulting firms, Danbury Consultants and NFC Consultants, which received revenue from at least three mortgage firms: New American Financial in Newport Beach, Irvine-based Segway Financial and Cardwell's Key Mortgage Corp., which does business in California as KMC Corp.</p>
<p>Under a handshake agreement – because Ketner did not want to disclose his income after his 2001 bankruptcy – he received half of the profits from New American, according to an FBI memo filed for the prosecution. New American records showed Ketner's take from 2001 to 2004, when he split with co-owner Rick Arvielo, was $3.5 million. Arvielo, who is not accused of wrongdoing, confirmed the accuracy of the prosecution memo, but declined to comment further.</p>
<p>Ketner continues his ties with KMC and Segway, according to prosecution documents. He arranged a lease and financing to set up Segway in 2004, the company's owner, Pamela Stewart told FBI agents in 2004 and 2005, according to prosecution memos. Stewart, 44, of Laguna Niguel has not been accused of wrongdoing.</p>
<p>An FBI memo about a June 2005 interview quotes Stewart saying "it was Ketner who decided Segway's profits would be split 1/3 to Stewart and 2/3 to Ketner. … Ketner is paid by Segway via his companies, NFC and Danbury. Ketner directs Stewart on how to direct payments to the companies."</p>
<p>As evidence of her knowledge of Ketner, the memo described Stewart, a former employee of Mortgage Capital and New American Financial, as Ketner's "asexual mistress," because she received jewelry, artwork, gambling trips to Las Vegas and other gifts from Ketner and had "the usual man/mistress social interaction, less the sexual portion of the relationship."</p>
<p>Stewart declined requests for an interview with the Register. In an e-mail to the Register about the FBI memo, she wrote that "several of the facts stated were inaccurate and misleading with regard to my interviews."</p>
<p>Ketner co-founded Key Mortgage Corp. in Phoenix in 1996 with Cardwell, according to Arizona Department of Financial Institution records. Ketner resigned from the company in January 2001. Department of Real Estate records show Key Mortgage's California affiliate, KMC Mortgage, was formerly licensed at 22 Cape Danbury, Ketner's home after his 2001 bankruptcy. </p>
<p>Ketner has continued to work as a consultant for Key Mortgage, Cardwell said in a phone interview.</p>
<p>"I think he's a good guy, an honorable guy," said Cardwell, who has not been accused of wrongdoing in this case. "A lot of people plead guilty. It's hard to defend yourself against the government."</p>
<p>In January, the Department of Real Estate issued a "desist and refrain" order, threatening the licenses of KMC and Segway for advertising mortgages under terms that were "false, misleading or deceptive." </p>
<p>Stewart and Cardwell both said the complaint has been resolved. But a hearing on the complaint is scheduled for Aug. 1 at the Department of Real Estate's Los Angeles office, said Pool, the department's spokesman.</p>
<p class="contact"><strong>Contact the writer:</strong> 714-796-7969 or <a href="mailto:jgittelsohn@ocregister.com">jgittelsohn@ocregister.com</a></p>
