TACOMA — Washington State Auditor Troy Kelley, the elected official charged with rooting out government fraud and waste, pleaded not guilty Thursday after a federal grand jury indictment charged him with filing false tax returns, attempted obstruction of a civil lawsuit and possession of millions of dollars in stolen money related to his former business.
The 41-page indictment, unsealed earlier in the day, alleged various misdeeds by Kelley in connection with mortgage title services companies he previously ran. Federal prosecutors said the money should have been refunded to customers and that he unlawfully avoided paying taxes by not reporting the income or by claiming personal or campaign expenses were business-related.
“Mr. Kelley spun a web of lies in an effort to avoid paying his taxes and keep more than a million dollars that he knew did not belong to him, but instead should have been returned to thousands of homeowners across this state,” acting U.S. Attorney Annette L. Hayes said.
As he appeared Thursday afternoon for his arraignment at U.S. District Court here, Kelley was flanked by his attorneys. A magistrate judge set trial for June 8.
Later, at a news conference nearby, Kelley and the attorneys expressed puzzlement about the indictment, which one lawyer said involves matters “already resolved through civil litigation.”
Kelley said: “I did not break the law. I never ever, ever thought I was breaking the law, and I still do not to this day.”
After reading a statement, Kelley left while his criminal attorney, Mark N. Bartlett, a former top federal prosecutor, spoke about the allegations. Bartlett and Kelley’s tax attorney, Robert N. McCallum, said the indictment charged Kelley with ducking taxes he was in the process of paying.
“This is a prosecution that is flawed both in execution and in conception,” Bartlett said.
The most serious charge in the indictment carries up to 20 years in prison.
Speculation has been swirling around Kelley, a Democrat elected auditor in 2012, since last month, when federal agents searched his home and subpoenaed the auditor’s office for records concerning a longtime business associate who subsequently went to work for Kelley at the state agency.
Days after the search, Kelley wrote a $447,000 check to the U.S. Treasury Department, noting in the subject line that it would cover future tax debts, the indictment said.
Kelley’s company, Post Closing Department, worked with escrow and mortgage title companies to track certain real estate transactions. According to the indictment, it was supposed to collect up to $150 in advance as a fee for each transaction; keep $15 to $20 for its services; pay any government fees required; and then refund whatever portion remained. Instead, Kelley kept the money, the indictment said — an amount that totaled at least $3 million from 2006 to 2008.
“Contrary to his representations, Troy X. Kelley did not refund unused portions of reconveyance fees to borrowers, but instead fraudulently retained, stole, and converted them to his own use,” the indictment said.
One of the escrow companies Kelley worked with, Old Republic Title, sued him in 2009. He eventually paid more than $1 million to settle the case.
According to the indictment, “Kelley gave false testimony during a deposition, lied in sworn declarations submitted to the Court, and misled Old Republic as to the whereabouts of the unlawfully retained reconveyance fees through false and fraudulent answers to interrogatories.”
Attempted obstruction of a civil lawsuit carries a maximum sentence of up to 20 years. Possession and concealment of stolen property carries up to 10 years. Kelley is also charged with corrupt interference with internal revenue laws.
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