TACOMA, Wash. — The jury box was empty, but otherwise the three-day U.S. District Court hearing in the case of indicted Washington state Auditor Troy Kelley this week bore some resemblance to an actual trial: Prosecutors laid out their allegations, witnesses faced withering cross-examination, a defense lawyer insisted no crime had been committed.
In the end, the spectacle did little to sway the judge, who said he had pretty much known all along how he was going to rule on the matters before him.
But it did provide a dry run that offered the clearest look yet at the potential strengths and weaknesses of the Justice Department’s case against Kelley, the first Washington state official to be indicted in decades.
Kelley, a 51-year-old Democrat who was elected auditor in 2012, faces money laundering, possession of stolen money, lying under oath and tax evasion charges arising from his operation of a real-estate services business from 2006 to 2008. Prosecutors insist that as he tracked transactions for mortgage title companies, he kept about $3 million in fees that he was supposed to refund to homeowners. He later started paying himself $245,000 a year from the proceeds, investigators said.
U.S. District Judge Ronald Leighton granted the hearing at the request of Kelley’s attorney, Angelo Calfo, who wanted the judge to force the government to return $908,000 it seized in September. The government had not proved the money was contraband or shown that it had a need to keep it, Calfo argued.
In the end, Leighton ordered the money given to Calfo, who can’t spend it without permission. Calfo said he expects to ask to spend some of it, such as for hiring expert witnesses.
The judge chastised prosecutors for seizing the money in the first place, as it was already being held in trust by Kelley’s former law firm and was in no danger of being spent.
Leighton called the seizure an “extraordinary step” that challenges the notion someone is innocent until proven guilty, and said prosecutors could have simply asked him to freeze the money in Calfo’s trust fund when Calfo took over as Kelley’s lawyer in September.
Instead, the hearing drew further pretrial attention to the case and put the judge in the awkward position of having to opine publicly about the strength of the government’s case, possibly tainting potential jurors, he said.
Leighton sidestepped that problem. He simply ordered the return of the money without comment on whether prosecutors could meet their burden for keeping it.
“You may well be right, but being right sometimes isn’t enough,” he told them.
The testimony gave each side a chance to feel out the other’s arguments, clarifying some of the main issues for the March trial.
Assistant U.S. attorneys Andrew Friedman and Richard Cohen called to the witness stand the lead FBI agent on the investigation, Michael Brown, as well as an FBI forensic accountant. Under relaxed evidence rules, hearsay testimony was allowed, and Brown said business documents, emails, and statements from Kelley’s former employees and former clients undermined his claims that he was entitled to the money.
Brown testified that to obtain business from the title companies, Kelley’s company, Post Closing Department, repeatedly promised it would collect fees for each transaction of $100 to $150, keep $15 or $20 for itself, use some of the money to pay county recording fees or other fees as necessary, and refund any remaining money to the customer. But in more than 27,000 transactions handled, Kelley issued just 89 refunds — indicating that Kelley obtained the money under fraudulent pretenses, he said.
Calfo framed the issue as a contract dispute, not a criminal matter. On cross examination, he grilled Brown about who owned the money, whether it really was stolen, whether the homeowners had a right to get it back, or whether the title companies were victims, in an effort to suggest the agent didn’t understand his own case.
While insisting the money wasn’t Kelley’s to keep, Brown often dodged the questions, saying they called for legal conclusions. He eventually settled on the position that the money was due to the homeowners.
“There was no representation in the settlement statement that the fee was refundable, is that true?” Calfo asked.
“I’d have to look at it,” Brown replied.
“It’d be pretty important to know whether the borrowers were promised a refund, wouldn’t it?”
“Are you aware of any document in which a homebuyer was promised a refund of this fee?” he asked.
“I am not,” Brown said, though at least some would have received verbal promises when they closed on their deals.
Calfo also sought to counter the government’s assertion that a series of transfers involving the $3 million Kelley retained constituted money laundering. Kelley moved the money and stopped doing business as Post Closing Department in 2008, soon after learning that the title companies he worked with faced class-action lawsuits after customers failed to get their fees back.
Kelley eventually settled a lawsuit brought by one of the companies, Old Republic Title, for more than $1 million.
Calfo argued when they were sued, the title companies took the position that customers weren’t entitled to the refunds. Kelley didn’t try to hide the money, he argued, but simply moved it among different accounts. Prosecutors pointed out that his moving of the money forced Old Republic to go to extra trouble — and obtain an additional subpoena — to find it.
And, Calfo said, Kelley assumed the ongoing legal risk of ensuring homeowners obtained their property free and clear. The excess fees were in consideration of that, he argued.
“That isn’t stealing,” he said Friday. “That is doing your job.”
As the hearing concluded Thursday, the judge did raise questions about what appeared to him to be inconsistent statements Kelley had made about the money, variously claiming it was earned, so he was entitled to keep it, and that he held it in an “impound account” to honor future business obligations even though his business had been shut down.
“Why do you have an impound account at all if you earned the money?” Leighton wondered. “Logically it doesn’t make sense to me. … You’re saying you don’t have any obligation to the borrowers, it’s your money. If it’s your money, pay the taxes.”