A federal grand jury has indicted Washington State Auditor Troy Kelley on charges of filing false tax returns, making false statements, obstruction and theft.
He’s scheduled to appear in federal court in Tacoma Thursday afternoon. Kelley announced he would take a leave of absence starting May 1. Washington Governor Jay Inslee called for Kelley to resign.
The indictment against the first-term Democrat and former state lawmaker was announced Thursday by the U.S. Attorney’s office for Western Washington. Most of the 10 charges stem from Kelley’s past business practices in the real estate industry.
The indictment alleges Kelley kept more than $2 million in fees he was not entitled to when he ran a business that tracked documents for real estate transactions, and that he lied about keeping the fees under oath.
The charges against Kelley follow a federal probe that came to light in March when Kelley’s Tacoma home was searched by federal agents and a grand jury subpoenaed records from the state auditor’s office.
FBI and IRS agents also sought records from the Washington legislature, the state Department of Revenue and the Public Disclosure Commission.
In a written statement Thursday Kelley said he was confident he would be able to prove his innocence.
"In the end, they’ve been able to obtain an indictment," he said, "but they are a long way from proving any wrongdoing."
In a written statement on March 23, Kelley, whose job as state auditor is to root out waste and fraud in government, acknowledged the U.S. attorney had “questions about some financial activities” related to his prior business. Kelley denied any wrongdoing and said he had “fully cooperated” with the feds and remained “puzzled by their interest.”
In recent weeks, Kelley avoided reporters and didn't answer questions about the federal probe, despite the urging of Inslee and other top Democrats in the state for him to be open with the public. Kelley said Thursday he would speak to reporters after his court appearance.
Allegations from real estate business
Prior to becoming state auditor, Kelley was in the reconveyance tracking business. His company, Post Closing Department, was hired by title and escrow companies to ensure that after a real estate deal closed, the bank with the previous mortgage released its lien against the property. Kelley’s company would collect those tracking fees up front.
In 2010, one of Kelley’s clients, Old Republic Title, sued Kelley alleging that he pocketed reconveyance fees that should have been refunded to escrow company customers. The judge in that lawsuit summed up the allegations against Kelley as “misappropriation of customer funds, lying, fraudulently transferring funds, intentional spoliation of evidence, shady business schemes, tax evasion, and hiding from creditors.”
Court records reveal that in 2008 Kelley quickly shut down his business in Washington and executed seven wire transfers through four financial institutions in three states over the course of 15 days. That resulted in $3.8 million being moved to accounts that were eventually linked to an off-shore trust in Belize.
At the time Kelley said all of his accounting and estate planning decisions were fully compliant with the law and made on the advice of his attorney. That attorney was Alan Eber, a California lawyer who specializes in asset protection.
Just before Kelley shut down his business, class-action lawsuits had been filed against two of his title company clients including Old Republic. While Kelley wasn’t named in those class-action lawsuits, which were never certified, his company managed the transactions in question.
Kelley has long maintained that he refunded escrow customers when appropriate and that when he didn’t issue a refund it was because the reconveyance was still open or his office had done work to ensure the reconvenyance was completed. However, Kelley did not produce the records to prove his assertion. Kelley offered several explanations for the lost records including that they had been destroyed in a fire and that they were on a broken computer that he had given away to Goodwill.
On the issue of tax evasion, Kelley said in 2012 while running for auditor that he was not the subject of IRS civil or criminal action. Kelley also indicated he had an IRS private letter ruling regarding income earned but not yet realized.
“You can’t show it on your books and you don’t pay taxes at that point until you’ve earned the fees,” said Kelley in September of 2012.
Past experience in asset protection, deferred taxes
Asset protection and the intricacies of tax law were not foreign concepts to Kelley in 2012. In fact, in a previous career Kelley specialized in helping clients defer having to pay capital gains tax.
In 1998, Kelley was named president of First American Exchange, a subsidiary of First American Title, that acted as a “qualified intermediary” for investment transactions called 1031 exchanges. This refers to a section of the IRS code that allows an investor to exchange or “swap” one asset - usually real estate - for another without incurring a tax liability.
A press release at the time of his appointment said Kelley had worked his way up from the mailroom at First American to the job of president of the subsidiary. But he would soon leave the company on acrimonious terms.
In 2000, Kelley was fired from First American and then sued for wrongful termination. In that lawsuit, he accused the company of engaging in illegal activities. The company, in turn, accused Kelley of stealing a painting from his office. The lawsuit was later dismissed.
After leaving First American, Kelley moved to Washington state and, according to his bio, started his own businesses tracking “recorded documents” as part of real estate transactions.
Before his legal troubles came to light in March, Kelley had maintained a relatively low profile as state auditor since taking office in January of 2013. His schedule for his first nearly two years in office showed more than 150 work days where it was unclear if he was in the office or not and what he was doing on those days.
In a recent annual report Kelley called his first two years in office a time of “change and accomplishment.” The Auditor’s office is responsible for auditing state and local governments, conducting performance audits and investigating fraud and whistleblower complaints.
Prior to becoming auditor Kelley served three terms as a member of the Washington House. He’s also a lieutenant colonel in the Washington Army National Guard where he works as a judge advocate general training military defense attorneys.
In Washington the state auditor is fourth in line to become governor. It’s believed Kelley is the first top elected official in Washington to be indicted in 35 years. In April of 1980 the Speaker of the House John Bagnariol and Senate Majority Leader Gordon Walgren were indicted in a federal racketeering case that resulted in both men and a lobbyist going to prison. That case, known as Gamscam, involved kickbacks in exchange for legislation favorable to the gambling industry.
The announcement of a high-profile tax evasion indictment around April 15 is not unheard of. In 1988 billionaire hoteliers Harry and Leona Helmsley were indicted on April 14.
The threshold for a grand jury to indict someone is that majority of the grand jury members need to find that there’s probable cause the individual committed the alleged crimes.
If convicted, Kelley could face decades in federal prison.
State auditors in the news
Kelley isn’t the first state auditor to be indicted by a federal grand jury. In 2008, Oklahoma’s then-auditor Jeff McMahan and his wife were indicted and later convicted of trading “favorable treatment” in exchange for gifts, including campaign cash, jewelry and travel. McMahan did not resign his office until after he was convicted.
Kelley also isn’t the only state auditor to make headlines in 2015. In February, Missouri state auditor Tom Schweich died by suicide. At the time of his death, Schweich was a candidate for governor and the subject of an alleged smear campaign by fellow Republicans. A few weeks later Schweich’s spokesman, Robert “Spence” Jackson, was also found dead of an apparent self-inflicted gunshot wound.