Prosecutors lay out details in case against state auditor

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Posted: Dec 01, 2015 9:14 PM
Prosecutors lay out details in case against state auditor

TACOMA, Wash. (AP) — Washington State Auditor Troy Kelley has been on leave and has faced calls for his resignation since the government charged him with keeping millions of dollars that should have been refunded to customers of his old real-estate services business.

But his attorney sought to undermine those allegations in court Tuesday with a simple notion: that the money wasn't stolen.

In his first opportunity to cross-examine an investigator on the case, defense attorney Angelo Calfo hammered FBI Special Agent Michael Brown on whether anyone -- either homeowners or title and escrow companies -- was entitled to refunds of the fees paid to Kelley's former company, Post Closing Department.

"Are you aware of any document in which a homebuyer was promised a refund of this fee?" the lawyer asked.

"I am not," Brown replied.

The testimony came during a hearing before U.S. District Judge Ronald Leighton, in which Kelley is seeking to have the government return $908,000 it seized from him in September. Prosecutors say the money had been stolen from clients of his former real-estate services business and that he has no right to it.

Prosecutors laid out their case against Kelley in the greatest detail yet, as Brown testified that financial records and statements from his former workers belied his explanations of why he was entitled to keep about $3 million from old real estate transactions.

Kelley, a 51-year-old Democrat from Tacoma, is a former state representative who was elected in 2012 to be Washington's auditor — the state official tasked with rooting out waste and fraud in government operations.

At Post Closing Department, Kelley worked with escrow and mortgage title companies to track real estate transactions.

Investigators say Kelley kept fees the company was supposed to refund to customers — an amount that totaled at least $3 million from 2006 to 2008 — and paid himself $245,000 a year from the ill-gotten proceeds.

Just before he was indicted last spring on charges including possession of stolen money and filing false income tax returns, Kelley wrote a $447,000 check to the U.S. Treasury Department, noting in the subject line that it would cover future tax debts, and transferred more than $908,000 to a law firm that represented him at the time.

Federal prosecutors seized the money being held by the firm in September. Calfo sought its return, arguing that the government did not need the money as evidence and had not demonstrated that it had probable cause to seize it.

In his opening statement Tuesday, Assistant U.S. Attorney Richard Cohen said the money was stolen and directly traceable to money laundering.

The FBI agent then took the stand, explaining in detail Post Closing Department's business model and relationship with the two title and escrow companies with which it primarily worked.

Referencing emails from Kelley and his employees, Brown described how Post Closing had repeatedly insisted to the other companies, Fidelity National Title and Old Republic Title, that it only kept $15 to $20 of each $100 to $150 fee collected from borrowers to track the transactions, called reconveyances. The rest of the money was to be held in case additional fees were required by county recorders' offices or others, with the balance being refunded to the borrowers.

In reality, of more than 27,000 transactions, it provided refunds in just 89 instances, Brown testified.

Some of Kelley's former workers, including Jason Jerue, whom he later hired at the auditor's office, told investigators that Kelley had drafted the emails they sent to the title companies, Brown said.

During cross-examination, Calfo said Post Closing never made promises to home buyers that some of the fees would be refunded, and noted that their closing documents made no such promises.

One of the title companies that Kelley worked with took the position during related litigation that borrowers would not be entitled to recover the fees from Post Closing, Calfo suggested.

He also got Brown to acknowledge that some of the biggest title companies collected such fees without refunding unspent portions to homeowners.

Calfo questioned Brown about who owned the money paid in reconveyance fees -- the title companies, or the homeowner? Brown evaded giving a straight answer, saying that would call for a legal conclusion that wasn't his to make. But at any rate, it didn't belong to Kelley, he said.

The most serious charges Kelley faces are money laundering, but Calfo indicated there was no crime in Kelley's transferring money among his various bank accounts.

Old Republic Title sued Kelley in 2009. He eventually paid more than $1 million to settle the case.

Four of the charges against Kelley allege he lied in a deposition in that case to avoid blame. Kelley's attorney described the matter as a contract dispute.