Prosecutors: Washington auditor lied in prior business life

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Posted: Mar 15, 2016 9:24 PM
Prosecutors: Washington auditor lied in prior business life

TACOMA, Wash. (AP) — Jurors got their first detailed look at the government's case against Washington State Auditor Troy Kelley on Tuesday, with prosecutors alleging that in his prior business life, he lied to mortgage title companies to obtain and hide $3 million in other people's money.

Kelley's attorneys countered that the government has a fundamental misunderstanding of the real estate industry he worked in.

"Really what this case boils down to is a contract dispute," defense attorney Patty Eakes said during opening statement in federal court. "There wasn't any theft. There wasn't any cheating. There wasn't any lying."

Kelley, a 51-year-old Democrat and former state representative, is the first Washington state official to be indicted in 35 years. He faces a range of charges — including possession of stolen property, money laundering and tax offenses — stemming from conduct that began in 2005 when he ran a real-estate services firm called Post Closing Department.

Kelley was elected state auditor in 2012, tasked with rooting out fraud and waste in government operations. Allegations of impropriety surfaced during that campaign, leading federal investigators to examine how he ran his old company.

Prosecutors say to obtain business from the title firms, Post Closing Department promised it would collect $100 to $150 fees for each deed-of-trust transaction it tracked; keep $15 or $20 for itself; use some of the money to pay county recording and other fees; and refund the customer any remaining money.

But in most cases, Kelley kept the excess fees, assistant U.S. attorney Andrew Friedman told the jury.

"He stole that money $100 at a time from tens of thousands of borrowers," Friedman said.

One of the companies Kelley worked with, Old Republic Title, sued him for not paying the refunds. Kelley settled the case for $1.1 million after making what prosecutors contend were false statements about his practices under oath.

Friedman broke Kelley's alleged conduct into three phases:

— 2005 to 2008, when he ran Post Closing and "lied to get $3 million in other people's money."

— 2008 to 2011, when Kelley is accused of trying to hide the money by moving it among various accounts, including a trust in Belize.

— 2011 to 2015, when he allegedly began paying himself $245,000 a year from the proceeds and claimed personal costs as business expenses to make it appear that he was still doing real estate work.

Kelley is charged with retaining at least $1.4 million in stolen money.

In 2011, Friedman said, Kelley and his family took a trip to Yellowstone and Glacier national parks, then claimed the costs as business expenses. Also claimed as business expenses, Friedman said, were toys, family meals and a zoo membership.

One of Kelley's former workers, Jason Jerue, will testify he doctored spreadsheets sent to title companies to conceal that borrowers weren't receiving refunds, Friedman said.

In response, Eakes sought to dismantle each of the government's claims.

Nowhere were borrowers promised refunds, she said, nor can the government produce any signed contracts between Kelley and the title companies that required him to return the money.

Kelley settled the Old Republic lawsuit just to get the matter behind him and focus on his political career, she said.

Some of the business expenses may have been reported in the wrong spot on the tax forms, Eakes said, but it's not criminal to make a mistake on your taxes.

As for Jerue, she added, he changed his story after prosecutors offered him immunity for his testimony. The spreadsheets he claims to have doctored can't be found, she said.

Jerue told the FBI he disposed of the computer he used at the time because it stopped working, according to an agent's notes of the interview.

Kelley took a seven-month leave of absence following his indictment last year. He returned to work in December, despite calls from Gov. Jay Inslee and other officials to resign.

Eakes said Kelley won't run for re-election and is done with politics.

Testimony in the four-week trial begins Wednesday. The most serious charge, money laundering, carries up to 20 years in prison.