TACOMA, Wash. (AP) — A judge on Thursday ordered the Justice Department to turn over nearly $1 million to a lawyer for indicted Washington state Auditor Troy Kelley — but he can't spend it without permission.
U.S. District Judge Ronald Leighton upbraided federal prosecutors for seizing the money in the first place, saying it had been held in trust by the law firm that previously represented Kelley and there was no danger of the money being used.
"A pretrial seizure of property is an extraordinary step, and it challenges our fundamental belief in a person being deemed innocent until proven guilty," the judge told assistant U.S. attorneys Richard Cohen and Andrew Friedman. "We had the money in a blocked account going nowhere. ... Why did you do it?"
However, the judge ruled in favor of the government on a matter that will likely have a more significant bearing on the case. He refused to sever some of the charges against Kelley into a separate proceeding, as Kelley's attorneys had requested.
Kelley, a 51-year-old Democrat, is a former state representative who was elected in 2012 to be Washington's auditor — the state official tasked with rooting out fraud and waste in government operations.
He was indicted this year on money laundering, possession of stolen money and other charges related to his prior operation of a real-estate services firm called Post Closing Department, which tracked certain transactions for mortgage title and escrow firms.
Investigators say Kelley kept fees the company was supposed to refund to homeowners — 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 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. Kelley's new attorney, Angelo 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.
After more than two days of testimony this week by an FBI agent and a forensic accountant, Calfo asked the judge to return the money as well as for permission to spend up to $350,000 of it on legal expenses. Leighton didn't go that far but said Calfo could petition the court later to spend some of it.
The government's lawyers argued that they seized the money because they didn't know how Calfo would handle it. Furthermore, they said, Kelley didn't have a right to the money because it was traceable to a money-laundering transaction.
The judge said he did not want to opine on that issue for fear of tainting potential jurors in the case.
As long as the money isn't being spent, however, the decision is unlikely to have a significant impact on the case. Another decision the judge made Thursday, however, does.
Calfo wanted charges that Kelly lied in a civil deposition and some tax-related charges separated into another proceeding, saying it would be easier for the government to convict Kelley of possessing stolen property and other counts if it could also paint him as a liar and a tax cheat. He called the request an issue of "critical fairness" and said it would be much harder to defend the case if the charges weren't severed.
The judge refused, saying the indictment against Kelley alleged a single scheme to take money by fraud and conceal it, and the charges should be tried together.
The judge also said one of the four false statements charges against Kelley should be dropped as redundant, bringing the total number of charges against him from 17 to 16.
Kelley's trial is set for March.