Washington state Auditor Troy Kelley kept stolen money, lied under oath and evaded taxes, a federal grand jury has charged.
The grand jury in Seattle charged the state’s top fiscal watchdog with 10 counts of felony criminal activity Wednesday in an indictment made public Thursday.
Kelley vowed to fight to clear his name. The 50-year-old first-term auditor and Tacoma Democrat pleaded not guilty to all charges Thursday afternoon at U.S. District Court in Tacoma and was released without having to post bail.
Appearing before reporters after his arraignment, Kelley read from a written statement, then ducked out a back door. His attorneys fielded questions.
“I never, ever thought I was breaking the law, and I still do not to this day,” Kelley told reporters.
None of the allegations appear to touch on Kelley’s work as an elected official. Kelley said his business practices “were squarely in line with standard industry practices” and he paid taxes on the money in question “long before the government’s interest in this case.”
Kelley said he will take a leave of absence starting May 1, but expects to return to work after his legal fight.
But prominent Democrats quickly abandoned Kelley. Within minutes of the federal announcement Thursday, Gov. Jay Inslee called on Kelley to step down. The state party, attorney general, state treasurer and top Democrats in the Legislature echoed that call.
“This indictment today makes it clear to me that Troy Kelley cannot continue as state auditor,” Inslee said in a statement. “He should resign immediately. An appointee can restore confidence in the office and assure the public that the Office of the State Auditor will operate at the high standards required of the post.”
The allegations revolve around Kelley’s past business that tracked documents related to real-estate sales for title companies Old Republic and Fidelity. The indictment alleges Kelley, a former three-term state House member first elected in 2006, devised schemes earlier that year to defraud the title companies and their borrowers.
Authorities say from 2006 to 2008, Kelley’s business failed to refund the companies and their customers $2.97 million above and beyond what was owed. Kelley avoided about $1 million in income taxes in those years by underreporting his income, authorities allege.
Acting U.S. Attorney Annette Hayes said in a statement that Kelley “spun a web of lies” in a coverup that extended past his ascent to the auditor’s job in January 2013.
“The public deserves integrity and honesty from elected officials,” Frank Montoya Jr., special agent in charge of the FBI’s Seattle division, said in the statement. “For that reason, identifying and investigating public corruption is a top priority for the FBI.”
The indictment confirmed Kelley has known about the investigation for at least two years. Kelley said he never learned the specifics of what was sought until Thursday.
“I hope everyone now understands why I remained silent. Now that the U.S. Attorney has made the investigation public, I am determined to fight back,” he said in a written statement.
The charges against Kelley each could lead to prison time, and the most serious among them could land him a sentence of up to 20 years.
The FBI and IRS’ interest in Kelley was revealed publicly when investigators searched his house March 16. Since then, the already low-profile Kelley has largely kept out of sight.
Senate Majority Leader Mark Schoesler, R-Ritzville, joined Democrats in asking Kelley to resign Thursday.
“I’ve tried to be patient with Troy Kelley and asked him to take a leave of absence very early,” Schoesler said. “I believe that with 10 very serious charges against him, he should do now the honorable thing and leave.”
The indictment charges Kelley with possession and concealment of more than $1.4 million in stolen property.
In the most serious charge, it accuses him of obstructing a civil lawsuit against him by Old Republic by giving false information about his bank accounts.
Kelley moved nearly $3.8 million through a succession of bank accounts as his legal troubles began to mount. He connected one of those accounts to an account he set up in Belize but never moved money overseas.
The indictment accuses Kelley of giving false testimony about his business practices and about whether he wrote a refund check to a borrower, which he denied. At the time the borrower had filed a class-action lawsuit against Fidelity trying to recoup fees.
Old Republic, which also faced a class-action lawsuit, sued Kelley in 2010 and claimed he misappropriated $1.2 million. They settled the following year after Kelley paid Old Republic more than $1 million, according to the indictment.
Kelley had refused to disclose the amount of the settlement publicly after the case became an issue in his 2012 campaign.
An attorney for Kelley and a former longtime assistant U.S. attorney, Mark Bartlett, said he has never heard of prosecutors bringing a criminal charge that someone lied in a civil deposition. “This is an unprecedented prosecution,” he said.
Another attorney for Kelley, tax lawyer Robert McCallum, said the tax case is an issue of “timing” that should have been resolved in civil court.
The indictment says that Kelley withdrew annual installments of $245,000 as recently as this year from what remained of the ill-gotten money after his settlement with Old Republic.
He sought to reduce his 2011 and 2012 taxes on the withdrawals by fraudulently claiming personal and campaign-related spending as business deductions, the indictment states.
Kelley spent $500,000 of his own money in 2012 to win the auditor’s race, defeating Republican candidate James Watkins.
IRS agents interviewed Kelley in Olympia on April 19, 2013, four months after he took office as auditor. Kelley told them he was gradually earning the money by continuing to track real-estate documents, the indictment states.
But investigators concluded Kelley, who had fired his employees, wasn’t doing any significant work.
Scott Smith, a former attorney for Old Republic, said he was surprised to see that much of the alleged tax evasion happened so recently.
“Wow,” Smith said. “This guy is now in the cross hairs with our lawsuit, with the press exposure during his campaign for auditor, and he’s still doing it?
“I don’t understand the psychology of someone who would do that.”
On March 26 — 10 days after agents searched his house — Kelley withdrew the last of the money in question, according to the indictment. He wrote two checks, the indictment states — one for $447,421 to the U.S. Treasury, and one for $908,397 to a trust account for his benefit.
McCallum called the check to tax collectors a “good-faith payment.”
While the federal judge released Kelley on Thursday on his own recognizance, Kelley was told he must stay within Washington — with an exception granted for a two-week deployment to South Korea that he was scheduled to make April 26 as a member of the Washington National Guard.
But on Thursday, the National Guard decided to cancel Kelley’s annual temporary assignment to South Korea because of the indictment, Washington Military Department spokeswoman Karina Shagren said.
Kelley is a lieutenant colonel and lawyer in the Washington National Guard who usually has an annual assignment working with U.S. Forces Korea.
“This trip is called off,” Shagren said.
Work at the Auditor’s Office — an agency tasked with identifying fraud and waste in government — continued unabated Thursday despite Kelley’s indictment, said Doug Cochran, Kelley’s chief of staff.
Senior agency officials learned of Kelley’s planned leave of absence through media reports Thursday morning, Cochran said.
The agency has since asked the state Attorney General’s Office for “advice on all the legal issues surrounding this situation,” Cochran said, including how Kelley should be paid while on leave.
“There are a number of different things here about what the responsibilities and authorities of the auditor are, and how they might be delegated,” Cochran said. “I can’t guess how long it will take for them to get back to us.”
After the news broke Thursday, Cochran posted a message for staff on the agency’s internal network.
“Please keep your heads up and continue doing the important work that is the foundation of the State Auditor’s Office reputation,” Cochran wrote. “As I have told you before, this situation is not related to the State Auditor’s Office and, while it is distracting, we all need to keep our focus and keep producing great results.”
Jason JeRue, an Auditor’s Office employee and longtime Kelley business associate about whom authorities subpoenaed information from the state agency last month, was not mentioned in the indictment.
Kelley’s trial is scheduled to begin June 8, though that date could be delayed.
Troy Kelley cannot continue as State Auditor. He should resign immediately.— Governor Jay Inslee (@GovInslee) April 16, 2015