Jury finds state Auditor Troy Kelley not guilty of lying to IRS, deadlocks on other charges

In the end, federal prosecutors weren’t able to convince a jury that state Auditor Troy Kelley stole $3 million, evaded taxes and lied under oath.

A 12-member jury found Kelley, a Tacoma Democrat, not guilty Tuesday of a charge that he lied to the Internal Revenue Service. The jury returned no verdict on the other 14 felony charges, which included theft, tax evasion and money laundering tied to Kelley’s former business. Some jurors reported earlier in the day that they were deadlocked.

After U.S. District Court Judge Ronald Leighton dismissed the jury, Kelley hugged and kissed his wife. He declined to comment to reporters.

U.S. Attorney Annette L. Hayes released a statement Tuesday afternoon thanking the jury and prosecutors for their work. She indicated her office had not yet made a decision about retrying Kelley.

“My office will thoroughly review the counts that the jury deadlocked on before making a decision about our next steps in this case,” Hayes said.

Kelley’s attorney, Angelo Calfo, said the case should have never been brought to trial. He said he was confident prosecutors would “make the right decision” and dismiss the charges for good.

“I think he’s feeling relieved, as you might imagine, but mainly, vindicated,” Calfo said of his client.

Federal prosecutors had argued that Kelley pocketed $3 million in fees that should have been refunded to homeowners when he ran a real-estate services business.

But Kelley’s defense team countered that Kelley was entitled to keep the money as fees in exchange for the work he did. The defense accused prosecutors of targeting Kelley because he is an elected official.

Kelley was elected auditor in 2012 after serving three terms in the state House. His opponent during the 2012 campaign brought up the theft allegations, which were laid out in a civil lawsuit brought by an escrow company, Old Republic Title. Kelley settled with the business for more than $1 million.

Federal prosecutors went on to pursue criminal charges against Kelley, alleging he stole millions from homeowners from 2006 to 2008 while running his company, Post Closing Department. The business tracked documents related to property ownership after closings of home sales and refinancings.

According to the prosecution, escrow companies took fees of $100 or more from homeowners and passed them to Kelley, their contractor. Prosecutors said Kelley was supposed to take a cut of $15 to $20, pay any third-party charges, and refund the rest of the fee to homeowners, but that he rarely issued refunds.

Calfo argued during the criminal trial that the money wasn’t stolen because it didn’t belong to homeowners in the first place. He said Kelley was entitled to keep the money as fees for his services, and that authorities should have pursued the tax accusations in a civil case.

The defense’s arguments appeared to sway some jurors. The jury foreman, Mike Lowey of Roy, told reporters that jurors could not agree on whether the money in question was stolen.

“The contracts (with escrow companies) just weren’t clear enough to be able to judge anybody on anything,” Lowey said.

Jurors asked several questions of U.S. District Court Judge Ronald Leighton this week as they struggled to agree on a verdict on 14 of the charges.

A majority of jurors were leaning toward acquittal on the theft charge, Lowey said. Lowey said he personally would have convicted Kelley on some of the tax charges, however.

“The discussions got heated,” said Lowey, a mailman who also coaches sports at two schools in the Bethel School District.

“When you get 12 different minds in there … 12 different people think 12 different things, you know. They see 12 different things,” he said.

Defense lawyers for Kelley also questioned the reliability of witnesses who testified for the prosecution.

Kelley’s deputy at his business, Jason JeRue, was one of the prosecution’s key witnesses. He testified that Kelley asked him to alter a spreadsheet to look like no refunds were due.

JeRue said Kelley offered him a part-time job working remotely for the state Auditor’s Office from his home in California in 2013. He was dismissed last year by Jan Jutte, who stepped in as acting auditor when Kelley took a leave of absence following his indictment. Kelley returned in December after four House members floated a proposal to impeach him on grounds of “dereliction of duty.”

Calfo said authorities pressured JeRue to say what they wanted, as part of a deal that granted him immunity.

The verdict came on the fourth day of jurors’ deliberations, following a trial that lasted more than five weeks. A conviction would have disqualified Kelley from serving as state auditor, an office charged with rooting out government fraud and waste.

The case against Kelley was the first time in more than 35 years that a high-ranking public official in Washington state had been indicted on federal charges.

Despite the jury’s decision Tuesday, at least one legislative leader continued to call for Kelley to step down, while Democratic Gov. Jay Inslee said “serious questions remain” about Kelley’s ability to remain state auditor.

“The elected office of state auditor has been sullied by Mr. Kelley’s trial,” Senate Majority Leader Mark Schoesler, R-Ritzville, said in a news release. “He should do the right thing and resign and give the electorate and the state auditor’s office a chance to heal and move forward.”

Inslee implied Kelley should leave management of the Auditor’s Office to Jutte, praising the job she did in Kelley’s absence.

“Washingtonians deserve a leader focused fully on overseeing the agency’s important work,” Inslee said in a statement.

Calfo said in the immediate aftermath of the verdict, Kelley has no plans to resign, though he is unlikely to run again for elected office. Kelley’s four-year term as auditor ends this year, and several people are vying to replace him in November.

Calfo said politicians don’t understand the facts of the case, and should “stay out of it.”

“Mr. Kelley is someone who can be trusted in office for the remainder of his term,” Calfo said.

In Washington, high-ranking public officials have been indicted on federal charges only a handful of times.

The last federal investigation to target a prominent Washington state official appears to be the 20-month FBI undercover investigation called Gamscam, which led in 1980 to a federal racketeering indictment against former House Speaker John Bagnariol and Senate Majority Leader Gordon Walgren. Both Bagnariol and Walgren were found guilty of some of the charges and lost their seats in the fallout from the indictment.

This story was originally published April 26, 2016 at 10:48 AM with the headline "Jury finds state Auditor Troy Kelley not guilty of lying to IRS, deadlocks on other charges."