Acting U.S. Attorney Annette Hayes says Washington Auditor Troy Kelley “spun a web of lies” to avoid taxation on — and hide money he stole — from home loan borrowers in an announcement Thursday that a grand jury has indicted the elected official on 10 criminal charges.
The Attorney’s Office reports Kelley schemed to keep more than $2 million in stolen money, hiding it from the Internal Revenue Service, and preventing thousands of Washington homeowners who purchased a house or refinanced their mortgage from receiving their due refunds.
Kelley, 50, who was elected state auditor in 2012, operated a business from 2003-2008 that tracked real estate sales and refinancings for real estate title companies, which provided $100-$150 on each loan to pay Kelley’s fee and cover costs associated with returning a title back to the borrower. Many lenders covered these fees, which required Kelley’s Post Closing Department to refund all but his fee to associated borrowers, according to the indictment, which details how he endeavored to keep those funds hidden from borrowers, title companies and the IRS.
PCD entered into an agreement with Fidelity National Title of Washington in 2003, agreeing to provide reconveyance tracking services, take from Fidelity the full amount of money expected to cover trustee and county recording fees and return the unused portion to borrowers. Within three years, the indictment states Kelley rarely cut refund checks to borrowers, typically when an escrow company or borrower complained. Fidelity stopped using PCD’s services in March 2008.
The indictment states Kelley kept most of the reconveyance processing fees in a bank account used for conducting business with Fidelity, later transferring $443,000 to a personal account.
PCD began providing reconveyance tracking services for Old Republic Title in 2006, the indictment alleging Kelley took similar illegal actions to avoid refunding fees to borrowers and hiding the scam from the title company, ordering an employee to doctor spreadsheets. From 2006 to 2008, the indictment alleges Kelley transferred $95,000 to his personal bank account from one used for business with Old Republic.
Kelley is further charged with underreporting his income between 2006 and 2008 by more than $3 million, avoiding about $1 million in income taxes owed to the IRS.
Class action lawsuits were filed against Fidelity and Old Republic in 2008 related to borrowers not having their reconveyance fees refunded. Kelley allegedly began shifting $3.78 million from a PCD bank account through “a series of convoluted wire transfers through newly-opened bank account,” according to the indictment.
It’s also around this time that federal prosecutors allege Kelley withdrew funds from his personal bank account to provide one class-action suit plaintiff with a cashier’s check for his owed refund; Kelley allegedly covered the fees for the cashier’s check using the Friends of Troy Kelley campaign finance account. Included with the cashier’s check, the indictment states Kelley put in a letter dated to give the impression the refund had been sent on time, and intentionally made an error writing the address to make it seem like the payment had been lost in the mail. The $250 Kelley took from his personal account, he allegedly reimbursed himself using a PCD account.
Kelley shut down PCD in June 2008, allegedly stating a fire that same month at Stewart Title destroyed his company’s records, which were also unaccessible through his computer due to a system crash. Several months later, class action plaintiffs turned to Kelley seeking PCD records that may shed light on the whereabouts of their owed refunds.
The class action suits against Fidelity and Old Republic were dismissed in July 2009, and Old Republic later sued PCD to discover where Kelley had placed its funds, according to the indictment. Kelley settled with Old Republic in 2011, providing the title company $1.05 million from an account prosecutors alleged he used for concealing the money he stole from thousands of home borrowers.
Following the settlement, the indictment states Kelley still had about $2.5 million in stolen funds, and transferred $245,000 annually to accounts he controlled, claiming it as income on behalf of his Blackstone International company — even adding deductions for nonexistent business expenses. Kelley is alleged to have lied about Blackstone’s earnings to criminal investigators with the IRS in April 2013.
From 2013-2015, Kelley allegedly withdrew $245,000 annually from the Blackstone account until the balance was $1.3 million, reducing it to zero in March 2015, when he wrote a $447,000 check to the United States Treasury and a $900,000 check to a personal trust account in Seattle, according to the indictment.
The U.S. Attorney’s Office charges Kelley with corrupt interference with Internal Revenue laws, two counts of filing false income tax returns, four counts of false declarations, one count of attempted obstruction of a civil lawsuit and possession and concealment of stolen property.
“This indictment today makes it clear to me that Troy Kelley cannot continue as state auditor,” Washington Gov. Jay Inslee said in a prepared statement Thursday. “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.”
Kelley pleaded not guilty Thursday afternoon in U.S. District Court in Tacoma. In a statement released by Kelley following the grand jury decision to indict, the auditor states he will take a temporary leave of absence from his elected office, denying all allegations against him and claiming he followed standard industry practice while operating his private businesses.
“In the end, they’ve been able to obtain an indictment, but they are a long way from proving any wrongdoing,” according to Kelley’s statement. “Put more directly, I am very confident that I will be able to prove my innocence.”
