A serious criminal case lurked in the background. But it was difficult

A serious criminal case lurked in the background. But it was difficult to keep a straight face when the question of recalling state auditor Troy X. Kelley from office was argued in court last week.

There was the lawyer from the office of Attorney General Bob Ferguson—who has called for the auditor to resign. He’s legally obligated to defend the auditor against recall claims. Thus, at taxpayer expense, he was helping Kelley stay in office.

Also there in Kelley’s defense was his personal attorney, Jeffrey Paul Helsdon, who is 1-1 in recall defenses. He won representing quirky Pierce County Auditor Dale Warsham and lost in the recall of stubborn Pacific Mayor Cy Sun. Kelley seemed like a Larry to their Curly and Moe.

And there was recall petitioner Walkin’ Will Knedlik, ex-state legislator and disbarred attorney, promising to get 715,800 signatures for a public vote to remove Kelley from an office he has already departed on unpaid leave.

The sideshow lasted an hour until a Pierce County judge said “Enough.” Walkin’ Will had tripped over the legalities and, rather than Kelley, the recall petition was thrown out.

It was a diverting exercise in democracy and futility. If Kelley returns to office, it will most likely be to clean it out. The governor and legislators are pushing for that. And though he has promised to return, it will only be after his more serious federal legal battle is over, Kelley said.

Thanks to a newly released federal search warrant, we now know Kelley’s own maneuvering will likely make that battle a hard one for the auditor to win. While investigators were initially looking for tax-evasion evidence, they came across what they assert was an ongoing criminal cover-up, expanding the case.

Typically, cover-ups are worse than the crime, and this one includes allegations of forgery, backdating documents, and lying under oath in an attempt to justify non-payment of at least $1 million in taxes for 2011 and 2012, when ex-legislator Kelley, now 50, was elected state auditor.

In the March 25 federal search warrant, IRS special agent Aaron Hopper sought court approval to search Kelley’s home computers and accessories, which had been seized earlier that month. The IRS made electronic clone images of the data from six thumb drives, an ASUS notebook computer, an Apple iMac desktop, and an external hard drive. Hopper wanted permission to search the e-images for evidence corroborating a cover-up.

“During the search of Kelley’s [Tacoma] residence,” Hopper stated, “searching agents found and seized hard copies of documents that, on their face, corroborate Kelley’s statements to the IRS.” In an IRS interview two years earlier, Kelley claimed that his escrow business, called Blackstone International, was still working on contracts with title firms and was incrementally earning the fees he’d already collected and stored in an impound account. Each time he moved money from the account, he’d then pay taxes on it. (Kelley maintains that was a legal practice with IRS approval).

“However,” Hopper stated, “a closer examination of these documents raises questions about the reasons for and the timing of their creation, which may be answered by an examination of the contents of the images.”

For example, the search of Kelley’s home turned up a $20,000 bill of sale from Blackstone to an unidentified purchaser for a 2012 Toyota Highlander. It was dated Feb. 1, 2013, two months before Kelley sat down for the IRS interview. Kelley’s bank records didn’t show a $20,000 deposit to Blackstone that year, just an October deposit for $30,000 to Blackstone from Kelley’s personal account.

The document, created on Kelley’s computer, “appears to support the conclusion that the vehicle was disposed of prior to any contact” by investigators, stated Hopper. “On the other hand, the bill of sale appears self-serving in content and timing.” Maybe the images—which could show when documents are created—could resolve that.

Additionally, the Tacoma search produced 200 pages of spreadsheets from Kelley’s office. “On their face, these spreadsheets give the appearance that Kelley and his company may indeed be continuing to service old files from his former clients,” Hopper stated.

Yet during a 2010 civil lawsuit brought by a former client, Kelley swore that all his business records were destroyed in a mysterious 2008 fire in Everett. Here were “hundreds of pages of spreadsheets that appear to contain some of the very records sought during that litigation,” Hopper stated.

The warrant was granted. The images were searched. Less than a month later, the grand jury indictment of Kelley on 10 felony counts was announced. The auditor pled not guilty and said somewhat inscrutably, “I hope everyone now understands why I remained silent.” The problem, it seems now, is that he didn’t.


Rick Anderson writes about sex, crime, money, and politics, which tend to be the same thing. His latest book is Floating Feet: Irregular Dispatches From the Emerald City.