State Auditor Troy Kelley. From Office of the Washington State Auditor

In 2011, then-state representative Troy Kelley was worried that voters might get

In 2011, then-state representative Troy Kelley was worried that voters might get the wrong impression about him. An escrow-services executive and Democrat from the 28th District, representing University Place and Tacoma, Kelley had been accused of theft and fraud in a federal civil lawsuit. Though he settled the claim out of court without admitting wrongdoing, Kelley said he was concerned that an unscrupulous challenger would twist the truth in an election campaign.

“My political opponents may use them as ‘court documents’ evidencing liability and/or guilt of misappropriation of funds, spoliation of evidence, discovery abuse, lies, and fraudulent transfer of assets,” he wrote in a court brief, outlining claims made against him by a business partner, Old Republic Title. The firm, which insures property titles against legal challenges, had hired Kelley’s escrow company to collect fees from customers who paid off their mortgages. But Kelley, Old Republic claimed, had quietly pocketed $1.2 million he should have returned to their clients.

None of those accusations had been ruled on because he settled, Kelley emphasized at the time, “but campaigns today tend to overlook that critical fact and pull ‘dirt’ from the court file.”

For example, Kelley claimed he could have proved the allegations were untrue, but unfortunately all the records from his Tacoma business had been destroyed by a mysterious 2008 fire in Everett, where he kept an office. He did admit under oath, however, that he hadn’t paid taxes on the disputed amount and other earnings, totaling $3.8 million. That was the amount he moved from bank to bank in what Old Republic called a plan to ultimately hide the money in a tax-free offshore trust.

The fire that Kelley claims destroyed his records. Herald File Photo

His opponents and voters didn’t need to know about this, Kelley effectively argued. An attorney and former federal prosecutor who targeted white-collar crime, he asked U.S. District Court Judge James Robart to seal the file from public view.

Robart was unsympathetic. Though Kelley may feel the documents could “subject him to annoyance, embarrassment, or harm to his political career,” Robart said in a ruling, “the court finds that these bases do not overcome the strong presumption of public access to the court’s files.”

A year later, Kelley won election to high office, becoming the state’s auditor with an annual salary of $117,000. As he predicted, the court case did indeed surface during the 2012 general election campaign against Republican James Watkins, who posted most of the legal files on a website. But while the revelations attracted some news coverage and generated a short-lived debate, they gained little traction. Kelley called it a low blow politically, and said the allegations were never substantiated—since of course he’d settled. Besides, this was an unsexy race for a numbers-crunching job that many voters knew little about. Though the auditor’s 350 employees watchdog billions of dollars in state and local government expenditures, the office had earned widespread respect under Democrat Brian Sonntag, who was retiring after 20 years. His fellow Democrat Kelley had sailed to victory, beating Watkins by 168,000 votes.

But today those 2010 court files could have the kind of career-altering effect that Kelley once feared. Along with other evidence and testimony, they are the core of a federal investigation to determine whether the 50-year-old Kelley, a father of two who is married to a University of Puget Sound foreign-language professor, violated any criminal laws in his past business dealings.

FBI and Justice Department prosecutors, using a federal grand jury, have been looking into the transactions since Kelley’s 2012 election. The collection of grand-jury documents include a deposition from the Old Republic case, obtained also by Seattle Weekly, in which Kelley admits he didn’t pay taxes on the $3.8 million he wired bank to bank.

Voters and the media may not have been overly interested in the allegations, says Old Republic’s attorney Scott Smith, but the feds apparently were. They contacted him in late 2012 while the auditor’s race was still being fought. “What I think happened is that they were reading newspaper articles around the time of the election and decided to take a look into the tax question,” he says.

The feds are also interested in Kelley’s legislative records. Last week, the state Public Disclosure Commission said it had turned over all of Kelley’s personal financial disclosure statements to the FBI, including a file of a 2012 complaint made by the state Republican Party claiming Kelley violated a series of disclosure laws. The PDC determined that Kelley had failed to fully and timely report income related to the Old Republic case while he was a three-term state legislator. It fined him $200, with half the fine suspended if he has no other violations for four years. The PDC termed the violations “relatively minor,” and chose not to refer the case to a prosecutor or the attorney general.

Kelley, who ran for auditor on a promise of transparency and accountability, has known about the U.S. probe since at least 2013, but did not publicly disclose it. (The investigation bubbled quietly beneath the surface until the media caught wind of it two weeks ago when federal agents served a search warrant and took evidence from Kelley’s home in Tacoma.) Old Republic notified Kelley in April 2013 when it received a grand-jury subpoena for the case files, including interview transcripts, discovery evidence, and exhibits. Smith says they also had to provide a copy of the settlement agreement between Kelley and Old Republic, which both sides had agreed to keep private.

“We were obligated to notify Mr. Kelley that we turned over a copy of the agreement,” Smith says. “We sent him a letter, telling him of the subpoena. His office confirmed they received the letter.”

Federal officials will not discuss the case, but are summoning Kelley’s former business associates to interviews and closed-courtroom questioning. One of the key figures is 20-year business associate Jason Jerue, who was last reported living in Los Angeles. Jerue was Kelley’s go-to guy when they worked together for a title company in California and later at Kelley’s Tacoma escrow business. Jerue, 45, continues to toil for Kelley as a part-time technical writer for the auditor’s office, working remotely from California. He made a total of $39,000 over the past two years, state records show.

“The feds want to talk to Jerue for the same reason we did—though we were never able to reach him,” says Smith, who notes that, during the Old Republic case, Kelley had Jerue’s cell-phone number but claimed that he did not know where he lived. “Jerue was his operations manager, his right-hand person. He knows more about Kelley’s business than anyone other than Kelley,” says Smith. “Under oath, either he corroborates Kelley or he contradicts him.”

Jerue and Kelley were working at First American Title Co. in Los Angeles when Kelley was fired by the firm in 2000. He sued for wrongful termination and defamation, claiming officials had said he was embezzling company funds. American Title then accused him of burglarizing its offices and stealing artwork, all of it caught on surveillance video. Kelley denied the charge, saying he was out of town that day and could prove it. When time came to do so, he dropped the lawsuit.

“His defense was, ‘I didn’t steal it, I earned it.’ OK then, did you pay taxes on it? Well no, he said.”

Kelley has said little about the federal probe, other than stating that he is puzzled by the inquiry. He’s kept a low profile, but is being called on by state officials to appear at a hearing or face questioning at a press conference. Ex-auditor Sonntag, who endorsed Kelley for the state house but took no position in the 2012 auditor’s race, told The News Tribune that the public would like to hear “a little more open discussion” from Kelley about why he is being investigated.

Says attorney Smith, “It’s pretty reasonable to see that non-payment of taxes is the feds’ primary angle,” adding that IRS investigators are also involved in the probe. “His defense was, ‘I didn’t steal it, I earned it.’ OK then, did you pay taxes on it? Well no, he said.”

That was the essence of an exchange that transpired during an August 2010 deposition Kelley gave under oath in Seattle. Kelley confirmed that his company—United National, doing business as Post Closing Department (PCD)—had earned $3.8 million from Old Republic and two other title companies, Fidelity and Stewart Title.

In Old Republic’s case, Kelley had signed a contract agreeing that PCD would be paid a $20 tracking fee on each mortgage payoff it handled. But PCD regularly collected a $140 fee and, after taking its $20 cut, kept the other $120.

That money should have been returned to customers, Old Republic contended. The fact that it was not led to a 2008 class-action suit against the title company. In turn, Old Republic, blaming Kelley’s firm for wrongly collecting the money, sued PCD in 2009.

“In the majority of transactions, the full amount collected by Old Republic was not needed and money was left over,” the company said in its lawsuit. “Instead of making refunds, Kelley kept most of the excess reconveyance fees. The total amount he misappropriated from Old Republic was $1,207,483.72.” Old Republic also claimed Kelley misappropriated more than $2 million from two other escrow companies, and that PCD’s tax returns showed no payments on the funds.

Other financial documents revealed a money trail that was traced through seven wire transfers in two weeks, the $3.8 million going to four financial institutions in three states. Kelley also set up an offshore account in tax-haven Belize which, Old Republic believed, would be the money’s final stop.

Kelley claimed the funds transfers were done at the advice of a California-based “estate planner,” whom he identified as Palm Springs attorney Alan Eber. According to Eber’s website, he specializes in asset protection and wealth preservation, promising to “keep your assets out of the reach of judgments, creditors, business conflicts, and divorcing spouses.“ (During the 2012 campaign, Kelley told reporters the Belize account, known as the Wellington Trust, was established by an “outside attorney.” When Kelley found out about the account, he closed it, he said, and the funds remained in a U.S. bank account. But records show that Kelley himself signed papers to create the offshore trust.)

“When you started this series of wire transfers, who did the money belong to, the $3.8 million?” Smith asked Kelley during the 2010 deposition.

“The money was earned, so it belonged to my company,” Kelley answered.

“Do you have any intention of paying taxes on that money?” Smith asked in a later follow-up.

“Yes.”

“When?”

“On advice of counsel [Eber], when he tells me to.”

“Any estimate of whether that will be one year, two years, 10 years?”

Kelley couldn’t say. In 2012, he contended that he’d paid all taxes he owed. He could not be reached for further comment last week.

Smith also asked Kelley why he appeared to be hiding the $3.8 million. “Any interest in trying to avoid payment of these funds to your creditors?” Smith inquired.

Kelley said his advisor made him do it. “Again, based on the estate planning, I don’t know what—how the attorney did it or why.” He was just following expert advice, said Kelley, who has an extensive legal background in tax law.

Lawyers for Old Republic felt Kelley was less than forthcoming about the transfers, as well as about his loss of company records. In court files, they contend that in June 2008, one month after Old Republic was hit with the class-action suit, Kelley got word of the legal action and began making moves. “In the next few weeks, Kelley shut down PCD and terminated its employees [even though the business was making a profit]. . . . To cover his tracks, Kelley cleaned out his home computer [and] Kelley’s vice-president and operations manager, Jason Jerue, took all of [another employee’s] records and deleted all PCD files from her home computer.”

On June 12, 2008, the state legislator began the fund transfers, withdrawing funds from PCD’s account and wiring the money to another bank that day, then wiring it to a third bank the following day. By June 18, it had gone to a Nevada bank under the name of another company, and then on to an East Coast account in the name of a new entity created by Kelley, Blackstone International.

The remains of the Stewart Title Company following the fire. Herald File Photo

On June 25, fire struck the Stewart Title Company building in Everett, leaving behind ashes and a $1 million loss. The cause was never determined, the fire department says today. In his deposition, Kelley said the fire destroyed PCD records that could have cleared up most of the accusations, showing he properly charged extra for collecting and retaining the Old Republic fees—although the contract that Old Republic handed over to investigators didn’t allow such charges.

Smith, however, says Kelley’s office was actually next to the title building and had been closed two weeks earlier. Most of the important records he sought from Kelley were electronic spreadsheets, he says, and should have been saved elsewhere. Kelley admitted in the deposition that his office received only smoke damage and was unable to clearly explain why electronic records weren’t retrieved. (A title company official told The Herald of Everett that all Stewart’s electronic records were secure, having been backed up on other computers.)

Kelley said he wasn’t much of a record-keeper anyway, Smith recalls. “I asked about his [personal] computer, and he said, ‘Well, I don’t have the computer. It had a glitch, and I gave it to Goodwill.’ OK then, how about e-mails? He said he didn’t save them either. What about data from your website? ‘Cleaned that out before I shut it down.’ ”

In his only statement about the federal probe, Kelley said the government won’t tell him why it’s snooping into his past. “I do not know any specifics about their inquiry, despite repeated requests for information, and cannot comment further,” he said. However, he added, “I can assure you that all of my actions over the years have been lawful and appropriate.”

randerson@seattleweekly.com

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.

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