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Dispatches from public radio's correspondent at the Washington Legislature. Austin Jenkins is the Olympia correspondent for the Northwest News Network. You can also see Austin on television as host of TVW's (the C–SPAN of Washington State) weekly public affairs program "Inside Olympia."

Washington State Auditor Found Not Guilty Of False Statement To IRS, Jury Hangs On Remaining Charges

Washington State Auditor Troy Kelley hugged and kissed his wife and shook his lawyers' hands as he was found not guilty Tuesday on a charge of making a false statement to the IRS. A federal jury in Tacoma deadlocked on the remaining 14 counts, including charges of possession of stolen property, money laundering and filing false tax returns.

The dramatic turn of events followed nearly four days of deliberations and comes almost exactly a year after Kelley was indicted by a federal grand jury. Prosecutors did not immediately indicate if they intend to re-try Kelley on any of the charges.

"The whole 'stolen money' was really hard for us," jury foreman Mike Lowey said after the trial. "It was hard to establish that it was actually stolen--we were split to that." Lowey said most jurors were not willing to convict on a stolen property charge.

Prior to announcing their verdict, U.S. District Judge Ronald Leighton polled the jurors individually twice to ask if they thought they could overcome their deadlock. Initially, four indicated they thought they could, but the remaining 8 said they didn’t believe so.

“Your honor, I don’t see it happening,” said one of the jurors who was only identified by his juror number.

Defense attorney Angelo Calfo argued against letting the jurors continue to deliberate. “Your honor, this is the definition of a hung jury,” Calfo said. “I think we need to bring them out as soon as possible.”

“Yeah, it’s a hung jury,” Judge Leighton agreed.

A short while later, Leighton was notified that one juror had heard something about the case on the radio that might have had an effect on deliberations. That prompted Calfo to make a motion for a mistrial which Leighton denied. Leighton did question the juror about whether what she had heard affected her deliberations or vote on any counts. Her answer was “no.”

As Kelley, a first-term Democrat, awaited the verdict he seemed to visibly relax, laughing and smiling at one point. His wife and supporters were in the courtroom as well.

Shortly after 2pm, the jury returned its verdict on the single count of making a false statement to the IRS. The 7 man, 5 woman jury had apparently found unanimity on a second count, but then “some jurors changed their way of thinking,” a member of the jury explained to the court.

The case against Kelley had been presented to jurors at closing arguments as a “plain case of fraud” by prosecutors and a “rotten onion” by the defense. Those starkly different portrayals apparently carried into the the jury room where one of the jurors described a dynamic of “complete opposites.”

A complex case

The charges against Kelley related to his past real estate services business, not his role as state auditor. Kelley was charged with pocketing millions of dollars in reconveyance fees that should have been refunded to homeowners, seeking to conceal the money and avoid paying taxes on it.

A reconveyance is when a lender clears its interest in a property after a loan is paid in full. During the pre-recession housing boom, prior to becoming state auditor, Kelly operated a company called the Post Closing Department that contracted with title and escrow companies to track reconveyances to make sure they were recorded.

Federal prosecutors alleged Kelley was obligated to issue homeowner refunds in cases where the lender completed the reconveyance, but instead usually kept the money in violation of his agreements with Fidelity National Title and Old Republic Title.

Once class action lawsuits were filed against the industry in 2008 over un-refunded reconveyance fees, Kelley was accused of shuttering his business and taking steps to conceal the more than $3 million he had amassed by moving the money through a series of rapid bank transfers. The money was parked in a Vanguard account in Pennsylvania that Kelley ultimately linked to an off-shore trust in Belize, although he never moved any money there. Kelley’s defense maintained he was lawfully protecting his assets against frivolous lawsuits.

In 2011, Kelley settled a lawsuit filed against him by his former client Old Republic Title for more than $1 million. After that, he started drawing down the remaining funds in $245,000 annual installments and paying taxes on the money.

In trial, Kelley’s defense argued that homeowners gave up their rights to the reconveyance fees when they signed their closing statements and that Kelley had no obligation to refund the fees. They also asserted that he had adopted a lawful accounting method that allowed him to realize the money as income over time and pay taxes on it then.

Nearly six-week trial

Over the course of a nearly six-week trial, jurors heard from more than 70 witnesses including Kelley's former escrow company clients who said Kelley promised to track reconveyances for a small tracking fee of $15 to $20 and refund excess fees if they weren’t needed to pay trustee or county recording costs.

The prosecution also called Kelley’s former operations manager, Jason JeRue, who testified that at Kelley's direction he falsified spreadsheets to make it look like reconveyance fees had been paid out to third parties, not retained by Kelley. Jerue testified under a promise of immunity from prosecution.

Jurors also heard about business tax deductions Kelley later claimed for items such as Egyptian cotton sheets, toys and travel expenses related to a family trip to Yellowstone National Park in 2011. Kelley’s defense called those "mistakes" and not evidence of a crime.

Kelley never took the stand in his own defense, but his lawyers called tax, escrow and contract experts to testify in an effort to portray the case as a contract dispute and tax audit issue that the feds had turned into a criminal indictment. They also sought to put the entire escrow industry on trial and show that Kelley’s practices were consistent with industry standards during the pre-recession housing frenzy.

Nordstrom comparison

Throughout the trial, Kelley sat next to his lawyers often taking notes on a yellow legal pad. His wife Diane, a French professor at the University of Puget Sound, was a frequent presence in the spectator gallery. She was often joined by friends and family. Former State Auditor Brian Sonntag, who previously called on Kelley to resign, was also a regular fixture in the courtroom.

Several times throughout the trial, defense attorney Angelo Calfo unsuccessfully sought to have the case thrown out for lack of evidence. Ultimately he did succeed in getting one false declaration count dismissed.

Two other false declaration counts remained. One of those charges stemmed from Kelley’s denial in a 2010 deposition that days after a class action lawsuit he sent a refund to the lead plaintiff in a class action lawsuit filed over reconveyance fees.

Throughout the trial, Kelley's attorneys maintained that any refunds he sent over the years were done as a customer courtesy that they likened to Nordstrom's famously generous return policy. During closing arguments, Assistant U.S. Attorney Andrew Friedman said Nordstrom co-founder John Nordstrom "would roll over in his grave" if he knew Kelley's business practices were being compared favorably to Nordstrom.

Since his indictment in April of last year, Kelley resisted calls for him to resign. He did take a seven-month unpaid leave of absence, but ended that leave last December after some lawmakers announced they would lead an impeachment effort against him for abandoning the office.

While on trial, Kelley continued to draw his $120,459-per-year salary. A spokesman for the auditor's office, Adam Wilson, said Kelley showed up for work on Fridays, which are non-trial days in federal court.

Defense attorney Calfo told reporters after the trial that "it was the right outcome."

"This is a case that we think never should have been brought," he said.

Since January 2004, Austin Jenkins has been the Olympia-based political reporter for the Northwest News Network. In that position, Austin covers Northwest politics and public policy, as well as the Washington State Legislature. You can also see Austin on television as host of TVW's (the C–SPAN of Washington State) Emmy-nominated public affairs program "Inside Olympia."