State Auditor's Legal Team Calls Stolen Funds Charge Flawed
In the second day of a pretrial hearing in the case of indicted Washington State Auditor Troy Kelley, defense attorney Angelo Calfo continued to question the lead FBI investigator in the case. Calfo is seeking to undermine key foundational elements of the theft, money laundering and tax evasion case against Kelley even before it reaches a scheduled trial in March.
The charges stem from Kelley's prior business in the real estate services industry before he was elected auditor. At the heart of the case is the allegation that Kelley unlawfully retained and tried to conceal millions of dollars in homeowner fees that he should have refunded.
Stealing Or Not Refunding?
In the early-to-late 2000's, Kelley ran a company called the Post Closing Department. He contracted with title and escrow companies to make sure lenders cleared their interest in a property after a loan was paid off as the result of a sale or refinancing. This is known as reconveyance tracking.
During cross-examination, Calfo got FBI Special Agent Michael Brown to acknowledge that title industry practice at the time was not to refund reconveyance fees that were paid upfront at real estate closings.
Calfo then got Brown to agree that title companies that collected reconveyance fees, but didn't refund those fees were not engaging in theft of funds.
"Do you think title companies steal money from homebuyers," Calfo asked, "when they collect [reconveyance] fees …. [and don’t refund them]?"
"If they provide a service that’s agreed upon between them and the borrower it’s not stealing,” Brown said.
Asked then what obligated Kelley and his third-party reconveyance tracking firm to issue refunds, Brown said it was the contracts Kelley had with his title and escrow company clients and representations he made to those clients.
Having established the importance of those agreements to the government's case, Calfo then introduced the contract the feds say Kelley had with Fidelity National Title to provide reconveyance tracking services. Calfo quickly established that the copy of the agreement the FBI is relying on is a version that is missing Kelley's signature.
Calfo asked, "Do you have the signed contract with Fidelity?"
"We do not, not with his signature," Brown admitted.
Calfo then further established that the version of the contract the FBI has is incomplete because it's missing a sample refund letter that is referenced.
"So what you have here is an unsigned agreement that isn't complete," Calfo asked.
"That is true," Brown acknowledged.
On redirect, Assistant U.S. Attorney Andrew Friedman referred Brown to Kelley's 2010 deposition in a civil lawsuit involving Old Republic Title. In that deposition, Kelley was shown the same unsigned contract and asked if it was the agreement he had with Fidelity.
"I have no reason to think that it is not," Kelley said at the time.
Friedman also had Brown read from the portion of the Fidelity contract that said if extra funds were left over after a reconveyance, those funds would be "forwarded" to the customer. At trial, the definition of excess funds is likely to become a point of dispute between the prosecution and defense.
On the first day of the hearing Brown struggled to answer as Calfo demanded to know who the victims were in this case since Kelley didn't have a direct contract with the homeowners who paid the fees. Friedman sought to show that all the government needs to prove is that Kelley wasn't entitled to keep the funds--not that he necessarily victimized anyone.
Transferring Or Laundering?
Another issue Calfo had challenged was whether Kelley actually sought to conceal his allegedly ill-gotten gains in 2008 when he rapidly moved the money through a series of bank transactions. Calfo called those "money transfers," not money laundering, and noted that the accounts and businesses that Kelley set up to receive the money were all in his name. Friedman repeatedly noted for the court that there appeared to be no "legitimate business purpose" for those transfers.
Over the years Kelley has offered different explanations for why he moved the money. In a 2010 civil deposition he said it was for estate planning purposes. In a 2012 news conference when he was running for auditor he said it was because he was reconstituting his business.
The government, in its indictment, alleged Kelley moved the money to avoid potential creditors after class action lawsuits were filed against his title company clients over reconveyance fees. In court Calfo suggested that if Kelley was motivated to shield his money because of those lawsuits, he was justified in doing so because he believed the class actions were unjustified and could result in an unfair judgment against him. In the end the lawsuits were dismissed, which the defense says is further evidence the government's case against Kelley is misguided.
The prosecution maintains the facts of the case against Kelley are different than the facts in the lawsuits against the title companies.
What's already clear though is that while the government intends to put Kelley on trial, his attorney plans to put the entire title and escrow industry on trial.
As the hearing stretched into a second day, Kelley sat back in his chair listening to the testimony. At times he would shake his head "no" in disagreement with something that was said. On another occasion he held up a yellow legal pad to shield a whispered conversation with his attorney. Kelley is an attorney by training.
This hearing is ostensibly for U.S. District Judge Ronald Leighton to decide if the feds overreached when they seized $908,000 Kelley had paid to his previous lawyer's law firm to hold in trust. The government claims those are tainted funds; Calfo says they're not. But his stated goal in this hearing is to more broadly convince the court that the government's theory that Kelley possessed stolen funds in the first place is flawed.
How the court rules on the question of the $908,000 could have major implications for the future of the case.
In afternoon testimony the government called Gary Beisheim, an FBI forensic accountant who traced the $3.8 million that Kelley retained and later moved through the series of bank transfers. The case against Kelley focuses on about $1.4 million of that.
Beisheim testified that the $908,000 the government seized in September was part of the pot of money the feds believe constitutes tainted funds.
But Beisheim’s role in the case provided more fodder for defense attorney Calfo.
Defense Questions Accountant’s Background
Before going to work for the FBI Beisheim worked as a controller for the Hagens Berman law firm--coincidentally, the same firm that brought the class action lawsuits against the title industry in 2008.
Beisheim confirmed during his testimony that he was recently interviewed by the FBI in Chicago in connection with a tax-related investigation involving an attorney who was receiving settlement payments from the Hagens Berman firm. Beisheim said he is a witness in the case and not a target of the investigation.
However, Calfo seized upon this in his cross-examination of Beisheim. He noted that Beisheim had issued a direct payment to the attorney in question, despite having concerns that the direct payment might be a way for the attorney to avoid his obligation to the IRS. Beisheim, a certified fraud examiner, defended his decision to issue the payment saying he trusted that what his bosses at Hagens Berman were instructing him to do was legal.
An email to Hagens Berman was not immediately returned.
Beisheim also acknowledged that he’s being audited himself by the IRS for business expenses he claimed while briefly in private practice after leaving Hagens Berman and before joining the FBI. As a part of that audit, the IRS determined that $1,200 of his business expenses were not appropriate. Beisheim called that “one mistake.” The indictment against Kelley includes allegations he made false business deductions. Asked by prosecutors if the audit had any effect on the work he did on the Kelley case, Beisheim answered, “not at all.”
“Pressure To Be Right”
The cross-examination of Beisheim also offered a window into the high stakes involved in the Kelley prosecution, including the personal involvement of former U.S. Attorney Jenny Durkan, an Obama appointee, in the case. Calfo introduced emails that Beisheim wrote to colleagues in the FBI in which he said he was under “considerable pressure” to finish his work and had four assistant U.S. attorneys “breathing down [his] neck.”
Calfo asked, “Did you feel considerable pressure to work this case?”
“It an important case. It’s a public official, sir,” Beisheim replied, adding, “pressure to be right, sir.”
Beisheim denied that he and the FBI wanted to bring the case against Kelley prior to the next political cycle to avoid being criticized.
“There was no discussion of that,” said Beisheim.
Separately, Beisheim acknowledged that he led a team that looked into Kelley’s campaign finances, but that no criminal charges arose from that review.
Besides seeking the return of the $908,000, Calfo is also arguing to have the indictment against Kelley split up and some of the 17 counts dismissed. The hearing is scheduled to conclude Thursday.
Kelley has pleaded not guilty to all counts and is on an extended leave of absence from the state auditor's office.