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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."

Former WA state auditor faces prison after U.S. Supreme Court denies petition for review

Austin Jenkins
Northwest News Network
Former WA State Auditor Troy Kelley leaves court during his first trial which ended in 2016 with the jury deadlocking on most charges and acquitting him of one. Kelley was later retried and convicted on several counts. He's now exhausted his appeals.

Former Washington state Auditor Troy Kelley has exhausted his appeals and now faces the prospect of having to report to a federal prison to serve a 366-day prison sentence after the U.S. Supreme Court denied a petition for review of his case.

That denial Monday represented the last avenue of appeal for Kelley who has spent years fighting his 2017 conviction for possession of stolen property, tax fraud and making false statements. Kelley, a Democrat, has been free while his conviction was under appeal.

"[I]t is past time for Mr. Kelley to begin his prison sentence," said Acting U.S. Attorney Tessa Gorman in a statement. "Justice requires accountability and it is time for Troy Kelley to be held accountable."

The case against Kelley stemmed from his work in the real estate services industry during the pre-Great Recession housing bubble in the early to mid 2000s, prior to his election as state auditor in 2012.

Kelley, who previously served as a state lawmaker, was accused of pocketing millions in fees that should have been refunded to escrow company customers. Later, prosecutors said, Kelley tried to hide the money by moving it through a series of wire transfers while also establishing an off-shore trust in Belize.

Kelley’s first trial in 2016 ended with the jury deadlocked on all but one count, on which he was acquitted.

Federal prosecutors tried him a second time in 2017 and won convictions for several of the charges, however Kelley was acquitted of money laundering.

Kelley, a lawyer by training who also served in the Washington Army National Guard, was sentenced to a year and a day in prison, plus a year of supervised release -- far less than the 87 months sentence prosecutors had sought.

Kelley and his attorneys promptly appealed, first to the 9th U.S. Circuit Court of Appeals and, eventually, to the U.S. Supreme Court.

In their request for Supreme Court review, Kelley’s attorneys said his case raised two questions worthy of legal review: whether someone can properly be convicted of possession of stolen property for breach of contract and whether his conviction violated the prohibition on imprisonment for debt.

The U.S. government waived its right to file a response to Kelley’s petition. That the Supreme Court declined to take his case is not unexpected. Only about two percent of petitions for a writ of certiorari are accepted, according to the United States Courts website

It’s not clear when Kelley will begin to serve his sentence or at what federal facility.

In a statement Tuesday, Kelley’s attorney Angelo Calfo said, “It’s been a long road for Troy.”

He also criticized federal prosecutors in Seattle for pursuing the case.

“Simply put, this was a situation where prosecutors identified a high-profile target and built a crime around him,” Calfo said.

The allegations against Kelley first came to light when he was running for state auditor in 2012. His opponent, Republican James Watkins, created a website called that included court documents related to lawsuits Kelley had previously been involved in regarding his employment and business dealings. Among the cases was a lawsuit brought by his former client, Old Republic Title, which had resulted in Kelley paying a $1.05 million settlement.

The allegations of less-than-scrupulous business dealings, along with bizarre details that Kelley had lived rent-free in a seized California mansion and allegedly filched a painting from one of his former employers, dogged him during his 2012 campaign.

Nonetheless, Kelley, who largely self-financed his campaign, prevailed in the race with 53 percent of the vote. In January 2013, Kelley was sworn in as the state’s top fraud fighter. Soon enough he'd be fighting allegations that he'd committed fraud.  In the meantime, Kelley maintained a low profile and largely avoided the press.

The first clue that Kelley was under federal investigation came in March 2015 when agents served a search warrant on his Tacoma home while he and his family were out of town. 

That April, Kelley was indicted on multiple charges, including filing false tax returns, making false statements, obstruction and theft. It was the first time a top elected official in Washington had faced charges in 35 years.

Kelley later took an extended leave of absence from the auditor’s office, but refused calls to resign. He ultimately served out the remainder of his term and did not run for re-election.

Kelley’s defense has long argued that federal prosecutors turned a contract dispute into a criminal prosecution.

"This case started as a political attack and once the FBI got it, it became a high-profile public corruption case," Calfo told the judge in the case during a pretrial hearing in 2016.

Prosecutors countered that Kelley had cheated scores of property sellers out of money that he was obligated to refund to them. He “was keeping money that wasn’t his to keep,” said Assistant U.S. Attorney Andrew Friedman following Kelley’s conviction.

Kelley occupied a unique and largely hidden realm of the real estate transaction process. His company, the Post Closing Department, would contract with escrow and title companies to track reconveyances. A reconveyance is when a lender clears its interest in a title to a property after a loan is paid back in full. This happens after a property sale, but also when a person refinances a loan.

Usually the lender completes the reconveyance, but not always. If it drops through the cracks, then the title to the property can be clouded.

In the years leading up to the Great Recession, when property closings were happening at a breakneck pace, Kelley’s title and escrow clients didn’t want to have to worry about ensuring that the reconveyance happened after closing. That’s why they contracted with companies like Kelley’s to track the reconveyance and ensure the previous lender cleared the title.

On the closing statement, the seller would see a fee for between $100 and $150 for the Post Closing Department. But instead of a department within the escrow or title firm, it was Kelley’s company. After closing, the escrow firm would transfer those funds to Kelley.

The crux of the civil and criminal cases against Kelley was that he was entitled to keep a $15 to $20 reconveyance tracking fee. The rest of the money, though, was to be held in trust to pay county recording fees or other costs, in the event the previous lender failed to complete the reconveyance on their own. In the vast majority of the cases, those fees weren’t needed.

Prosecutors said Kelley was contractually obligated to refund customers if the extra funds weren’t needed. That became a major source of contention at his trials. Kelley’s defense argued that the contracts were not explicit on the matter. Prosecutors insisted that refunds were owed and suggested Kelley had initially paid them, but then stopped when he realized no one was watching.

Even if refunds were owed, Kelley’s attorneys said, he didn’t steal the money because the property sellers had willingly paid the money at closing and given up ownership at that point.

According to court records, by 2008 Kelley had amassed nearly $3.8 million in fees. That’s when his industry clients were suddenly targeted by class action lawsuits over unrefunded fees. While Kelley and his company weren’t named in those lawsuits, he quickly shut down his business and began moving the money through a series of rapid wire transfers. Eventually, the money landed in an account that was linked to an off-shore trust in Belize. Kelley’s defense insisted he was lawfully protecting his assets against frivolous lawsuits.

Later, Kelley settled the lawsuit with Old Republic Title and agreed to pay more than $1 million without admitting wrongdoing. Kelley’s attorneys would later note that Old Republic used most of the money to cover legal fees and paid few refunds to its clients -- an attempt to further bolster their argument that there were no actual victims in the case.

After the settlement, Kelley started drawing down the remaining funds in $245,000 annual installments and paying taxes on the money, while also claiming large deductions that caught the attention of IRS investigators.

Federal prosecutors later alleged that Kelley used some of the ill-gotten gains to finance his 2012 campaign for state auditor.

In the more than eight years since questions first surfaced publicly about Kelley’s business dealings, he’s rarely spoken publicly, never admitted wrongdoing, rejected plea deals and refused to accept defeat.

Now, though, it appears his options have run out. With credit for good behavior, his attorney said Kelley will spend about eight months in prison -- presuming there are no modifications to his sentence based on last minute motions to the trial court.

“Even that, respectfully, is too much time for Troy to serve given what he allegedly did,” Calfo said in his statement.

This story has been updated. 

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."