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Tuesday, July 03, 2018

Former Washington State Auditor Sentenced to One Year In Prison for Fraud, Tax and False Statement Crimes Committed while Serving in Washington Legislature


Defendant Used Money Stolen from Customers to Help Fund Election Campaign

          Former Washington State Auditor TROY X. KELLEY was sentenced today in U.S. District Court in Tacoma to one year in prison for possession of stolen property, making false declarations in a court proceeding, and tax fraud, announced U.S. Attorney Annette L. Hayes.  KELLEY was convicted of eight federal felonies in December 2017, following a five-week trial.

          The charges stem from a business KELLEY operated while also serving in the Washington state legislature.  KELLEY used some of the stolen money to fund his 2012 campaign for State Auditor.  At the sentencing hearing, U.S. District Judge Ronald B. Leighton said, “There was overwhelming evidence of guilt… He wanted money, he found a vehicle to acquire wealth and what he did was known by him to be wrong…. Somebody who has done nothing wrong does not forge documents.  He is guilty of this crime.”

            “This case stands out because of Mr. Kelley’s calculated efforts to steal nearly $3 million dollars from thousands of homeowners when he thought no one was looking,” said U.S. Attorney Annette L. Hayes.  “What’s worse, he did this while serving as a state legislator and then used part of his ill-gotten gains to fund his campaign for state auditor.  We rightly expect our public servants to comply with the law and truly serve.  I commend the prosecutors and investigators who put this case together and thus ensured Mr. Kelley’s lies and deceit were exposed for all to see.”

            According to the evidence at trial, between 2003 and 2008, KELLEY operated a business that monitored real estate filings on county websites.  KELLEY agreed with escrow companies that his business would charge a flat fee of $15 or $20 for each real estate transaction it monitored for the escrow companies’ customers.  In addition to the flat fee, the escrow companies also gave Kelley $100-$150 of customer money for each transaction, which KELLEY agreed to use to pay expenses if necessary.  KELLEY agreed to refund the money to the homeowners if there were no expenses.  However, beginning in 2005, in virtually every case he handled, KELLEY kept the entire amount withheld on each transaction, thereby stealing nearly $3 million. 

          In 2008, class action lawsuits were filed against escrow companies, claiming that homeowners had been charged excessive fees in real estate transactions.  After the lawsuits were filed, KELLEY falsified a letter to the plaintiff in one lawsuit to make it appear that KELLEY had refunded the plaintiff’s money, when in fact he had not.  Concerned that the lawsuits would lead to his downfall, KELLEY transferred millions of dollars of stolen money through a series of bank accounts, ultimately placing the funds in an investment account for a company controlled by a Central American trust controlled by KELLEY.   One of the escrow companies sued KELLEY to retrieve the stolen money.  KELLEY testified falsely under oath in the lawsuit that he had only kept money he had earned for services provided.  One of KELLEY’s convictions for making false declarations in a court proceeding is based on that testimony.

          Beginning in 2011, KELLEY spent the stolen money on personal expenses and his campaign for State Auditor.  To hide the fact that this was money he had stolen years earlier, KELLEY claimed on his tax returns that he was continuing to perform real estate services, and to earn income through his business, when in fact he had not operated the business for years.  In the same tax returns, KELLEY claimed tens of thousands of dollars of business deductions for personal items like spa treatments, a family trip, and household purchases such as sheets and toys.  KELLEY’s tax fraud convictions are based on this conduct.

          In December 2017, a unanimous jury convicted KELLEY of possession of stolen property, two counts of making false declarations under oath, and six counts of tax fraud.  Following the trial, an unrelated U.S. Supreme Court ruling resulted in the dismissal of one of the tax fraud counts.

         “During the years he ran his business Mr. Kelley stole $2.9 million from thousands of his customers.  He attempted to further conceal his misdeeds by failing to report the monies to the IRS,” said Darrell Waldon, Special Agent in Charge, IRS Criminal Investigation.  “Today’s sentence demonstrates the government’s determination to protect consumers and ensure that everyone, including elected officials, are playing by the rules and paying the taxes they owe on income received from legal and illegal sources.”

          “The vast majority of public officials are honest in their work.  Unfortunately, a small percentage abuse the trust placed in them," said Special Agent in Charge Jay S. Tabb, of the FBI's Seattle Field Division.  “Identifying and investigating those corrupt public officials is the FBI’s top criminal investigative priority.  Citizens have the right to nothing less than fair and honest government.  Mr. Kelley violated the public's confidence through criminal actions he undertook while in office to conceal his previous illegal activity. The citizens of Washington rightfully demand high ethical standards from public servants.”

            The case was investigated by the Internal Revenue Service Criminal Investigation (IRS-CI) and the FBI.

            The case was prosecuted by Assistant United States Attorneys Arlen Storm, Andrew Friedman, Seth Wilkinson, Katheryn Frierson, and Michelle Jensen.  Appellate attorney Michael Morgan provided significant assistance.

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