'Plain Case Of Fraud' Or 'Rotten Onion'? Troy Kelley Case Goes To Jury

Apr 20, 2016

After a nearly six week trial, the guilt or acquittal of Washington State Auditor Troy Kelley rests with a jury of seven men and five women. The case went to the jury late Wednesday afternoon following lengthy closing arguments by the prosecution and defense.

“This is a plain case of a fraud and a cover-up,” Assistant U.S. Attorney Katheryn Frierson told the jury at the outset to the prosecution’s closing argument.

“Troy Kelley stole millions of dollars of reconveyance fees $100 at a time,” Frierson said.

A reconveyance is when a lender clears its interest in a property after a loan is paid in full due to a sale or refinance. 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.

Frierson told the jurors 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, Frierson said Kelley shuttered his business and took steps to conceal the more than $3 million he had amassed.

“He dumped records, he closed his business, he drained his accounts and spirited away the money,” Frierson said.

The second phase of the “cover-up,” Frierson told the jury, was Kelley’s effort to hide the money from the IRS and not pay taxes on it until he thought there were no longer any legal claims to the funds. In 2011, Kelley began to draw down the money and pay taxes on it in $245,000 annual installments. Documents seized from Kelley’s home indicated he was still tracking reconveyances and had a 10-year plan to wind down his business. The prosecution maintains this was a fiction.

“Mr. Kelley then embellished this fiction,” Frierson continued with the jury, “by declaring tens of thousands of dollars in bogus business expenses.”

Those deductions, according to prosecutors, included portions of a family trip to Yellowstone, depreciation and mileage on his wife’s vehicle and purchases of personal items such as sheets and toys.

“You can’t treat your tax returns like a comic book, but that’s precisely what Mr. Kelley did,” Frierson said referring back to a quip made by the defense’s tax expert during the trial.

As Frierson addressed the jury with the aid of PowerPoint-type slides, Kelley took notes on a yellow legal pad.

A ‘rotten onion’

When it was defense attorney Angelo Calfo’s opportunity to offer closing arguments, he returned to an analogy he had first introduced during jury selection: that the case could be viewed as an onion whose layers needed to be peeled back to find the truth.

“This onion is a rotten onion,” Calfo told the jury. “I wouldn’t use it in my spaghetti.”

Calfo went on to accuse the prosecution of mounting a top-down investigation predicated on a “fundamental misconception” that the money Kelley is accused of pocketing belonged to other people.

“We all know this case didn’t start because somebody who thought money was stolen complained to the authorities,” Calfo said.

Instead, he told the jury, the case started with a political attack on Kelley during his 2012 state auditor race, was fueled by “bizarre animosity” on the part of an attorney for Old Republic Title and was prosecuted under pressure from then-U.S. Attorney Jenny Durkan.

“Let’s throw this rotten onion out, let’s let Troy go back to his wife and kids.” Calfo urged the jury at one point.

Calfo then proceeded to call into question the reliability of key prosecution witnesses, including Jason JeRue, Kelley’s former operations manager who testified under a promise of immunity from prosecution.

JeRue testified that Kelley ordered him to falsify spreadsheets to make it look like money had been paid out in third party fees and was not retained by Kelley. Calfo tried to cast doubt on the authenticity of a spreadsheet introduced at trial that JeRue said he doctored, noting it could not be traced back to the Post Closing Department. He also suggested JeRue became a government witness under duress and threat of prosecution.

“I would throw his testimony out with the rotten onion because it’s worthless,” Calfo said.

In issuing the jury instructions, U.S. District Judge Ronald Leighton instructed the jurors to view JeRue’s testimony “with greater caution than that of other witnesses” because of the promise of immunity.

Frierson told the jury that the case doesn’t hang on the testimony of any one witness, but instead hinges on Kelley’s lack of credibility. “Mr. Kelley is willing to say different things to different people to suit the situation,” Frierson said.

As for the tax charges, Calfo said Kelley’s tax treatment of the funds was defensible under IRS rules and called the prosecution’s pursuit of the questionable business deductions “an effort to prop up an otherwise ridiculous case.”

High bar for conviction

The jury must decide 15 counts against Kelley that include possession and concealment of stolen property, false declarations, money laundering and filing false tax returns.

The bar for prosecutors is high. In order to convict Kelley of the stolen property charge the jury would have to find that the money Kelley took had “attributes of ownership” and that he knew the money didn’t belong to him.

The defense has sought to show that homeowners gave up their rights to the money when they signed their closing statements and that the escrow companies never had ownership of the fees.

Frierson, in her closing argument, used an analogy. She told the jurors that what Kelley did was the equivalent of tricking escrow companies into opening a safe full of money for him.

“He went into the safe and took the money that didn’t belong to him,” Frierson said.

Calfo told the jurors the government had failed to prove that Kelley possessed stolen money and that, without that charge, they must acquit on the remaining charges. “If count 1 doesn’t make -- and it shouldn’t -- the rest of this indictment doesn’t make any sense,” Calfo said.

On the tax-related charges, the jury would have to find that Kelley willfully violated the law. A good-faith misunderstanding of tax law is not enough. Kelley’s defense has maintained that he adopted a legal accounting method that allows businesses to realize income over time.

‘Real crimes’ vs a ‘tragic case’

As she concluded, Frierson cautioned the jury about what she called defense “distractions” such the suggestion that the tax charges against Kelley are the stuff of a civil tax audit, not a criminal prosecution, and that questions about reconveyance fees not being refunded amount to a contract dispute.

“In this case, Troy Kelley stole $3 million and evaded tax on $3 million, and then he laundered the money and lied under oath,” Frierson told the jury. “This is not a commercial dispute. This is not an issue for a civil audit. This is about real crimes.”

As the end of his closing argument, Calfo concluded, “This case is a tragic case. It’s a tragic case because it got investigated from the top down, and when it got investigated from the top down the agents ignored evidence of innocence.”

If convicted on one or more charges, Kelley could face a prison sentence. He would also lose his job as state auditor under a law that vacates a public office upon the officeholder being convicted of a felony. Even if acquitted of all counts, Kelley has said he has no plans to run for re-election this year.