He Got Rich And Rose Fast. Then He Fell Hard
The story of Troy Kelley, Washington state’s auditor, is stranger than fiction.
By Austin Jenkins
Update 12/21/2017 9:41 a.m.: Former Washington state auditor Troy Kelley was found guilty of possession of stolen property, making false declarations and filing false tax returns, but not guilty of money laundering. Learn more.
Dee Lamb was a 60-year-old widow living in Everett when her former boss showed up. He backed his car into the garage of her modest town home and started loading files. His associate went inside to find her computer.
“He was deleting everything,” Lamb said.
Their visit lasted about an hour. At the time, Lamb thought it made sense they would clear out files. After all, she had been laid off and no longer worked for the company.
But Lamb didn’t know that her former boss — a state lawmaker with a bright future in the Democratic Party — would soon face questions about the whereabouts of his business records.
Seven years later, on April 16, 2015, Washington State Auditor Troy Kelley strode into the federal courthouse in Tacoma. A tall man with dark hair and a square jaw, Kelley had always been the picture of confidence. But on this day, his suit hung from his shoulders, and his eyes looked sunken from apparent lack of sleep.
The day before, Tax Day, a federal grand jury had indicted Kelley on 10 charges related to his previous work in the real estate services industry.
Kelley was accused of possessing and concealing nearly $1.5 million in fees that should have been returned to homeowners across the state. The indictment said he “fraudulently retained, stole” and schemed to avoid paying taxes on the money.
As Kelley pleaded not guilty to those charges, his fellow Democrats abandoned him one by one. That day, Governor Jay Inslee, Attorney General Bob Ferguson and the chair of the state Democratic Party called for Kelley to resign.
Once In 35 Years
In Illinois or Louisiana, the indictment of an elected official might be considered almost commonplace. Not in Washington state.
It had been 35 years since a top elected official had been indicted here. In 1980, Speaker of the House John Bagnariol and Senate Majority Leader Gordon Walgren were charged with federal racketeering in an influence-peddling scheme known as “Gamscam.”
Gamscam was a classic public corruption case. By contrast, the case against Kelley was mostly unrelated to his duties in public office. The charges were related to the Wild West atmosphere that pervaded the real estate industry during the housing bubble of the early to mid-2000s.
It was hard to miss the irony: The auditor leads fraud investigations in the state. And here he was, facing federal fraud charges.
“He has lost the trust of voters,” opined The Seattle Times editorial board the day after the indictment was announced. It was a change in tune, as the Times had reluctantly endorsed Kelley for state auditor in 2012 after discounting similar allegations of “shady dealings.”
Kelley’s rise to Washington state auditor speaks as much to his audacity as it does to the scant attention that voters and reporters pay to races placed low on ballots.
Complacency may also be a factor. Washington state is known for its squeaky clean politics, and the press and political parties don’t often have to dig into a politician’s past. Democrats allowed Kelley to recruit himself, first into legislative politics and then state politics, because they liked his resume — a Democrat with a military and business background.
The details of that business background seemed not to matter in the context of campaigns and elections.
“I just don’t have candidates like this,” said Kelley’s onetime political consultant John Wyble in a soul-searching interview following the indictment. “I get it that I gotta do more diligence, but at the same time, it’s rare, frankly.”
Troy Xavier Kelley was born on August 16, 1964, in Los Angeles to Harold and Carol Kelley, an engineer and homemaker.
He graduated from John A. Rowland High School in Rowland Heights, California, in 1982 where he played varsity tennis, according to his high school yearbook.
He attended the University of California at Berkeley, graduated in 1986 and went on to receive a dual law and business degree from the State University of New York, Buffalo. Kelley spent a year at the Securities and Exchange Commission in Washington, D.C., then moved to San Diego in 1991 to take a job as an attorney working on real estate title matters.
The following year, he ran for Congress. He finished last in a five-way Democratic primary.
Politics might have been in Kelley’s blood. According to his former campaign manager, Kelley is a distant relative of Carmine De Sapio, known as the “last boss” of Tammany Hall, who was later convicted in a bribery scandal.
Kelley moved home to Los Angeles in 1993 to become an associate counsel at First American Title, one of the largest title insurers in the nation. He also joined the Army Reserve as a judge advocate general.
In 1998, Kelley married Diane Duffrin, a future French studies professor he had met volunteering on the Clinton campaign. That year he became national president of a subsidiary of First American.
First American Lawsuit
Kelley’s career at First American came to an end in 2000. After seven years as an in-house attorney and executive, the company fired Kelley. Officially, he lost his job to a corporate reorganization, but Kelley believed he had been unfairly dismissed. In a 2010 deposition he described the parting as “unfriendly.”
“Troy wasn’t particularly liked,” said Dennie Rowland, a former First American executive.
Rowland recalled that on the day that Kelley cleared out his office, he left his company car parked across three parking stalls.
“He handled it like a child,” Rowland said in a phone interview from Texas, where he’s now retired. Kelley later said he parked the car in Rowland’s spot, not across three stalls.
Seven months later, Kelley filed a wrongful termination lawsuit against First American in Los Angeles County Superior Court. He said he had suffered “embarrassment, humiliation, emotional distress, mental anguish and severe shock to his nervous system.”
The lawsuit, which also named Rowland, alleged that Rowland had slandered Kelley to other employees and managers at First American. The complaint listed what Rowland had supposedly said about Kelley:
- “[Kelley] had his hand in the cookie jar.”
- “We don’t know all the facts yet, but [Kelley] was embezzling from the company and it was a lot of money.”
- “Troy was stealing from the escrow accounts and we all could get into a lot of trouble for that.”
In the lawsuit, Kelley said he had been fired because he exposed illegal activity at the company, from the mundane — using unlicensed software — to the titillating — prostitutes, drug use and kickbacks.
Kelley also accused First American of doing what he would later be accused of: pocketing a fee that should have been refunded to homeowners.
First American, in court filings, “vehemently” denied illegal activity and sought to have the case dismissed.
The company also counterpunched. It sought to portray Kelley as an opportunist with questionable ethics.
In court filings, Kelley was accused of trying to “buttress” his case by recruiting another former First American employee, Jason Jerue, to also sue the company. Those cases were ultimately consolidated. Jerue would later become a mysterious figure in Kelley’s business and political life.
During a deposition, a First American lawyer also questioned Kelley about living rent-free on a two-acre estate that had been seized by the company in a title claim.
“Did you pay any rent during the time that you were staying at this property?” a lawyer asked.
“No, I did not pay rent,” Kelley said.
Kelley said he lived at the mansion because another First American executive “wanted somebody at the property.”
Living at the mansion wasn’t stress-free, however.
Court records reveal an acrimonious fight between Kelley, described as a “caretaker,” and a previous owner of the gated estate in Pasadena, California.
The man was Troy Cory Stubblefield, also known as Troy Cory and Keith Stubblefield, a stage and television performer who hosted the Troy Cory Evening Show in the 1970s.
Court records show Stubblefield believed he had been unjustly foreclosed upon in the 1980s.
The situation came to a head in August 1997. That’s when Stubblefield filed to have Kelley removed from the property. The action was dismissed.
The following month, Stubblefield said, he entered the property to maintain it, believing it unoccupied. But then Kelley and someone Stubblefield described as a bodyguard arrived at the estate, and Kelley ordered the bodyguard to place Stubblefield under citizen’s arrest for trespassing.
Kelley, in his own court filing, confirmed the attempt to place Stubblefield under citizen’s arrest. But Kelley’s attorney insisted that Stubblefield knew the estate was occupied.
Dueling restraining orders were filed. One alleges a murder plot. Kelley’s attorney wrote that Stubblefield “seems to believe that Mr. Kelley (and his lawyer) would attempt to ‘set-up’ Mr. Cory by luring him to the Rosemont property and committing ‘murder.’”
Kelley ultimately prevailed. Stubblefield was “barred from entering the property and harassing its occupants.”
As if that wasn’t bizarre enough, First American accused Kelley of poaching a painting from company headquarters.
“After his departure from First American, [Kelley], a former in-house attorney for the Company, sneaked back into the Company’s Glendale offices late in the evening and stole some artwork,” lawyers for First American wrote in a legal filing. “He was caught on a security surveillance videotape.”
First American produced a grainy, still frame from the video that showed a man in shorts and T-shirt exiting the building with what appeared to be a large piece of artwork propped on his shoulder. The object obscured his face from the camera.
Rowland, the former First American executive, said he was the one to first review the surveillance video after the painting went missing.
“Clearly it was [Kelley], there was no doubt about it,” Rowland said in an interview. “I recognized the Bermuda shorts that he had on.”
Kelley, who by then had moved to Washington, claimed he was in Seattle having dinner with his wife on the evening of the alleged theft. First American’s lawyers demanded credit card statements, telephone records and other documentation as proof.
When Kelley failed to produce what they wanted — after saying he had made a “diligent search” — First American’s lawyers accused him of “gamesmanship and a blatant disregard of the discovery process.”
Reporters asked Kelley about the surveillance video image in 2012.
“It’s not me in the photo,” he said. “Someone else created the photo.”
Asked if he was saying the photo was doctored, Kelley adjusted his answer.
“I don’t think it’s Photoshopped,” he said. “I don’t think that’s me in the photo. I’ll take a look at it. I haven’t seen it in 13 years. My recollection at the time was they thought it was someone who looked very different from me.”
Kelley’s failure to produce records wasn’t the only frustration First American lawyers experienced.
Kelley was also a repeated no-show on days when he was supposed to sit for the remainder of his deposition. Finally, after three last-minute cancellations by his attorney, the judge in the case ordered Kelley to finish his deposition. The judge also ordered Kelley and his lawyers to pay $1,500 to First American’s lawyers as a sanction.
First American’s lawyers also wanted Kelley to prove he wasn’t in Los Angeles the night the art went missing. But before the court could hold a hearing on the matter, the case was settled and the lawsuit was dismissed.
In a 2010 deposition, and again in a 2012 news conference, Kelley said the lawsuit ended with a settlement. “They paid me,” he said. “The exact specifics are under seal.”
(First American did not respond to numerous requests for comment.)
This chapter of Kelley’s past would have likely remained buried in the microfiche files of Los Angeles Superior Court had Kelley not announced, in 2012, a run for Washington state auditor. That’s when his Republican opponent, James Watkins, dug up the court documents and posted them on a website called factchecktroykelley.com.
Watkins also posted court records related to a 2009 lawsuit — this one filed against Kelley — that said he misappropriated millions of dollars of homeowners’ money and then tried to hide the money from would-be creditors and the IRS.
After Kelley lost his job with First American in 2000, he followed his wife to Washington state, where she was hired as a French literature professor at the University of Puget Sound in Tacoma.
The couple purchased a modest 1970s split-level house in Tacoma’s West End neighborhood with views of the Narrows Bridge and the Olympics.
Kelley went to work for Title Temps, a company that provided temporary staff to title companies. According to his bio, Kelley said he “assisted in the expansion and re-branding” of Title Temps and the ultimate sale of the company for $33 million.
Kelley also registered his own business — Blackstone International. The company was incorporated in Nevada on October 26, 2000.
Amy Cobine, a former business associate, said in 2012 that Kelley advised her to incorporate her company in Nevada because it has a strong “corporate veil” that protects individuals against potential creditors.
“They can’t go after you personally,” Cobine recalled Kelley telling her.
Cobine said Kelley also advised her to establish layers of protection to guard her personal assets.
“You need more layers,” Cobine recalled him telling her.
‘Family Of Companies’
After his move to Washington and working for Title Temps, Kelley was ready to branch out on his own in the real estate services industry.
In August 2002, he formed a Washington company called United National, LLC. He also registered a company by the same name in Oregon.
In the years to come, Kelley continued to register new companies in Washington and Oregon. In May 2003, he created The Post Closing Department in Oregon. Later that year, he registered Attorney Trustee Services, Inc., in Washington. In May 2004, Kelley registered United National 14, LLC, also in Washington.
Separately, Kelley also became a licensed life, disability, property and casualty insurance agent in the state of Washington.
By 2003, the website for United National advertised a “Family of Companies” providing title services, insurance services and post real estate closing services.
‘Leave Us With The Headaches’
By 2003, Kelley considered his primary line of work to be reconveyance tracking. This was a niche in the real estate industry.
After a real estate deal closed, Kelley’s company would check county records to make sure the previous lender cleared its interest in the property. When the reconveyance wasn’t recorded in a timely fashion, Kelley’s job was to make sure it got done.
Kelley marketed his services to title and escrow companies.
“Leave us with the headaches. YOU DO NOTHING. WE RECONVEY. YOU GET PAID,” read one of Kelley’s marketing brochures.
Kelley signed contracts with Stewart Title of Snohomish County, Fidelity National Title of Washington and, later, Old Republic Title in Washington, as well as several smaller escrow companies, to handle their reconveyance tracking.
His timing was good. The housing market was hot and getting hotter. As the volume of loan originations and payoffs picked up, title and escrow companies were more than happy to outsource this tedious last step of a real estate deal.
The business model worked like this: Title and escrow companies would collect a $100 to $150 fee from the owner selling or refinancing a house. The escrow company would then turn that fee over to the Post Closing Department. To the consumer, it would appear the fee was going to a department within the escrow company — when in fact it was going to Kelley’s company.
When a reconveyance got hung up, Kelley could use the pre-paid fee to pay the third-party trustee to complete the paperwork and, if necessary, any county recording costs. If the money wasn’t needed for this purpose, then Kelley was supposed to refund the homeowner, minus a small tracking fee of $15 to $20 that was his to keep — at least according to federal prosecutors and his former client Old Republic.
Instead, in years to come, Kelley would be accused of pocketing most of the fees for his own enrichment.
One of the early pioneers in reconveyance tracking in Washington was a longtime escrow officer named Judy Caton who lived in Snohomish County. Caton had worked for about 15 years in the escrow industry and had noticed that tracking reconveyances was a “very low priority” for the companies.
Caton said she would often help escrow companies clear out backlogged files and make sure the reconveyances for each closing had been recorded with the county auditor.
“It dawned on me one day that I could help many more escrow companies with their situation by giving them a resource where they could off-load the work,” Caton said by email.
In 1997, Caton started a company called Reconveyance Services, Inc (RSI).
“The business was launched and after word-of-mouth kicked in, it took on a life of its own and we grew, and grew, and grew,” Caton recalled. By 2000, Caton said, she had 75 employees and operations in seven states.
This success continued until 2003 when Caton’s reconveyance tracking empire imploded.
Caton said she was the victim of embezzlement by a trusted employee and family member. She ended up declaring personal bankruptcy and RSI closed in 2008.
“We would still be in operation today, but I made a lethal error in judgment and I lost everything,” Caton said.
Caton said in her experience, 60 percent of reconveyances go through “without a hitch,” 20 percent “need a little nudge,” and the remaining 20 percent “will take up all your time.”
But it was impossible to know in advance which reconveyances would become the “sticky” ones.
In later court filings, RSI was accused of not issuing refunds to homeowners when a reconveyance was completed without complication.
Caton denied this. “I could always produce reports that evidenced the refunds issued,” she said.
‘Post Closing’ Is Born
While Caton’s business ultimately didn’t survive, she said her early success spawned “copycats.” One of them, according to Caton, was Amy Cobine, a former RSI employee.
In a 2015 interview, Cobine said she left RSI because she believed that Caton engaged in unethical business practices.
After RSI, Cobine went to work for a title company in Oregon and then started her own consulting firm offering reconveyance tracking services.
It was during this time that she met Kelley.
Cobine had also previously worked at Title Temps, the company Kelley first worked for when he moved to Washington. Cobine said she had remained in touch with the company’s CEO and at some point he suggested she meet Kelley.
Cobine said she and Kelley first met briefly at a conference and then had a follow-up meeting where they hit it off.
“He liked my company idea and what I was already doing,” Cobine said. “I just wanted to expand and I needed help.”
According to Cobine, she and Kelley agreed to adopt a new business model.
Instead of collecting the entire $100 to $150 customer reconveyance fee from the title or escrow company, Cobine said their plan was to charge a small tracking fee and have the client company hold the rest — or not even collect it all.
“I didn’t want to hold money in trust. I didn’t want to do refunds,” said Cobine in a 2012 interview.
Cobine provided a three-page marketing pitch outlining this business model that she said Kelley had written and that was going to be given to potential clients.
The marketing pitch read in part:
“With some of our competitors, you simply turn over the trust accounts to them and wait. It is difficult to ascertain what is happening through status sheets, and in most cases the trust accounts dwindle to zero as administrative fees are charged.”
The marketing document advertised a $15 service fee and specifically highlighted the lack of other fees:
“There are no other fees associated with our service even if we make a dozen phone calls and send 30 letters to a lender — it does happen! No postage fees. No follow-up phone fees. Once you pay the $15, we are responsible for getting the job done.”
Cobine said she and Kelley quickly grew close.
“Truth is, we were kind of best friends,” Cobine said in 2012. “We spent a lot of time together.”
But in 2002, Caton of RSI sued Cobine in Oregon over a non-compete clause. With that legal cloud hanging over her, Cobine said she and Kelley decided not to formally partner. “Troy and I both backed off,” Cobine said in 2015. She later settled the lawsuit.
Instead, Cobine said she and Kelley decided that he would pursue contracts with title companies in Washington. Cobine and her company, Cobine Consulting, would continue working in Oregon, Idaho, Nevada and Colorado. (Kelley ultimately expanded his operations to six counties in Oregon.)
“We were friendly companies to each other,” Cobine said.
Both Cobine and Kelley did business as the Post Closing Department, although Cobine capitalized the T in “the.” That name was meant to make consumers believe they were dealing with a department within the title company, when it fact it was an outside vendor.
In a 2010 deposition, Kelley offered a similar version of events.
“We were considering [partnering] and we were going to, but no, the plans never gelled,” Kelley said. He described Cobine as a competitor with whom he did business.
But an archived version of Kelley’s company website shows that from 2002 to February 2004, Cobine was listed as a division president responsible for overseeing “post closing services” in seven states.
Cobine said she can’t explain why her name was on Kelley’s website. “I didn’t know it and I didn’t see it at the time,” she said.
Their friendship didn’t last. In the summer of 2004, Cobine moved to Las Vegas and within months her relationship with Kelley had soured.
“We just kind of had a falling out at that point,” Cobine said.
Cobine said she asked Kelley to stop using the logo they shared for the Post Closing Department, but he refused. The logo showed a person running with a briefcase in one hand and an Olympic-type torch in the other, as if racing to close an important deal.
“I did ask him to stop using the logo; it was used by me first and he said no,” Cobine said.
Kelley claimed in 2010 that Cobine took the logo from him. “I had a logo and I guess she liked the logo, and I didn’t complain,” Kelley said in a deposition.
He also accused Cobine of trying to steal his clients. “Wherever I had a client … she was always trying to pick up the clients and spread rumors,” he said.
Cobine rejected this. “I was never trying to take his clients. In fact, the opposite was true,” she said. “I didn’t go after any clients in Washington … I had plenty of clients elsewhere.”
As for the logo and who created it, Cobine pointed out the figure is a woman in a skirt.
In a testy 2005 email exchange, Cobine wrote to make sure Kelley had stopped doing business as the Post Closing Department.
Kelley, in turn, complained to Cobine that a just-published business directory made it look like they were in business together. “We do not work for the same company; please have this entry removed,” Kelley wrote.
Cobine ultimately moved to Utah, where she continued to work in the reconveyance tracking business.
In 2012, after questions about Kelley’s business practices made headlines, Cobine observed that “he ended up doing exactly what the people we partnered to take out of business were doing.” (Kelley apparently did adopt the no-upfront-fee business model in Oregon, however.)
Earlier this year, Cobine was named in a lawsuit filed in Multnomah County, Oregon, by Pacific Realty Advisors LLC. The lawsuit accused Reconveyance, Inc., a now dissolved company, of collecting $18,420 in upfront reconveyance fees — or $100 per reconveyance — and then failing to provide Pacific Realty “with any report or confirmation” that the reconveyances were recorded.
Cobine said by text message earlier this year that she expected the lawsuit to be dropped once the plaintiff was provided with documentation proving the work was done. However, in September, the plaintiffs obtained a default judgment in the case.
The reconveyance tracking business in Washington was a largely unregulated niche that existed in a regulatory no-man’s land between the state’s Office of Insurance Commissioner, which policed title companies, and Department of Financial Institutions, which oversaw escrow companies.
Eventually these tracking companies came onto the radar of regulators at the Department of Financial Institutions.
“We started seeing more and more of our escrow licensees using these third parties and we said, ‘Wow, they’re completely unregulated,’” said Charles Clark, the department’s director of consumer services. “They’re getting a $150 fee; what is it that’s actually going on here?”
But it wasn’t until September 2008 — more than a decade after the first reconveyance tracking firms had launched in Washington — that the department issued formal guidelines to the escrow industry.
The new policy said reconveyance tracking fees must be reasonable. It also laid out what documentation an escrow officer must retain when using a third-party tracking firm.
Finally, the policy statement instructed that homeowners receive a complete refund of the fee — minus tracking fees — if the lender completed the reconveyance and no services were provided by the vendor.
This policy, however, only applied to escrow companies regulated by the Department of Financial Institutions. Washington’s Office of the Insurance Commissioner did not issue similar guidance to the title companies it regulated.
By the time the policy was issued, Kelley was no longer doing business in Washington.
To help him run the Post Closing Department and manage the information technology aspects of the business, Kelley recruited Jason Jerue, the former First American employee who had also sued for wrongful termination and whose case had been consolidated with Kelley’s.
Jerue’s wife was also put on the payroll but in a later deposition testified that she did very little work for the company. She said the money she was paid — roughly $1,200 a month — was mostly reimbursement for her husband’s health and retirement benefits.
Soon Post Closing had several other employees who managed the files and tracked reconveyances. As with any business, there were challenges. Kelley confirmed in a 2010 deposition that he had to fire an employee after she was caught embezzling from a client, First American Title of Skagit County.
“She stole checks as they came in to the company,” Kelley said.
When the embezzlement was discovered in 2004, the president of First American Skagit, Gale Hickok, said he asked Kelley to repay the more than $30,000 that had been stolen.
“We requested that he send the money back, but that never happened,” Hickok said by phone. Hickock said he didn’t pursue the matter in civil court because the loss was embarrassing to his company.
“Our reputation was more important than the money,” he said.
All these years later, Hickok still holds a grudge against Kelley.
“I have no respect for the man,” he said. He said he considered Kelley’s indictment earlier this year “karma.”
The website for Kelley’s company United National listed several board members including a California lawyer named Theodore Saibeni and a Columbia Bank manager named Calvin Pearson. Both men said they had no involvement with the company.
“I never gave permission for my name to be used in any capacity,” Saibeni said by email.
Pearson wrote, “I have never been a board participant in the activities of United National.”
Kelley also included his wife, Diane Kelley, on the list of board members, using her maiden name, Duffrin. In a later deposition, she said she didn’t use Duffrin after getting married and denied any role in United National’s operations.
“My husband put me on the board of directors, but I never participated in the business,” she testified.
In 2012, Kelley acknowledged that his wife had “nothing to do with the business” but did not say why he listed her as a board member.
This wasn’t the only time Kelley appeared to use people’s names without their knowledge for his business purposes.
When Kelley registered United National in Oregon in August of 2002, he listed a Klamath Falls attorney named Neal Buchanan as the company’s registered agent. But Buchanan said he had no record that Kelley or United National had ever been a client.
“I’m something of a dinosaur. I still use three-by-five cards,” Buchanan said. “And I did not come across any indication that I either have a closed file or an open file on either [Troy Kelley or United National].”
The only connection Buchanan could find to Kelley was that his former legal assistant was the former mother-in-law of Amy Cobine.
Mysterious Joint Ventures
In addition to his reconveyance business, Kelley also said he formed a series of joint ventures.
In the real estate services industry, joint ventures are one way to avoid running afoul of the 1974 Real Estate Settlement Procedures Act, a federal law that bans kickbacks, referral fees and fee splitting related to real estate settlement services.
One of Kelley’s first business ventures was with a company called Horizon Mortgage run by twin brothers named Scott and Douglas Huntington.
In a 2010 deposition, Kelley said the Huntington brothers owned a small non-equity or profit ownership of a division of United National. He also said that he shared office space with their company between 2002 and 2008 at two locations in Tacoma.
Separately, Kelley said he tracked reconveyances for an escrow company co-owned by the Huntingtons and an escrow officer named Lennie Mueller. That company was called Avista Escrow.
In 2008, Avista ran afoul of the Washington Department of Financial Institutions for “failure to maintain sufficient funds in trust,” among other alleged violations. State regulators ultimately took possession of Avista and later revoked its license to operate. Mueller went to prison in 2012 for theft of escrow funds.
In his 2010 deposition, Kelley was asked about his connection to Mueller.
“Did you ever do any business with Lennie Mueller?” the lawyer asked.
“Lennie Mueller was the escrow officer in charge of Avista, so yes,” Kelley replied.
In 2011, the Department of Financial Institutions charged Horizon Mortgage and Douglas Huntington with unlicensed activity. The statement of charges also alleged Huntington owed more than $500,000 in unpaid taxes. Huntington ultimately agreed to pay a fine and stay out of the state-regulated mortgage broker industry for two years.
Scott Huntington was not a focus of the state’s action. Neither Huntington brother would comment for this story, nor would Mueller.
The purpose of Kelley’s joint ventures remains murky. In a 2010 deposition, he said it involved providing services to title companies like “prescreening of new clients and new loans,” but he did not elaborate.
As Kelley established his business, he got involved with the Escrow Association of Washington. In 2005, he became president of the organization, a role he held for one year.
Kelley also started exploring a run for the Washington statehouse in the 28th District in Pierce County.
Kelley had never before held elected office, but he had the resumé to win in the 28th District, a swing district, which at the time ran from Tacoma south to Fort Lewis, now Joint Base Lewis-McChord.
One day, in late 2005, Kelley asked Don and Tami Green, a powerhouse Democrat couple, for a meeting to discuss a possible run for an open statehouse seat. Don Green was the chair of the 28th District Democrats, and Tami Green held the other House seat in the district.
“He came over to our house and we chatted for probably an hour and a half,” Tami Green said. “He had a great profile for our district.”
Kelley was still a military lawyer with the Army Reserve and he was a small businessman. He was also a family man — he and Diane Kelley now had two young sons.
“He was a very attractive candidate,” Don Green said.
The Greens had a vested interest in recruiting a more conservative Democrat to run for the other House seat in the 28th District. Tami Green, a psychiatric nurse with ties to organized labor, had barely won her race in 2004. The 2006 mid-term election would tend to favor Republicans as the party out of power.
“We needed to field a strong House candidate so I didn’t get the heck beat out of me,” Tami Green said.
The Greens said Kelley came across as likeable and motivated.
“I didn’t have any kind of red flags whatsoever,” said Don Green. He said another potential Democratic candidate, a woman, stepped out of the way so Kelley could run unopposed in the primary.
That candidate was Debi Srail, a high school teacher.
“I was already in campaign mode when he just appeared out of nowhere,” Srail said in an interview. She had previously run twice for the seat and thought she had a good chance of winning in 2006 since the Republican incumbent wasn’t running again.
But Srail said she didn’t have the money for a primary fight. Kelley “literally said he could finance his own campaign, so I really didn’t have a choice,” she said.
Srail bowed out of the race. Soon Kelley got in touch with John Wyble, a veteran Democratic consultant in Seattle.
“He kinda showed up at our door,” Wyble said.
Kelley made an immediate impression. “I thought he was a very by-the book kind of guy, actually,” said Wyble. Kelley soon proved himself to be a hard worker and a disciplined campaigner.
Kelley also proved willing to self-fund at least part of his campaign. He contributed $58,350 of the $252,907 he raised for that race, according to the Public Disclosure Commission. In November 2006, Kelley bested his Republican challenger in the general election.
In January 2007, Kelley was sworn in as a state representative. He was named vice chair of the Insurance, Financial Services and Consumer Protection Committee — with jurisdiction over the real estate industry, including regulation of mortgage brokers, escrow and title insurance companies.
Kelley’s future as state auditor might have been preordained that June. That’s when he was appointed to the Joint Legislative Audit and Review Committee responsible for overseeing audits and review of state government operations. Kelley would eventually become chair of that committee.
Asked in 2012 if his role on the Financial Services Committee presented a conflict of interest because of his personal business dealings, Kelley acknowledged, “Yes, there’s some indirect or even direct overlap there.” But he said he had checked with House legal counsel to make sure it wasn’t a problem.
A lawyer for the Washington House could not find documentation that Kelley sought legal counsel regarding potential conflicts of interest. Kelley could have received verbal guidance, however.
If there was one issue Kelley was especially passionate about, it was payday lending. This was likely because of his military background. In 2007, Congress placed restrictions on payday loans to service members because of concerns about predatory lending.
In 2009, the Washington Legislature decided to crack down on the payday lending industry. Kelley played a key role in negotiating the details of that bill, according to state Representative Steve Kirby, D-Tacoma, chair of what’s now called the Business and Financial Services Committee.
As a part of that effort, Kelley conducted his own field research. “He would go around to payday lenders and apply for loans just to see what happened,” Kirby said.
The result was a new law that restricted the size and number of payday loans a consumer could take out, among other new rules governing the industry.
Kirby recalled that Kelley’s focus throughout the negotiations was consumer protection. “That was always his mindset, to go after the bad guy,” Kirby said.
That Kelley now stands accused of anti-consumer practices in his own business confounds Kirby.
“It doesn’t add up,” Kirby said. As if searching for an explanation, he added, “Back then maybe that’s just how business was done.”
While in the Legislature, Kelley also introduced bills related to veterans’ issues, public safety and campaign finance disclosure.
‘Wound Really, Really Tight’
To his fellow lawmakers, Kelley appeared smart and strait-laced, if a bit rigid.
“There’s no question Troy was wound really, really tight,” recalled longtime Democratic state Representative Chris Hurst, D-Enumclaw.
In the Legislature, Kelley aligned with a group of moderate-to-conservative Democrats that included Hurst.
“I knew him as well as anybody,” Hurst said. “Troy was a very good legislator.”
Hurst said that what set Kelley apart was his lawyerly attention to detail and his military-like ability to strategize.
“It’s almost scary the amount of information he’s able to gather effectively and strategically use,” Hurst said.
There was something else that set Kelley apart too — he didn’t drink. “Troy just kind of seemed like a guy without vices,” Hurst said.
Another character trait was frugality. Hurst discovered this when he and his wife overlapped with Kelley and his family on vacation in Hawaii one year. Hurst was surprised when he saw the Kelleys’ accommodations.
“It was an old 1960s-era concrete blocks kind of thing,” Hurst said. “He was staying in a place I wouldn’t have stayed in, and I’m not rich.”
Hurst, a former police commander, said he’s still struggling to reconcile the man he knew in the Legislature with the allegations against him contained in the federal indictment.
“I never saw anything that caused me to think that, you know, he was doing anything wrong,” Hurst said. He is among those who believe Kelley should resign his position as state auditor.
“Honestly it kind of breaks my heart. It doesn’t seem like the same person to me,” he said. “I find it very distressing. I’m saddened for his family, his wife and kids.”
The 2008 legislative session was a short 60-day affair. It convened on January 14 and was over by March 13.
This was the calm before state revenues started to plunge during the Great Recession. It was also an election year, and Kelley, like all House members, was up for re-election. That would be the least of his worries: The housing market was showing signs of trouble.
In March, Fidelity Title canceled its contract with the Post Closing Department. As a result, Kelley laid off a longtime employee named Dee Lamb. She needed the job and asked him if she could work on some of his other accounts.
“I do not have anything for you to do right now, plain and simple,” he wrote to her, adding that he was running a business, not a government program.
“It was like slapping me in the face,” Lamb said.
A few weeks passed. Then, Lamb said, Kelley and his associate Jason Jerue came to her Everett home to delete work-related files off her computer. She said they told her they were shutting down the business.
(There is discrepancy about whether Jerue and Kelley were both at Lamb’s house that day. Lamb said they were; Kelley indicated in a court filing that only he showed up.)
Kelley said he picked up the files because it would have been irresponsible to leave records with a former employee. “There is nothing suspicious about this,” he said in a court filing.
The timing of the visit was significant. Dee Lamb recalled Kelley and Jerue came to her home in late May.
On May 14, the Hagens Berman law firm in Seattle had filed a series of class-action lawsuits in federal court against several of the nation’s largest title and escrow companies.
Hagens Berman has played a role in some of the nation’s most high-profile class-action lawsuits, including against Enron and, recently, Volkswagen.
The lawsuits alleged that Fidelity National, First American, Old Republic and Chicago Title violated federal and state consumer protection laws by “charging consumers duplicate reconveyance fees.”
Kelley wasn’t a named defendant in the lawsuits, but Old Republic was his client and Fidelity had been a client until just two months before.
The lawsuits were filed on behalf of homeowners who had paid reconveyance tracking fees to their lenders and then were charged second, larger reconveyance fees of $100 to $150 by their escrow companies at closing.
“Defendants engage in the practice of collecting illegal, unearned and deceptively disclosed fees across hundreds of thousands of transactions and have reaped ill-gotten gains in excess of tens of millions of dollars,” read the class-action lawsuit against Old Republic.
The lawsuits sought damages for homeowners who had paid reconveyance fees at closing but didn’t receive refunds when the fees weren’t required to process reconveyances. The lawsuits said the fees were rarely needed and, therefore, most customers should have been refunded.
At the time the lawsuits were filed, the lawyers for Hagens Berman had not yet figured out that the title and escrow companies often outsourced recovenyance tracking to firms like Kelley’s. They soon would.
A Sudden Refund
Over the years, Kelley had amassed nearly $3.8 million in consumer-paid reconveyance tracking fees in three different business bank accounts — one for each of his major clients: Fidelity, Stewart and Old Republic title companies.
(The federal indictment focuses on just $1.46 million of those fees, in part because of the statute of limitations.)
Within a month of the lawsuits being filed, Kelley initiated actions that would raise questions for years to come. He shuttered the Post Closing Department in Washington state and moved most of the nearly $3.8 million to an account that he eventually linked to a trust in Belize, a known offshore haven.
But first, Kelley allegedly sent the lead plaintiff in the lawsuit against Fidelity National Title a refund check.
According to his federal indictment, two days after the class-action lawsuits were filed, Kelley withdrew $300 from a Bank of America ATM near his Tacoma home.
From there, the feds say Kelley went to a nearby Washington Mutual branch where he purchased a $250 cashier’s check made out to Frank Cornelius, the lead plaintiff. The indictment doesn’t name Cornelius, but uses his initials FC. Kelley then allegedly mailed the check to Cornelius along with a letter that claimed this was the second attempt to refund him:
“A review of our records shows that you did not cash our check of January 7, 2008. The letter mailed to you was not returned by the post office, and you have not contacted Fidelity National Title or The Post Closing Department since the time your escrow closed. That check is now stale dated and you should not cash it. We are enclosing an official bank check to zero out your account balance, and mailing it to you with proof of mailing.”
The letter said Cornelius was receiving a $250 refund because Fidelity had collected $280 from him for two, separate loan payoff reconveyances. Because his lender had “secured the reconveyance,” the letter continued, Cornelius was eligible for a refund from Kelley’s company, minus $15 in tracking fees for each loan payoff.
Enclosed with the refund check and the letter was a copy of the original letter the Post Closing Department had supposedly sent to Cornelius on January 7, 2008. But when federal investigators examined that letter, they were suspicious.
According to the indictment, Kelley “fraudulently placed a slightly-incorrect address in the letter’s heading” to create a “plausible explanation” for why the letter had never arrived.
‘What Is Going On?’
On the morning on May 19, 2008, Kelley’s former business associate Amy Cobine wrote him an email with the subject line, “what is going on!” It continued:
“So I got an email on Friday about a class-action out of WA that includes Old Republic and Fidelity National Title. What is going on? Does it include your clients and if so, should I worry about the PCD name? Do you need help with anything? Email me or call me to discuss.”
According to Cobine, Kelley replied that the class-action lawsuits didn’t involve his reconveyance files. Two months later, Cobine sent him another email with an almost identical subject line.
“Troy, I really need to know what is going on with your company and why I am getting calls from an FNT [Fidelity National Title] attorney. I thought you had said the class-action suits did not have any of your files in them. And why is your website down and why does your voice mail changed? Finding this information out today was a shock.”
Kelley and Cobine had both done business as the Post Closing Department and Cobine stated in her email that she did “not want the PCD name dragged through the mud.”
“If you need help getting caught up and getting refunds out, you just need to say the word, we can work something out,” Cobine wrote.
Minutes later, Cobine wrote Kelley again. This time she used his legislative email address. This email had the subject line: “One more question.”
She wrote, “Troy, do you still have the money you collected from clients like FNT? And if asked or if that money is demanded back, do you plan to return it?”
In a 2010 deposition, Kelley testified that he didn’t recall getting either of Cobine’s emails and said he didn’t think he had responded. He added that Cobine had posted something slanderous about him on her website that “has since been taken down.”
The site had read in part:
“It was recently brought to my attention that there still continues to be some confusion between my company The Post Closing Department (PCD) and United National’s Post Closing Department, a company known to be owned or operated by Troy X. Kelley. I would like to make it clear to all that our company severed ties with United National and has not had any affiliation with United National’s Post Closing Department for several years. We have made repeated verbal and written attempts asking United National to remove our logo from their website, documents, forms, and marketing materials since 2004 to no avail.”
The letter went on to say that the class-action lawsuits in Washington had nothing to do with their company and that they only collected a $15 to $20 flat fee and did not hold fees in trust for their clients.
Pushing $$ Around
A month after the class-action lawsuits were filed, in June 2008, Kelley did something else that would raise suspicions. According to the indictment, he began a “series of convoluted wire transfers” to consolidate and move the nearly $3.8 million in reconveyance fees he was holding in three business accounts.
A few months later, on September 23, 2008, Kelley’s records were subpoenaed in connection with the class-action lawsuits. That same day, according to the indictment, Kelley filed paperwork to link the Berkeley United Vanguard account holding the $3.6 million to an account at Atlantic International Bank in Belize, set up in the name of Wellington Trust.
He didn’t actually move the money offshore, but now he could, with essentially just the press of a button.
Why would Kelley go to this trouble? Federal prosecutors believe that by moving the money from account to account, Kelley was trying to “conceal” the funds from the plaintiffs in the class-action lawsuit.
Two years later, Kelley said under oath that he executed these bank transfers on the advice of a California estate-planning attorney named Alan Eber who advertised himself as a “pioneer in the asset protection field.”
Kelley offered reporters a different explanation during his 2012 campaign for state auditor. He said the transfers were related to a restructuring of his company.
“The money went to a Nevada bank because that’s where the holding company was, and then we recapitalized the companies and went out and did business,” he said.
Eber did not respond to a request for comment.
Stewart Title Fire
Around 9 p.m. on June 25, 2008, smoke began billowing out of Stewart Title’s office in downtown Everett. Soon the building was fully involved. There was nothing firefighters could do to save it.
The cause of the three-alarm fire was never determined, but investigators found no evidence of arson.
“Nothing stands out in this fire as suspicious,” said Richard Robinson, the Everett fire marshal.
The day after the fire, Houston-based Stewart Title issued a statement that said, in part, “We experienced no loss of data and our staff is able to access all files, applications, records and databases required to keep the work flow moving.”
Stewart Title had been one of Kelley’s clients and the Post Closing Department maintained office space in an adjoining building. That building did not burn in the fire, but it did sustain minor smoke damage, according to the fire marshal.
Kelley would later claim under oath that his business records were destroyed in the fire.
In fact, the fire was the reason Kelley’s attorneys gave in the fall of 2008 for why they couldn’t produce all of the records the Hagens Berman firm had subpoenaed from Kelley in the class-action lawsuits.
In a letter dated October 1, 2008, Kelley’s attorney, Thomas Girardi of Los Angeles, wrote, “Most of the records that Troy has were in fact destroyed” in the Stewart Title fire.
On October 6, a lawyer for Hagens Berman wrote back. “Why would Mr. Kelley, whose business and residence are in Tacoma have records kept at this office over 50 miles away?”
Later, the question would arise whether, at the time of the fire, Kelley even had business records in the Stewart Title building.
On September 25, 2008, the federal government seized Seattle-based Washington Mutual. The demise of WaMu would go down as the largest bank failure in U.S. history and another spectacular example of the havoc wrought by the collapse of the housing market.
That November, state Rep. Kelley cruised to re-election with 60 percent of the vote over his Republican challenger. Voters in the 28th Legislative District were blissfully unaware of his legal battle or business troubles.
On November 13, Kelley’s attorneys turned over to Hagens Berman some of the subpoenaed documents. But in response to 13 of the records requests, the same response was given:
“A fire destroyed the Everett Stewart Title Building, located at 2721 Wetmore Ave., Everett, Washington. All documents falling within the scope of the request were destroyed in that fire, which was the only location where United National transacted business relevant to the allegations contained in the complaint.”
The attorneys at Hagens Berman weren’t the first to be frustrated in their efforts to obtain records from Kelley — the lawyers for First American in California had experienced their own frustration — nor would they be the last.
Two of the plaintiffs in the lawsuit against Old Republic were Cindy and Koos Jager who had sold their home in Seattle’s Wallingford neighborhood in April 2008. The Jagers had a primary mortgage and a home equity line of credit.
At closing, the Jagers paid $300 in reconveyance fees to the Post Closing Department — $150 to clear each of the two bank liens on their Wallingford property. In court documents, the Jagers said they asked their escrow agent about the fees and were told “that it was simply part of the process of selling their house.”
The Jagers joined the class-action lawsuit after Cindy saw a report about it on TV. She called the Hagens Berman law firm and spoke with one of the attorneys who explained the basis for the case.
“I was just kind of angry,” Cindy Jager said recently.
By now the lawyers at Hagens Berman had figured out who was behind the Post Closing Department and they were stunned.
“Oh my God, this guy’s a legislator,” attorney Tom Loeser recalled thinking.
In an amended version of the lawsuit, Kelley was called out by name and identified as a state lawmaker. The lawyers for Hagens Berman even raised the specter of a conflict of interest between Kelley’s duties as a legislator and his private business.
“Post Closing Department — whose name was designed to make it appear that it was not a third party but rather a ‘department’ of escrow agents — was owned and operated by Troy Kelley,” the complaint said. “Mr. Kelley was elected to the Legislature, where his duties include oversight of the title insurance industry.”
On the question of whether Kelley’s company was obligated to refund homeowners, the complaint said the contract between Post Closing and Old Republic “nominally stated” that Post Closing would issue refunds. But the complaint said Kelley never provided Old Republic proof he was doing so and Old Republic didn’t press the issue until 2008.
Old Republic in Washington had contracted with Kelley’s Post Closing Department beginning in 2006. Prior to that, the title company had contracted with RSI.
In a response filed with the court, Old Republic confirmed that in early 2008 it began requesting refund reports from the Post Closing Department but said that those reports were not received.
On March 3, 2009, Old Republic went on the offensive. It filed a third-party complaint against Kelley, his wife and RSI, alleging breach of contract. The complaint said that RSI and Post Closing, not Old Republic, were responsible for any loss of reconveyance fees suffered by the plaintiffs in the class-action lawsuits.
Kelley’s wife was named in the lawsuit because her name appeared on many of the official documents relating to the businesses. She later testified in a deposition that she signed paperwork “because my husband asked me to” and that she “did not participate in the business.”
The lawyer who wrote the third-party complaint was Scott A. Smith, a partner in the Seattle law firm Riddell Williams. He and his client Old Republic would become an unyielding thorn in Kelley’s side in the years to come.
On May 8, 2009, Kelley’s lawyers fired back in a motion, calling the allegations against Kelley “baseless” and “entirely unwarranted.” They also maintained that Kelley had no obligation to homeowners to ensure they received refunds.
Kelley’s lawyers said there was no explicit language in the contract between United National — Kelley’s company — and Old Republic requiring that refunds be issued.
The lawyers also contested the suggestion that Kelley’s company was only eligible to earn a $20 tracking fee.
“Plaintiffs clearly have no concept of United National’s business operations, or the number of possible services that are performed in the process of tracking or fixing a reconveyance that is not taking place correctly or promptly,” the lawyers wrote.
Those services, they said, could include writing letters, conducting title searches, overnighting documents “to make sure that the reconveyance stays on track.”
The lawyers even invoked the Jagers’ case, noting that their reconveyances weren’t filed for two months after their sale closed.
“The reason for United National’s existence,” the lawyers concluded, “was to deal with the potential headaches and delays associated with completing the reconveyance process, as in the Jager case.”
This argument — that refunds weren’t necessarily owed and that fees beyond the $20 tracking fee could be legitimately earned — would form the basis of Kelley’s defense in the coming years as he faced civil litigation, pointed questions from reporters and, ultimately, his federal indictment.
Class-Action Lawsuits Dismissed
On July 9, 2009, the wind went out of the sails of the class-action lawsuits filed by Hagens Berman. That day, federal Judge Benjamin Settle in Tacoma sided with Old Republic in its bid to have the lawsuit dismissed.
In his 12-page ruling, Settle rejected the idea that the plaintiffs were victims of a fraud. He noted the reconveyance fees were “explicitly” disclosed on the closing statement and that the homeowners had agreed to pay them.
Settle also rejected that after collecting the fees, Old Republic was contractually obligated to see the reconveyance through.
“Plaintiffs have failed to show any specific provision of the contract that requires [Old Republic] to either perform or ensure the reconveyances,” Settle wrote.
The four class-action lawsuits had been assigned to different judges. But Settle’s ruling represented a major setback for the plaintiffs. “It became pretty clear at that point where things were headed,” attorney Tyler Weaver of Hagens Berman said.
In the end, Hagens Berman agreed to dismiss the case against Old Republic.
Over the next two years, the other cases were also dismissed.
In a 2012 news conference, Kelley noted that Hagens Berman was unable to convince a judge to allow the lawsuits to go forward as a class action. “These actions have not gone anywhere,” he noted.
Kelley also took aim at class-action lawyers in general.
“The most famous class-action attorney is Bill Lerach. You know where he is? He’s disbarred,” Kelley said, referring to a high-profile California attorney who was sentenced in 2008 to two years in prison for illegal kickbacks to a plaintiff in a class-action case.
The Hagens Berman lawyers said Kelley’s focus on the dismissal of their lawsuits was a red herring.
“No lawyer could seriously argue that the orders dismissing these cases in any way approved of what Troy Kelley did,” Weaver wrote in an email. “At most, they simply held that the escrow agents couldn’t be held liable for what [Kelley] did because the escrow agents didn’t have a duty to monitor what he did with the money.”
Asked why they didn’t go after Kelley directly, the lawyers for Hagens Berman said there was no “clear cause of action” against him because no contract existed between Kelley and the escrow company customers.
Old Republic did have a contract with Kelley, however. It also had thousands of customers who hadn’t gotten refunds. On December 10, 2009, Old Republic renewed its litigation against Kelley — filing a fresh lawsuit against him in King County Superior Court.
“Kelley materially breached [his agreement with Old Republic Title] by, among other things, failing to fulfill his obligation to refund all unused portions of reconveyance fees,” the lawsuit read.
The lawsuit went on to raise an issue that Kelley’s former associate Amy Cobine had said Kelley had mastered: the corporate veil.
Since Kelley had shut down his business in Washington, the lawsuit argued that “the court should allow Old Republic Title to ‘pierce the corporate veil’ and hold Troy X. Kelley and his marital community personally liable for all refunds owed in transactions.”
The lawsuit, which was later moved to federal court, sought triple damages and restitution for Old Republic’s customers.
Kelley later said he believed Old Republic pursued litigation against him, in part, because one of the company’s executives had “personal animosity” toward him.
In 2010, Kelley was once again up for re-election in the conservative-leaning and heavily military 28th Legislative District. This time he faced a more formidable opponent — Republican Steve O’Ban, a constitutional lawyer active in his community with a son at West Point.
But O’Ban wasn’t aware of Kelley’s legal troubles. “All I can say is we missed it. It was not on our radar screen,” O’Ban said in an interview.
Kelley had the advantage of incumbency and was a highly organized candidate, according to his former House colleague Chris Hurst. “Troy was a prolific campaigner, he didn’t like to lose anything,” said Hurst, adding that Kelley was a “killer, good door-beller” — a reference to candidates who walk their district knocking on the doors of voters.
Kelley was not out doorbelling on the morning of Monday, August 2, 2010, however, even though the primary election was just days away.
Instead, Kelley sat down in front of a video camera in the downtown Seattle offices of the Riddell Williams law firm. He wore a button-down Oxford shirt, no tie. He raised his right hand and took an oath to tell the truth.
Kelley was about to be deposed by Old Republic attorney Scott Smith. This wasn’t a new experience for Kelley. He estimated to Smith he’d been through a dozen depositions in his life, mostly because of his work as an in-house lawyer at First American.
Over the next eight and a half hours Smith questioned almost every aspect of Kelley’s business and financial life, down to the business expense he claimed for his wife’s academic journal.
Smith began the deposition gently enough. He asked for Kelley’s full name, his home address, where he’d gone to school and where he’d worked.
Kelley testified about moving to Washington from California, starting his first business and entering into the first of several joint ventures. But he explained that his primary business was document tracking — specifically reconveyance tracking.
“We track the payoff of a document, we track the reconveyance, we track other items that may go along with it to make sure that the debt and the lien are extinguished,” Kelley said.
Kelley testified that he was paid “various different fees” for this service. Pressed about this, Kelley was vague. “The fees were pretty much different in each arrangement, and the clients set the fees,” he said.
Asked about Old Republic’s fee, Kelley said it changed over time, but that it was between $120 and $160 per reconveyance file. Kelley was then asked what portion of that was Post Closing Department’s fee for services. Kelley’s answer was that “PCD has several portions of that fee.”
This would become a central point of contention in the case. Old Republic claimed that Kelley’s fee was a flat $20 per reconveyance. But Kelley argued that was just the set-up or tracking fee. He maintained that Post Closing could and did charge additional fees in the $5 to $25 range to do things like contact a lender, send a letter, or check a county auditor website to see if a reconveyance had recorded.
“There was a charge every time we checked the public website,” Kelley said.
Without those additional fees, Kelley said, the reconveyance tracking business wouldn’t be profitable.
Kelley said clients like Old Republic knew that he charged these fees and wanted him to actively “work the files” even though the fees weren’t enumerated in Post Closing’s agreements with them.
The customers asked that the fees not be reflected in the agreements, Kelley said.
“Why is that?” Smith asked.
“I assume for liability purposes, but I shouldn’t speculate,” Kelley replied.
Kelley said the title companies colluded to fix the prices for these services at land title association meetings.
“They get together and set the prices industry wide,” he said. “I’m not commenting on whether that practice is legal or not, but that’s what happens.”
George Peters, the executive director of the Washington Land Title Association, refuted Kelley’s claim.
“I can say that I’ve been to almost all the meetings for the last many years and that’s never happened,” Peters said. He said he had never seen Kelley at an association meeting.
Old Republic would later introduce into the court record an email it said was from Kelley to an executive at Old Republic dated April 13, 2006, that read in part:
“I have priced the tracking and refund service at $20 per [Trust Deed/Reconveyance] … If either of us believes pricing is out of whack after six months, I think we should revisit the issue to make sure that both of us are comfortable.”
Later in the deposition, Smith produced a copy of a spreadsheet prepared by the Post Closing Department showing the reconveyances it handled for Old Republic. The spreadsheet included a column for payments to trustees, but it did not have columns for the extra fees and services Kelley said the Post Closing Department charged.
“It’s possible the spreadsheet is folded down, which we did all the time, where you just take the cells and columns and shrink them so it makes a nicer fit on a piece of paper,” Kelley said.
Asked who could corroborate his testimony about these ancillary fees, Kelley mentioned Dee Lamb and another former employee named Amber Murray.
But when Smith deposed Lamb and Murray in 2010, they appeared to contradict Kelley’s claim that Post Closing charged ancillary fees.
(Kelley in a later court filing said Lamb and Murray were not in a position to know the details of how his company billed its clients.)
Asked if he was obligated under his agreement with Old Republic to issue customer refunds, Kelley said it depended.
“If there are excess fees left over, yes, I would agree,” he said. “But if we had additional services where we charged for additional fees for work and for fees earned, then I would think that there would be no refund.”
That answer didn’t satisfy Smith. He tried several more times to get Kelley to agree that if there were funds left over after a reconveyance was completed, then a refund was owed.
“If there’s excess fees where we did not earn our fees, then we would refund the money,” Kelley repeated. “That’s a common practice in the industry. I don’t know if this contract binds us to it.”
Kelley added that if what he was doing was such a problem, “I wouldn’t have clients now. They would all be suing me. Those things aren’t happening.”
Sometimes, Kelley acknowledged, a lender would process a reconveyance smoothly and quickly and no additional fees were required. “But that’s a very small percent, extremely small percent that the transactions went that easily,” Kelley told Smith.
If a reconveyance didn’t post within a month, Kelley said Post Closing would start what he termed a “corrective action” with the lenders — that’s when the additional fees would add up.
In a 2011 court filing, Stewart Title, which had been sued for how it had handled reconveyances, took a similar position. It argued that tracking reconveyances could involve “sending numerous letters and making numerous phone calls” and that it was acceptable to retain the full consumer fee in service of ensuring the reconveyance was done right.
The court ultimately dismissed the lawsuit against Stewart finding there was no basis to proceed to trial.
In a later court filing, Kelley said his agreement with Old Republic obligated him to do much more than track the reconveyance.
“Unless Old Republic expected that PCD was going to perform these additional services for free, which I find unlikely and unreasonable, it must have known there would be other fees,” Kelley wrote.
Kelley said Jerue, his operations manager and vice president, maintained a “master log” — an Excel spreadsheet with more than 26 columns — that had each fee broken out. But Kelley said he didn’t have access to that log anymore.
“You have no copies?” Smith asked Kelley.
“I have no copies, correct,” Kelley said.
“What happened to your copies?” Smith asked.
“My copies were destroyed in the fire,” Kelley said.
Kelley testified that at the time of the Stewart Title fire, Post Closing’s office was on the second floor of an adjacent, connected building that did not burn. But Kelley said he believed Post Closing’s few remaining records were stored in the basement of the Stewart Title building that did burn. Kelley said the lost records “were very limited … just be a box or two total, bankers box or two.”
But in those two bankers boxes, Kelley claimed, were the very documents that would back up his story — a copy of the master log, monthly statements to Post Closing’s clients and emails that authorized the additional fees.
Kelley’s testimony that Post Closing’s remaining records burned up in the fire did not match what his former employee, Amber Murray, said in her deposition.
She testified that she had moved out of the second-floor office next door to Stewart Title a few weeks before the fire. The only documents she recalled being stored in the basement of the building that burned were reconveyance documents for Stewart Title.
Even if Post Closing’s paper records were gone, “Weren’t the records on numerous computers in the state of Washington?” Smith asked Kelley in the deposition.
“They were on a backup also, up in Everett,” Kelley said. But he disagreed with Smith’s characterization. “Certainly wasn’t on numerous computers all over the state of Washington like you’re stating,” said Kelley.
Kelley said there were two computers in Everett — including a desktop that disappeared from the second-floor office after the fire.
“I went up there once after the fire and it wasn’t there,” Kelley said.
“Did you make any further inquiries?” Smith asked.
“After that, no, it was not our computer,” Kelley said. He added that the second floor received some smoke damage from the fire, but that he had no reason to believe the computer was fire damaged.
Kelley said the other computer, a laptop, was lost in the fire. “That was in storage as well. That was burned in the fire,” he said.
That led to the following exchange:
Smith: “When you would stop in at the Stewart Title office, would you go retrieve the laptop from the basement?”
Smith: “Then when you left, you would go to the Stewart Title main office, into their basement and put the laptop there before you left?”
Kelley: “Yeah, there was a stairway adjoined between the two.”
Smith: “You would go to the trouble of putting the laptop that you were using while you were in the office into the basement of the building next door?”
Kelley: “Only if I wasn’t going to be back for quite a while, so, you know, a month or so.”
Smith: “Are you confident that the laptop was in the basement at the time of the fire?”
Kelley: “I think it was, but no, I can’t say for sure.”
Kelley was asked where else records from his business might have been saved. He mentioned a Yahoo email server linked to his company website. But Kelley said those records were also lost, when he closed his business in June 2008.
“So when you shut down your website, you lost all of your company emails?” Smith said.
“I did not have them backed up any other way,” Kelley said.
By June 2008, the subprime mortgage meltdown was well underway and the housing bubble had burst. Arguably, Kelley’s reconveyance tracking business model was imperiled. But his decision to close shop also followed the filing of the class-action lawsuits.
“When did you first learn about the class-action lawsuits filed here in Washington against several title companies?” Smith asked during the deposition.
“I don’t remember,” Kelley said. “I can tell you specifically why I don’t remember. Title companies are being sued on these things all the time.”
“Were you aware of those class-action lawsuits before you closed down the business?” Smith asked.
“I can’t say I was specifically aware of those class-action lawsuits when I closed the business,” Kelley said.
Kelley testified that he had been thinking about closing down operations after he lost Fidelity as his largest client. But then the Stewart Title fire happened.
“The actual final decision was probably right after the fire,” Kelley said. “But even without the fire, I think we would have closed the business.”
Why, Smith continued, did Kelley close his business in Washington but continue to operate in Oregon? Kelley answered that the business structure was different in Oregon.
Smith asked which structure was more profitable, Washington’s or Oregon’s? Kelley said Washington. Smith pounced.
“So in June 2008, you made a decision to close down your reconveyance business in Washington but keep alive the reconveyance business in a less profitable state?” he asked.
Kelley didn’t answer the question directly. “No, we decided to close down the business in Oregon and reopen a new business with a different structure in Oregon only, not in Washington.”
Smith would later assert in a court filing that although Kelley wasn’t named in the class-action lawsuits, “his actions confirm he knew his misappropriation would soon be exposed.”
Kelley, in his own court filing, said his decision to shut down his company “was not prompted” by the class-action lawsuits but motivated by a “combination of factors” including his desire to “focus more energy” on his legislative work.
At the heart of the Old Republic lawsuit was a dispute over whether the nearly $3.8 million sitting in Kelley’s business accounts in 2008 belonged to Kelley or was money that should have been refunded to title company customers.
(Most of the nearly $3.8 million were fees collected from Fidelity Title. Fidelity did not file suit against Kelley but did issue subpoenas to several banks where Kelley had accounts, seeking to locate “stolen funds,” according to Kelley’s federal indictment.)
Smith asked Kelley: “Is it your position in this lawsuit that of the funds Old Republic Title sent to PCD, all of them were properly used?”
“Yes, it is,” Kelley said.
Asked why he didn’t issue more refunds, Kelley testified that he had in the early years because it was “easier to get a reconveyance done.” But then, he said, as the market heated up and there were bank consolidations and “a lot of refinances,” it took longer.
Tracking reconveyances between 2006 to 2008 could easily eat up $100 in fees, Kelley said.
Old Republic maintained the opposite in its lawsuit.
“In the majority of transactions, the full amount collected by Old Republic was not needed and money was left over,” Smith wrote in a 2011 motion. “Instead of making refunds, Kelley kept most of the excess reconveyance fees.”
Kelley testified that after he closed up shop in 2008, he reconciled his business accounts and provided his clients with final statements showing that the money left over had been legitimately earned by the Post Closing Department.
Smith was interested to see a copy of the Old Republic reconciliation spreadsheet that Kelley said he had posted to a secure page on his website. He asked Kelley where it could be found.
Kelley said he’d kept it on his computer, but that his computer stopped working — “We couldn’t even get it to turn on” — and he’d given it away more than a year prior.
“The old computer was, first of all, I’m sure it was cleaned and given to a Goodwill or another type of entity,” Kelley said.
In a subsequent court filing, Kelley said by “cleaned” he meant physically cleaned, not scrubbed of data. “At that point, the computer wouldn’t even turn on,” he wrote.
Smith asked Kelley if he’d gotten a receipt from Goodwill for the donation.
“Probably not,” Kelley said.
Smith asked Kelley about the nearly $3.8 million in cash he moved from his three business accounts at Columbia Bank shortly after the class-action lawsuits were filed.
“Why did you do that?” Smith asked as the deposition entered its fifth hour.
“On advice of counsel, I was consolidating the bank accounts as we consolidated the business,” Kelley replied.
Kelley identified his attorney as Alan Eber of Los Angeles. An online video from 2009 describes Eber as “a pioneer in the field of asset protection.” The video begins with ominous music as words like “lawsuit” and “litigation” appear on the screen. Next, an image of a bird’s nest with a golden egg appears and the words “Never Lose Your Assets.”
Kelley testified that he’d contacted Eber in the spring of 2008. Records later showed that Kelley paid Eber more than $18,000 for his services.
“When you started this series of wires transfers, who did the money belong to, the $3.8 million?” Smith asked.
“The money was earned, so it belonged to my company,” Kelley said.
Smith then asked Kelley if he intended to pay taxes on the money.
“Yes,” Kelley said.
“When?” Smith asked.
“On advice of counsel, when he tells me to,” Kelley said.
Kelley also said he opened a new business — Berkeley United — to receive most of the nearly $3.8 million, based on advice he got from Eber.
Smith: “You studied tax, didn’t you?”
Smith: “Take tax courses in law school?”
Smith: “Take tax courses in business school?”
Smith: “Got a JD/MBA?”
Smith: “You’ve taught tax, Mr. Kelley?”
Smith: “Can you give me a good reason why you’ve created a new company to [receive] the funds after they were wire transferred through three different states, three different entities?”
At this point, Kelley’s attorney stepped in and said Smith was getting “argumentative.”
“Yeah, a little rough here,” Kelley agreed. He said he wasn’t an estate planner and the transactions were executed as part of his estate planning.
“Any interest in trying to avoid payment of these funds to your creditors?” Smith asked.
“Again, based on the estate planning, I don’t know what — how the attorney did it or why,” Kelley said.
Next, Smith asked Kelley about the Wellington Trust account set up at the bank in Belize.
“Have you ever been to Belize?” Smith asked.
“Never been to Belize,” replied Kelley.
“Why Belize?” Smith asked.
“Advice of counsel, the estate and trust attorney,” Kelley said.
Smith also wanted to know about the refund check mailed to Frank Cornelius, the lead plaintiff in the class-action lawsuit against Fidelity Title. Smith showed Kelley the two letters and a copy of the check that had been sent to Cornelius.
“Do you recall sending a letter to Frank Cornelius on May 15, 2008?” Smith asked.
“No, I do not,” Kelley said.
“Who’s the universe of people that might have gone to the trouble of putting together these two letters and then getting a check for $250 and mailing it to Frank Cornelius the day after he filed a class-action lawsuit claiming that he had not received any refunds?” Smith asked.
Kelley answered with a question of his own. “And who had access to the letterhead? That would be Amy Cobine,” he said.
“You think Amy Cobine did this?” Smith asked.
“That’s one possibility,” Kelley said.
“But you’re denying you sent this letter?” Smith said.
“Yes,” Kelley said.
Kelley’s denial in the 2010 deposition that he sent the letter would become the basis for one of the criminal counts of “false declaration” against him in the federal indictment. The feds alleged Kelley was “well aware” he wrote the letter and sent the $250 refund to Cornelius.
‘I Don’t Remember’
Throughout the deposition, Smith’s efforts to tease information from Kelley were met with “I don’t remember.”
When asked to name the twin brothers who ran Horizon Mortgage, Kelley faltered. He came up with their last name, Huntington, but not their first names. That led to a testy exchange:
Smith: “You really don’t remember the names of the Huntingtons?”
Kelley: “I’m in the Legislature. I don’t think I can name all 98 members of the House of Representatives.”
Smith: “No, but I thought you might be able to recall the first names of two people named Huntington with whom you did a significant amount of business, Mr. Kelley, through the years. You’re under oath. What are their first names?”
Kelley: “I know I’m under oath, and I think you’re badgering me.”
Kelley eventually did muster the brothers’ names.
It was past 5 p.m., but Smith wasn’t quite ready to end Kelley’s deposition. Instead, he launched into a series of questions about Kelley’s business expenses.
Smith wanted to know about an apartment in Portland that Post Closing rented. Kelley testified that his brother Greg worked for the company for about a year and was based in Portland.
“Did your brother live in the apartment in Portland?” Smith wanted to know.
“He lived there and at our house [in Tacoma],” Kelley said.
“Did other employees get apartments as compensation for their services?” Smith asked.
“I don’t think other employees got apartments, so they had car allowances, I believe,” Kelley said. Kelley added that he couldn’t recall if his brother had reimbursed the company for the apartment but said the apartment served as an office too.
Smith asked Kelley about a series of smaller business expenses. There was a regular $80 payment to a cleaning lady.
“She cleaned office space,” Kelley said.
“What office space did she clean?” Smith asked.
“Occasionally the office space at my house, downstairs only. We paid separately if she cleaned upstairs,” Kelley said, estimating the space she cleaned was roughly 400 square feet.
Kelley’s wife would later seem to contradict this answer.
Smith also asked Kelley about three checks written from the United National business account to the Tacoma Lawn Tennis Club.
“These were business expenses, yes,” said Kelley explaining that he socialized there for “business and political purposes.”
There was also a Costco membership, a zoo membership, YMCA child care for one of his sons, a National Geographic subscription and a payment to the Johns Hopkins University Press. Kelley said the Johns Hopkins expense was a periodical that his wife reviews.
Smith: “How is that a business expense?”
Kelley: “It’s out for my customers. [My wife] also has an interest in it, so we got that.”
Smith: “Can you think of customers who have ever picked up and read the Johns Hopkins magazine?”
Kelley: “Possibly some employees; possibly some customers.”
Smith: “Can you think of any?”
Kelley: “Probably Jason [Jerue].”
Smith: “So Jason comes over, and while he’s waiting for you to conduct business, he’ll read your magazines that you deduct to the business?”
Kelley: “If I’m on the phone, he might look at it. Broad interest.”
Kelley’s company also picked up the dues for one of his wife’s academic associations — the American Society for Eighteenth-Century Studies — “as a courtesy.”
“Mr. Kelley, are you using your business account to get away with charging some personal expenses?” Smith asked.
“No. No, I am not. These are very small charges and they are definitely business related,” Kelley insisted.
In a later court filing, Kelley accused Old Republic of submitting the business expenses to the court as “evidence of wrongdoing” without any basis of knowledge for that.
Perhaps the strangest transaction to show up on Kelley’s company books was a $20 payment to Post Closing for “antenna removal.”
Kelley told Smith that he had “several lines of business … we removed some antennas, and we charged $20 for it, and it was booked as income.”
“Isn’t this to remove an antenna from your neighbor’s house that blocked your view, or you thought was unsightly?” Smith asked.
Kelley acknowledged as much. “That’s my neighbor’s address. So my company removed the antenna for a charge of $20. I’m sure we lost money on that.”
The deposition concluded at 6:05 p.m.
In 2015, a federal grand jury would indict Kelley for false declarations partly due to his responses in this 2010 deposition.
Eight months after his deposition, Kelley filed with the court a fiery 14-page diatribe.
“I want to speak out about the abuse I believe I have received in this lawsuit,” Kelley began. He accused Old Republic of defaming him with “actual malice.”
Old Republic “has accused me of ‘misappropriating’ the Funds of Fidelity National Title customers and Stewart Title customers as well,” Kelley wrote. “But Old Republic knows virtually nothing about PCD’s relationship with Fidelity and Stewart.” Kelley also noted that neither of those companies was suing him.
Kelley said his records had been “pawed through and his friends and colleagues dragged into the litigation.” Kelley’s legislative assistant and state Representative Chris Hurst both filed statements with the court saying they had received unsettling calls from Old Republic attorney Scott Smith.
Smith wrote the court that he made those calls to unidentified numbers that showed up in Kelley’s cell phone records to see if they belonged to people involved with Kelley’s business. “I did not intend to alarm or offend,” he wrote.
Kelley concluded: “In sum, I feel this entire case has been an abuse of the litigation process, which is only made worse by the fact it is supposedly ‘on behalf of’ persons who aren’t before the Court, who Judge Settle already decided have no contract claim, and who aren’t even pursuing their case anymore.”
Motion To Dismiss
The same month Kelley filed his declaration, his lawyer, Judith Endejan, sought to have the Old Republic lawsuit dismissed.
She argued that Kelley and the Post Closing Department were not obligated to issue refunds and that “it was industry practice” for escrow companies and their third-party service providers not to provide refunds.
Endejan wrote that Old Republic didn’t have grounds to sue because — by its own argument — the refunds were owed to its customer and not the company, therefore Old Republic had not been “injured.”
Diane Kelley Deposed
The Old Republic lawsuit against Troy Kelley also named his wife, Diane, who was then a tenured professor at the University of Puget Sound and chaired the university’s foreign languages department.
Although she claimed to have no involvement with Kelley’s businesses, Diane Kelley’s name often appeared in the context of Kelley’s web of businesses.
Even if Diane Kelley wasn’t involved in the day-to-day operations of the business, Smith intended to depose her. Troy Kelley was determined to make sure that didn’t happen.
On August 16, 2010 — Kelley’s birthday — his attorney filed a motion in federal court to “quash” Diane Kelley’s deposition on the grounds that she “had no involvement whatsoever in the business operations” and that the deposition “is intended solely to harass the Kelleys.”
Smith filed a counter-motion arguing that “Diane Kelley might be more forthcoming” than her husband and “will likely have information about business operations.”
If the lawsuit was already acrimonious, now it was getting personal. Kelley’s attorney accused Smith of making “libelous and erroneous” assertions and said Old Republic’s insistence on deposing Diane Kelley “demonstrates the type of paranoid, abusive behavior that [Old Republic] has pursued throughout the litigation that Mrs. Kelley should be protected from.”
In the end, the judge allowed the deposition to proceed.
Despite the turmoil in Kelley’s life, he held onto his statehouse seat in the 2010 election. Kelley defeated Republican challenger Steve O’Ban winning just under 53 percent of the vote.
On the morning of Tuesday, November 16, 2010, the Puget Sound region was cleaning up after a powerful windstorm that had taken down trees and knocked out power to more than 150,000 customers.
The storm forced a late start for the Kelley boys’ school. That morning Troy Kelley stayed home with them while Diane Kelley went to Seattle for her deposition.
Once again Old Republic attorney Scott Smith would be asking the questions. From the start, Diane Kelley invoked “marital privilege.” That meant she couldn’t be compelled to reveal communications she’d had with her husband.
Over the next two hours, Diane Kelley would repeatedly assert that she was in the dark when it came to Kelley’s business dealings.
“The only thing I know is what my husband has told me, because I do not participate in the business at all,” Diane Kelley said, adding that she trusted him. She also testified that she had “no knowledge” of the family finances because her husband handled the bills and taxes as part of a “natural division of labor” in the household.
Smith asked her if she got an allowance.
“An allowance?” Diane Kelley replied. “I make my own money, sir.”
Smith quickly said he didn’t mean to be offensive.
Smith showed Diane Kelley a series of documents related to the formation of a company called Attorney Trustee Service. She was listed as the president, registered agent and incorporator of the company and she had signed the paperwork.
“Why were you signing these documents if you had nothing to do with your husband’s businesses?” Smith inquired.
“Because he asked me to,” Diane Kelley said.
“Any conversation as to why you, why not him?” Smith followed up.
“No,” she said.
Records showed Diane Kelley also co-signed some of the documents relating to the movement of the nearly $3.8 million in reconveyance fees in 2008. Once again, she pleaded ignorance.
Smith: “What was your role in wiring those funds?”
Diane Kelley: “None.”
Smith: “Did you have any idea at the time as to the magnitude of money being transferred into the account that you opened as an officer of those two companies?”
Diane Kelley: “No.”
Smith: “Were you aware you had any accounts in Belize?”
Diane Kelley: “The only information I would have about that is what my husband has told me.”
At another point in the deposition, Smith asked Diane Kelley to verify her signature on some other documents. She took a look and confirmed it was her handwriting on two of the papers. But there was a third document — an annual report to the Washington Secretary of State — signed Diane Duffrin, her maiden name.
“This one is not my signature,” she said.
Later in the deposition, Smith showed Diane Kelley a deposit slip and check that also had her signature on it. Once again she said it wasn’t hers. That triggered the following exchange:
Smith: “Have you ever authorized your husband to sign documents for you.”
Diane Kelley: “Yes.”
Smith: “Did you authorize him to sign this document for you?”
Diane Kelley: “It’s very possible. I don’t know.”
Smith: “Does he do that frequently?”
Diane Kelley: “No.”
At other times during the deposition, Diane Kelley seemed to contradict her husband’s testimony.
Kelley had said Post Closing’s principal place of business was the Everett office next to the Stewart Title building. But Diane Kelley testified that, based on her observation, the company’s main office was their house in Tacoma.
On the topic of their cleaning lady, Diane Kelley said she came every two weeks, charged $80 and wasn’t paid separately to clean the office and the house, as Kelley had testified in explaining why it was a legitimate business expense.
There was also a surprise moment during Diane Kelley’s deposition. It happened when Smith showed her an “Interspousal Transfer Grant Deed” for the sale of a condominium in Fresno, California.
Diane Kelley confirmed it was her signature on the paper. “It is something my husband presented to me and asked me to sign and I signed,” she said.
“Is this the first time you were aware you owned a condo at one point in time in Fresno, California?” Smith asked.
“Yes,” she answered.
Unlike Troy Kelley’s all-day deposition, Diane Kelley was done before noon.
But in a 2012 news conference, Kelley was still angry that his wife had been dragged into the litigation.
His voice rising, he told reporters: “My wife was sued, my wife was deposed, she’s a tenured professor, she has nothing to do with the business. This was done to embarrass me.”
What Kelley didn’t mention to reporters is that he had structured the companies in such a way that, at least on paper, it looked like his wife was very much a part of the business.
On January 11, 2011, Kelley transferred from the Army Reserve to the Washington Army National Guard as a major. The following year he was promoted to lieutenant colonel.
On March 9, 2011, Smith filed a motion in U.S. District Court to freeze $1.2 million in Kelley’s Berkeley United account at Vanguard, the one that was linked to the trust in Belize. That amount — $1.2 million — represented the fees that Kelley’s company had received and cashed from Old Republic. Smith wrote:
“Berkeley United has no employees or business function but was created for the sole purpose of holding the $3.8 million that Defendant Troy Kelley misappropriated and tried to hide when he shut down his Washington reconveyance business in June 2008.
“As with his initial efforts to hide these funds, Kelley’s recent actions may have been implemented with the advice of Alan Eber, the California attorney who specializes in helping people protect their assets from creditors.”
Smith wrote that Old Republic was likely to prevail in its lawsuit against Kelley and that the injunction was needed to “prevent the misappropriated funds from being wired to an account in Belize, beyond the reach of U.S. courts.”
Kelley wrote the court that he moved the funds not to avoid creditors but to collect money “in a logical way and to provide a clear trail for tax purposes.” He said the money “has not moved since then.”
“As far as I know, everything that Alan [Eber] does is perfectly legal, and it is estate planning.” he wrote.
On May 3, 2011, Old Republic and Kelley settled the lawsuit. Kelley paid Old Republic $1.05 million but did not admit to wrongdoing.
In 2012, Kelley told reporters he agreed to settle the lawsuit because his insurance company controlled the litigation. “At some point we just said, ‘That’s it. The insurance company wants to settle, that’s fine, we’re done with this,’” Kelley said.
However, according to his indictment, the bulk of the settlement payment came out of Kelley’s Berkeley United account with Vanguard, not from his insurance company.
After the settlement, Kelley sought to have files related to the case redacted or sealed by the court.
On June 1, 2011, U.S. District Judge James Robart in Seattle issued a blunt three-page ruling in which he denied the motion to seal.
First, Robart summed up the allegations against Kelley contained in the Old Republic lawsuit:
“In briefing filed with the court, [Old Republic] accuses Mr. Kelley of all forms of wrongdoing including misappropriation of customer funds, lying, fraudulently transferring funds, intentional spoliation of evidence, shady business schemes, tax evasion, and hiding from creditors.”
Judge Robart noted that Kelley wanted the documents sealed because they might cause “annoyance, embarrassment and harm to his legislative career.”
In his 2012 press conference, Kelley criticized Judge Robart for his ruling:
“He had no judicial experience whatsoever,” Kelley said. “I don’t want to piss off a federal judge, but he had no experience going into this and he was appointed by George W. Bush.”
It was true that Judge Robart was a Bush appointee, but he was hardly new to the bench. At the time of his ruling on Kelley’s motion to seal, he’d been a federal judge for nearly seven years.
As Kelley feared, soon enough his political enemies would find the documents and try to use them against him.
Judge Robart’s ruling came just a few days after Washington lawmakers had adjourned a 30-day special session.
State tax revenues had cratered in the face of the Great Recession and collapse of the housing market. The looming budget shortfall for the next two years was pegged at $5 billion. Democrats controlled both the House and Senate but couldn’t agree on a budget deal by the end of the 105-day regular session. That forced the 30-day extra inning.
The budget wasn’t the only issue dividing Democrats in the House and Senate in 2011. So was workers’ compensation.
In the waning hours of the regular session at the end of April, Kelley had engaged in a legislative act of civil disobedience.
When minority Republicans tried to force a floor vote on a business-backed workers’ comp bill hotly opposed by organized labor, Kelley and three other more business-friendly Democrats refused to vote with their caucus to halt the effort.
Instead, they withheld their votes in an act of “mutiny” that reporter Erik Smith, writing in the Washington State Wire, termed “an act of rebellion so flagrant, so amazing, so absolutely impossible, that the entire state House was left agog.”
That may have been hyperbole — House Democrats still managed to vote down the Republican insurgency — but Kelley’s act of defiance was a poke in the eye of the all-powerful Speaker of the House, Frank Chopp. It wouldn’t be the last time Kelley went against his fellow Democrats in the Legislature.
The week after Labor Day 2011, Washington State Auditor Brian Sonntag announced that, after five terms in office, he would not run for re-election.
“[The] 2012 election is the right time for the office to transition to new leadership,” Sonntag said in a statement announcing his plans.
That fall Kelley and his legislative assistant Matt Miller had lunch together. The open race for state auditor came up in conversation. “I said, ‘You know you’d be good at this,’” Miller recalled in an interview.
Miller said Kelley seemed intrigued and responded by saying something to the effect of “I do know auditing.”
Kelley also immediately identified a key issue the auditor’s office would be grappling with in the years to come — how to audit large Public Utility Districts for compliance with Initiative 937, a voter-approved measure that required major utilities to get 15 percent of their energy portfolio from renewables.
In addition, as the former chair of the Joint Legislative Audit and Review Committee, Kelley was intimately familiar with state’s performance audit program run by the state auditor’s office.
Deciding To Run
Washington lawmakers returned to Olympia in January of 2012 for a short, 60-day election year session.
The budget they’d passed just months before was already projected to be $1 billion out of whack as the economy continued to falter.
Passing a tighter state budget wouldn’t prove so easy. Once again, lawmakers went into special session to get a final deal.
Republican James Watkins seized the moment to enter the race for state auditor. In his March announcement, Watkins, a business development consultant from Redmond, said, “With state government in yet another special session … maintaining an independent, effective state auditor must be a top priority for voters.”
The Legislature adjourned on April 11 after a budget all-nighter. The next day, April 12, Troy Kelley entered the race for state auditor.
In an emailed announcement, he said he wanted to apply his “background in auditing and business to make certain our tax dollars are used as efficiently as possible.”
Kelley tapped his legislative assistant Matt Miller to run his campaign. Miller had done opposition research on his own boss and found the Old Republic lawsuit. But when he asked Kelley about the litigation, Miller recalled Kelley waved it off as a nuisance lawsuit that had been resolved.
By this point, three Democrats had entered the open race for state auditor. State Senator Craig Pridemore of Vancouver was the early frontrunner and won the endorsement of the Democratic Party. State Representative Mark Miloscia of Federal Way had the benefit of hailing from populous King County.
But once again Kelley held a trump card — the ability to self-fund his race.
He put $240,000 of his own money into the primary and used it to buy cable TV ads.
Kelley’s campaign spot featured a flattering quote from retiring state auditor Brian Sonntag, a fellow Democrat with broad statewide popularity.
“He’s the independent voice we need,” the Sonntag quote read.
But Sonntag hadn’t endorsed Kelley in the auditor’s race. In fact, Sonntag had purposely not endorsed anyone to replace him.
The Sonntag quote was from Kelley’s 2010 race for the Washington House. Kelley put the date in fine print in his TV ad, but not in the primary voters’ guide where he used a longer version of the Sonntag quote.
To Kelley’s opponents, he was playing fast and loose and this created the first real dust-up in the crowded state auditor race.
Republican candidate Watkins took to Facebook to call it “outside the bounds of good ethics,” according to the News Tribune of Tacoma.
By attacking Kelley on ethical grounds, Watkins was foreshadowing what was to come in the race.
The ads featuring the Sonntag quote apparently “did the trick,” reported Erik Smith in the Washington State Wire, the day after the August 7 primary.
Kelley eked out a second-place finish with 23 percent of the vote. Pridemore was a close third with 21 percent and Miloscia trailed with 10 percent. Republican Watkins came in first with 46 percent.
As the top two vote-getters in the primary, Watkins and Kelley would face each other in the general election.
When the lawyers at Hagens Berman, the class-action law firm, heard Kelley was running for state auditor, they were stunned.
“At that point my mouth just dropped to the floor and I was speechless,” attorney Tyler Weaver said. “I’m sure my face turned completely red. I could not believe it.”
Kelley’s previous legal troubles hadn’t surfaced during the primary campaign. But Watkins had a September surprise waiting.
On September 6, Watkins and Kelley appeared together on TVW’s “Inside Olympia” program to discuss the race for state auditor. Almost immediately, Watkins announced that he had launched a website called factchecktroykelley.com.
Watkins said the website featured legal documents alleging all manner of misdeeds by Kelley including “misappropriation of funds, offshore accounts in Belize, even theft … all sorts of weird stuff.”
Kelley immediately fired back and accused Watkins of playing dirty politics.
“All the claims that are previously made are completely false, there’s no question,” Kelley said. “Most of them are ridiculous.”
Kelley Faces Reporters
Later that day, Kelley called a news conference in the backroom of Ramblin Jack’s restaurant in downtown Olympia to address the claims.
The event started with a kerfuffle over whether KING 5 News could have a camera there.
“You bring your camera in even though we requested you did not?” Kelley asked reporter Glenn Farley. When Farley pushed back, Kelley relented.
“I don’t want to prejudice you,” Kelley said. “I would just like a fair hearing.”
Kelley began by casting himself as the victim of a sleazy political attack.
“In my opinion, this is page one of the Tea Party playbook,” he said. “It’s the same folks that in the year 2000 went after John McCain for fathering a child out of wedlock with a black woman, which is a racial issue in South Carolina.”
Kelley was referring to a reported whisper campaign about McCain during his 2000 Republican presidential primary in South Carolina.
Kelley told the assembled reporters that he wanted to discuss and answer questions about the “complicated field” that he worked in. But first he burnished his credentials.
He noted he was a member of the bars in California, New York, Washington and the District of Columbia with no sanctions. Kelley said he had a “secret” clearance in the National Guard and had just served as a legal advisor on a “pretty big” military case.
Finally, Kelley said he would be speaking at an upcoming escrow convention. “If any of this stuff was true, there’d be serious problems,” he said. “I wouldn’t be speaking, I’d be a pariah in the industry, not a speaker there.”
Kelley also said he’d never been audited by the IRS. “If half the stuff was true, yeah, you’d think I’d have an audit, right … we’re 100 percent above board?”
As for the Old Republic Title lawsuit, Kelley said the company went after him because he was a state lawmaker and they wanted to “extort a higher settlement.”
“It was filed in such a manner that, you’ve seen the allegations, they’re completely absurd,” he said. “As you know the case has been dismissed pursuant to a settlement. There’s no questions there. Many of these companies remain my clients.”
Kelley’s “move on, there’s nothing to see here” answer obscured the fact he had paid more than $1 million to settle the Old Republic lawsuit.
At the news conference, Kelley was asked about the account in Belize. “That was set up with a minimum balance by an outside attorney. When I found out about it, it was closed,” he said.
Even if Kelley’s attorney set up the Belize account, it was Kelley, according to his indictment, who submitted the International Wire Option Form to link the account in Belize to the Vanguard account that held the millions of dollars.
As for why he moved the nearly $3.8 million through a complex series of wire transfers, Kelley said he simply transferred the money to his holding company, Blackstone, in Nevada and then “recapitalized the companies.”
This was a different answer than Kelley had given in his 2010 deposition when he said he moved the cash from bank-to-bank on advice of his estate-planning attorney.
Kelley also had a new explanation for how he came to possess the nearly $3.8 million. He said the money was moved from accounts “where the work has not been done yet.” In the 2010 deposition, Kelley had said that money “was earned, so it belonged to my company.”
Federal prosecutors would later latch on to this apparent inconsistency.
As the 2012 news conference wound down, Kelley was asked if title company customers even knew about the fees that his company was getting.
“There’s a hundred fees, they don’t know any of the fees on the [closing statement],” Kelley said.
Asked if he was part of a disreputable portion of the real estate services industry, Kelley was indignant.
“If you’re going to say that’s a disreputable portion of the industry, you’ve got to indict the entire industry,” he fired back. “I would like to defend the industry … we, I think, did a good job.”
With that, Kelley’s campaign manager hustled him out of the room.
Public Disclosure Commission Complaint
The Republican attacks on Kelley’s credibility did not abate. Later that month, the chair of the Washington State Republican Party filed a complaint with the state Public Disclosure Commission alleging that Kelley had failed to accurately disclose his business finances as required by law.
The Commission ultimately dismissed most of the allegations, but dinged Kelley for some reporting violations, including a failure to update his personal financial affairs statement to reflect that his company, United National, had been dissolved in 2008. He was fined $200 with $100 suspended.
Kelley’s campaign for state auditor was in damage control mode.
John Wyble, Kelley’s campaign consultant, said he had two questions after seeing the Watkins’ attack: “What is actually going on here, and what do we do about this?”
Kelley was unwavering. “I’ve done nothing wrong,” Wyble recalled Kelley saying. “I’ll be a great auditor.”
Wyble’s advice to Kelley was to double down. He told Kelley he would need another decent TV buy in the general election to repair any damage.
Before Election Day, Kelley put another $260,000 of his own money into the campaign to put his primary TV spot back on the air. In addition to the Sonntag quote, it featured Kelley and his family and highlighted his credentials.
“Troy’s experience to be our state auditor is unparalleled,” the ad proclaimed.
Kelley also published a paid response in his hometown newspaper, The News Tribune, titled “An Open Letter From Troy Kelley.” In it, he accused his opponent of launching an “unethical smear campaign.”
Kelley waged more than just a TV campaign. Miller said Kelley traveled the state holding “coffee shop chats” with a goal of hitting all 39 Washington counties.
Among Kelley’s top issues was cyber security as it related to state and local governments. Kelley believed the auditor’s office could help ensure that government agencies were prepared for a cyberattack.
In mid-October, as the election approached, Kelley won an important, if not reluctant, endorsement from The Seattle Times.
“Given a disappointing choice between two flawed candidates, Troy Kelley is a better fit for the job,” the editorial said. It went on to give Kelley the benefit of the doubt in the face of Watkin’s allegations of “shady dealings” on the part of Kelley. “The fact is [Kelley] has never been charged with or convicted of committing a crime.”
On election night, Kelley emerged victorious with 53 percent of the vote — outperforming even Jay Inslee, the Democratic candidate for governor.
On January 16, 2013, before a joint session of the Legislature, Kelley was sworn in as Washington’s 10th state auditor. His wife and sons stood with him on the rostrum as he raised his right hand and took the oath of office.
Afterward, Kelley asked the president of the Senate for permission to introduce his family to the assembly. He then kissed his wife, hugged his sons and stepped off the rostrum into the next chapter of his life — one that would put him on a collision course with the FBI, IRS and U.S. Attorney’s office.
The Washington Constitution is succinct on the role of the state auditor. Section 20 says, very simply, “The auditor shall be the auditor of public accounts.”
The position is fourth in line to succeed the governor. In fact, Kelley was acting governor for three days during the 2014 Super Bowl when the governor, lieutenant governor, secretary of state and treasurer were all out of state.
In practice, the primary mission of the Washington State Auditor’s office is to audit state and local governments. But the office also conducts voter-approved performance audits and investigates fraud and whistleblower complaints.
Brian Sonntag had held the office for 20 years. He was known as a gregarious pol not afraid to seize the bully pulpit. Kelley seemed to have the opposite personality.
“He’s not an easy person to know,” former Democratic state Representative Deb Eddy said in an interview. “He’s very guarded. He shares little and he has a very soft speaking voice that doesn’t make conversation easy.”
A details guy, one of Kelley’s first efforts, according to his staff, was to dig into the mechanics of how the auditor’s office actually operated. With nearly 400 employees and 15 offices statewide, Kelley was interested in revamping the organizational chart and assessing the cost of the auditor’s sprawling statewide physical footprint.
“During those early days, he was clearly committed to assessing the current condition of the agency and making targeted improvements,” recalled Eddy, who served as a temporary policy and communications advisor on Kelley’s transition team.
One of the key issues Kelley identified was a backlog of complaints in the state’s whistleblower program. By law, these complaints were supposed to be closed within a year. But some had remained open for years. Kelley ordered his staff to move quickly to clear that backlog.
Kelley also declined a perk of the job: being issued a state vehicle.
Nonetheless, he hit the road. In his first six months in office, according to his staff, Kelley visited all 13 of the state auditor’s regional offices.
But even those trips didn’t account for what Eddy observed from her office just down the hall from Kelley’s — the newly elected state auditor wasn’t around that much.
“Regardless of where he was or what he was doing, I saw very little of him,” Eddy said. “That’s a true statement. He was not in the office often or regularly.”
It would later be revealed that something else was going on.
As Kelley took on his new role, he reached into his past.
He instructed his staff to create a position in the auditor’s office for Jason Jerue, his former vice president at United National and co-plaintiff in the wrongful termination litigation against First American years earlier.
Jerue was hired as a part-time technical writer for $22 an hour. His supervisor, Laura Cameron, was handed a new employee with no clear sense of what he was supposed to be doing.
In an email to Jerue, Cameron noted, “In the ordinary way of the world, I’d have asked you for a writing or rewrite sample before hiring.”
There was something else unusual about this hire. Jerue lived in California, not Washington. The deal was he would work primarily from home — a “long-distance colleague” in the words of Cameron.
One of Jerue’s first assignments was to research state auditor websites from around the country with an eye toward overhauling the Washington auditor’s website.
Jerue was soon reassigned to work for Miller, Kelley’s campaign manager who was hired after the campaign to lead legislative relations. Miller said Kelley’s rationale for hiring Jerue was that he had technical expertise and that they could get him for “cheap.”
Jerue’s employment in the auditor’s office would eventually attract the attention of federal investigators.
In a later court filing, an FBI agent alleged that Kelley personally paid Jerue in the two years before he was hired to work in the state auditor’s office. The agent identified two payments of just under $10,000.
Jerue told investigators those were severance payments related to his past employment with Kelley.
As Kelley was taking office, lawmakers were beginning the 2013 legislative session. One of Kelley’s first actions was to introduce “auditor request” legislation to allow city councils and other government bodies to audio-record closed executive session meetings.
The idea behind the proposal was to create a record in the event that later there was an allegation that a government body had gone behind closed doors in violation the state’s Open Public Meetings Act. The bill got a hearing, but did not advance.
Kelley had better luck with another piece of auditor-request legislation to create a process for his office to seek a state investigative subpoena. The bill passed and was signed into law by the governor. Ironically, Kelley’s office would later become the target of a federal investigative subpoena.
In Kelley’s first six months in office, the auditor’s office sent out just two media announcements. One was an update on a performance audit of the state’s Medicaid program. The other announced a performance audit of the state’s Developmental Disabilities Administration. Both were holdovers from the Sonntag administration.
Kelley finally hired a communications director in August and the pace picked up after that.
But Kelley’s public profile didn’t change dramatically. In fact, his whereabouts on a day-to-day basis became something of a mystery.
A review of Kelley’s schedule for his first nearly two years in office revealed more than 150 workdays — or about a third of his time — where the auditor could not be accounted for.
Either the schedule was blocked with an “X” — an internal code for do not schedule — or did not indicate what Kelley was doing on those days.
Kelley was unwilling to clear up the question of his whereabouts when asked in March 2015.
His Chief of staff Doug Cochran said that, on a day-to-day basis, the office ran itself.
“Troy could say, ‘I’m going on vacation to Hawaii; I’ll be back in July.’ For the most part life goes on and nothing much changes,” Cochran said, adding that Kelley was always reachable by phone.
At the time, Kelley was earning a salary of $116,950 a year.
Reporter Jordan Schrader of The News Tribune later reviewed Kelley’s Internet browsing history on his office computer and found just 10 days of activity over 16 months.
Kelley, it seemed, was a man of mystery. Or, perhaps more apropos, an auditor without much of an audit trail.
His corner office in the Insurance Building next to the Capitol revealed a few things about him. On a bookshelf he displayed a baseball card of Warren Spahn, a Hall of Fame left-handed pitcher from the 1940s to the 1960s. Kelley is left-handed.
There was also a photo of his son’s flag football team, the Panthers. In his official state auditor bio, Kelley noted that he enjoyed coaching his sons’ football and baseball teams.
Kelley’s connection to the military was also on display. There was an Armed Forces stamp collection and framed military medals, including a War on Terrorism Service Medal.
His books included two on Six Sigma, the data-driven management philosophy made popular by Jack Welch at General Electric. A third book on the shelf was titled “Emotional Intelligence.”
According to Eddy, his former legislative colleague and transition team member, this was an area where Kelley struggled. “Anytime that I talked to him, there was that missing piece of empathy,” she said.
Another former employee described Kelley as a “walking pocket protector.” Even Cochran, Kelley’s chief of staff, described his boss as “introverted.”
“He’s quiet, kind of closed,” Cochran said.
Kelley’s mysterious and hard-to-trace ways as state auditor might be explained partly by what happened on April 19, 2013 — just three months into his term as state auditor.
On that day, according to his indictment, Kelley was interviewed at an undisclosed location in Olympia by special agents with the Internal Revenue Service.
Kelley had predicted in 2012 that he might be audited in the wake of the campaign questions about his business practices. But this wasn’t an audit. These were criminal investigators from the IRS.
Kelley didn’t need a law degree to figure out that he was under criminal investigation.
It was a stunning role reversal for the man elected to root out waste and fraud in state and local governments. Instead of issuing subpoenas and demanding answers as auditor, Kelley was about to experience the full brunt of a federal grand jury investigation.
A few days after IRS agents interviewed Kelley, attorney Scott Smith received a grand jury subpoena. The subpoena sought the details of the settlement in the Old Republic lawsuit, plus all records Smith had related to Kelley and Kelley’s businesses.
Because of their agreement to keep the settlement confidential, Smith sent Kelley a letter at home advising him of the subpoena.
“Unless ordered not to do so by a court, Old Republic intends to comply with the subpoena,” the letter read in part.
When Smith didn’t hear back from Kelley, he had his secretary call Kelley’s executive assistant in the auditor’s office with a clear message: If Kelley didn’t confirm he had received the letter, they would send a process server — possibly to the auditor’s office — to deliver another copy.
Smith said word quickly came back that Kelley had, indeed, received the letter.
Remarkably, that Kelley was under federal investigation would remain a secret from the public for two more years.
In March of 2014, the auditor’s office released its annual report. It began with a message from Kelley.
“It has been an exciting, challenging first year, as we have built the team, ethic and expectations for the years ahead,” the message read.
The annual report went on to tout a new vision statement, strategic goals and a “philosophy of transparency.” It also noted accomplishments of the previous year.
The list included reducing costs and increasing performance audits. The report also said it reorganized a fraud program and had faster whistleblower investigations.
The report highlighted audit findings, including one that found 15,000 developmentally disabled Washingtonians were receiving no services from the state despite being eligible.
Kelley’s second year in office brought an “Excellence in Accountability” award from the National State Auditors Association. The award recognized the auditor’s expanded Local Government Performance Center which helps local governments apply lessons learned from audits.
The auditor’s office also made progress on Kelley’s signature issue — IT security. In the first of two performance audits on the topic, auditors found state computers that were not properly scrubbed of confidential information before they were sold at surplus to the public.
A second IT performance audit, titled “Opportunities to Improve State IT Security,” found “numerous” cyber security issues at five selected agencies — including seven issues deemed “critical.” The definition of critical was that the weakness was “almost certain to be exploited” by a hacker resulting in an “extreme impact” on the entire agency or program. Examples included “inadequate use of encryption.”
With cyber security top of mind, Kelley hired both a new chief information officer and a chief information security officer in 2014.
To save money, he also closed one of the auditor’s three Olympia-area offices.
As Kelley began his third year in office, in January 2015, IT security remained a top priority.
A bill had been introduced in the Legislature to give his office the authority to audit state and local governments for their data storage and management practices.
This wasn’t auditor-request legislation, but Kelley and his team were keenly interested in seeing it passed.
However, when the bill came up for a public hearing at 8 a.m. on Friday, January 30, Kelley didn’t appear to testify on its behalf. Instead, he sent two members of his staff. The bill stalled.
Kelley’s career as state auditor was also about to stall.
On March 16, Kelley went on vacation to California with his family. While he was away, IRS agents searched his Tacoma home.
“There was like 10 undercover cop cars,” said Kelley’s next-door neighbor Cassandra Hafen. “And you could just hear banging on [his] door, ‘Police, open up.’”
When no one answered, Hafen said, the agents breached the door of his split-level house. Inside, agents might have noticed a photograph of Kelley’s grandparents with Frank Sinatra. According to Kelley, his grandmother occasionally babysat Sinatra as a child. But family heirlooms were not what they were looking for.
The search lasted several hours. Neighbors watched as the agents carted out boxes containing business documents, tax and bank records, computers and USB drives.
The news of the search didn’t leak out until two days later when The News Tribune broke the story.
Kelley sent out a short statement:
“I have been out of the state on family vacation since Friday night. We were not there when our home was reportedly searched and have not yet returned. I have not been served a search warrant and have not been informed of any reasons for a search.”
But Kelley had been aware the feds were closing in. Earlier that month, his legislative liaison and former campaign manager, Matt Miller, had delivered to Kelley’s home in Tacoma a copy of a federal subpoena demanding records from the auditor’s office.
The subpoena sought personnel records related to Jason Jerue. It also requested any emails between Jerue and anyone else in the auditor’s office about Jerue’s prior employment with Kelley, or the related lawsuits.
Jerue immediately took a leave of absence from the auditor’s office and could not be located or reached for comment.
Separately, the FBI asked the auditor’s chief information officer to preserve email and phone records but not to notify anyone else, including Kelley, that the FBI had made that request.
The day after the news of the search warrant broke, the state auditor’s office confirmed the existence of the subpoena and announced it had delivered boxes of documents that day to a federal grand jury in Seattle.
Before the day’s end, the Washington State Republican Party was calling on Kelley to step down.
Kelley, meanwhile, was still in California on vacation with no plans to return early, according to his office.
The feds were keeping mum about the probe, but Kelley’s fellow Democrats couldn’t remain silent for long.
As the week ended, Gov. Inslee’s office put out a statement urging Kelley to be “open with the public.”
Mark Miloscia, who had run against Kelley in the 2012 primary, called on him to “come clean” and warned the “credibility of the auditor’s office is in doubt.” After losing the race for auditor, Miloscia had switched parties and been elected as a Republican state senator.
The following Monday, Kelley returned to work in Olympia but ducked reporters. Instead, he issued a written statement that acknowledged the U.S. Attorney’s interest in his prior business.
“I have fully cooperated with their investigation and remain puzzled by their interest,” Kelley wrote, adding that his actions over the years had been “lawful.”
It soon became clear the feds were casting a wide net. They sought Kelley’s expense reports from his days in the Legislature, his tax records from the Department of Revenue and his financial statements from the state’s Public Disclosure Commission.
Still Kelley showed no sign he planned to resign or even take a leave of absence.
On March 26, Miloscia sent Kelley a letter offering the opportunity to testify before the Senate Accountability and Reform Committee.
“The reports of federal investigations centered on you and your business dealings raise questions about the public’s trust in your ability to carry out [your] role effectively,” Miloscia wrote. “It is important for you to address these matters personally, in public testimony.”
Kelley ended the week by sending an all-staff email to his nearly 400 employees.
He began by acknowledging the “difficult and unsettling time” and offered thanks for the words of encouragement he’d received. “I intend to use my actions to continue to show dedication to our office and trust of the people of the state of Washington,” he said.
The following week, Kelley was a no-show before the Senate Accountability committee. But a KING-TV news crew caught him as he hurried into his office. Asked to respond to what was going on, Kelley said, “I need more information; this is very frustrating for me.”
On April 1, Inslee sent Kelley a formal letter demanding answers. He wanted to know how the auditor’s office would be impacted. Kelley responded the same day. He told the governor the federal probe would not affect open audits and said he had removed himself from his office’s response to the federal subpoena.
As questions about Kelley swirled, the Washington National Guard said his status as a military lawyer was unchanged.
On April 3, a disbarred lawyer and former state lawmaker named Will Knedlik filed a petition with the Washington Secretary of State to recall Kelley from office.
For the next two weeks there was little news about Troy Kelley. It wasn’t even clear that the search warrant and subpoena were a sign of an indictment to come.
Then, on the morning of April 16, the U.S. Attorney’s office in Seattle issued a press release headlined “Washington State Auditor Troy X. Kelley Indicted For Filing False Tax Returns, False Declarations, Obstruction And Possession Of Stolen Property.”
The 41-page grand jury indictment alleged Kelley “fraudulently retained, stole, and converted” to his own use $1.46 million in “unused reconveyance-processing fees that should have been refunded to borrowers.”
Instead of refunding the money, as he was contractually obligated to do, the indictment alleged that “Kelley devised a scheme to take and convert” the money for his own use.
The indictment asserted that in most cases, the bank or lender, not Kelley’s Post Closing Department, handled the reconveyance, leaving a pool of funds that were not needed to pay trustee or county recording fees.
For example, according to the indictment, between 2006 and 2008, Post Closing tracked 21,158 reconveyances for Fidelity Title, but issued just 25 refund checks. Instead of refunding customers, the indictment said, Kelley kept the bulk of the $2,361,181 in Fidelity customer funds he had amassed.
So who got refunds? The indictment said Kelley issued them to borrowers who complained they hadn’t received a refund. It also alleged that Kelley sometimes issued “small batches of refund checks to create a defense” that he was refunding customers.
The indictment further accused Kelley of providing falsified spreadsheets to one of his clients — Old Republic Title — that purported to show “large numbers of third-party and refund payments” even when those checks had not been issued.
If Kelley’s first alleged crime was to defraud title company customers, his second criminal act — according to the indictment — was to cover his tracks and avoid paying taxes on the money.
According to the charges, Kelley’s scheme ramped up in May of 2008 when the Hagens Berman law firm filed its class-action lawsuits against several title companies. The indictment said Kelley learned of the lawsuits “no later than the day after they were filed.”
The day after the lawsuits were filed, the indictment said Kelley issued a refund to Frank Cornelius, the lead plaintiff in the case against Fidelity Title, in an effort “to discredit and disqualify” Cornelius as a plaintiff.
By sending that check, said the indictment, Kelley was acknowledging what he had previously denied — “that he was obligated to pay refunds to borrowers.”
Next, the indictment alleged, Kelley shut down his business and “sought to conceal” the nearly $3.8 million he held in three business bank accounts by moving it “through a series of convoluted wire transfers.”
Tax Fraud Scheme
For the next three years, the indictment continued, Kelley sat on the money waiting for the legal cloud hanging over him to clear.
“Kelley sought to avoid payment of taxes on the fraudulently-obtained and stolen funds, at least until after any such action was resolved,” the indictment read.
As evidence, the indictment noted that one month after he settled the Old Republic lawsuit in 2011, Kelley started drawing down the funds and reporting that money as income.
The indictment rejected Kelley’s argument that, on advice of his estate-planning attorney, he didn’t owe taxes on the money until it had been realized.
“The federal income tax system of the United States relies upon citizens to truthfully, accurately, and timely report income and expense information to the IRS,” the indictment said.
The indictment concluded that Kelley underreported his income by $3 million between 2006 and 2008, thus reducing his individual income tax bill by $1 million.
While Kelley may not have initially paid taxes on the millions of dollars he sequestered, it turns out he did report the money to the IRS.
According to a federal search warrant affidavit, the 2008 tax return for Berkeley United showed that the company held approximately $3.6 million in cash in an “impound holding account.”
Kelley later told IRS investigators that it was his understanding that reconveyance fees should be held in an impound account and “drawn down only when earned, at which point the taxpayer should report the money as income and pay tax on it.”
He also told investigators, according to the search warrant affidavit, “that reconveyances typically take about 10 years, and that there were ‘a whole host of charges that are not done yet.’”
As the search warrant noted, this explanation seemed to conflict with Kelley’s testimony in 2010 when he said the fees had been earned.
Asked about a 10-year time frame for completing reconveyances, Judy Caton, who ran Reconveyance Services, Inc., said that didn’t make sense to her.
“I have had some come to us that are several years old from neglected attention,” Caton wrote by email. “And some take maybe a year to complete once we got them in motion, but there really is no logical excuse for a reconveyance file to stay open for 10 years!”
However, Stewart Title in a 2011 court filing said the entire reconveyance tracking process can “take months or years of effort” and that the company doesn’t recognize the tracking fee as income until the reconveyance has been properly recorded.
In their application to search Kelley’s house, the feds wrote that Kelley “has a sophisticated understanding of tax matters.” This was a man who prepared his own business and personal tax returns and had even taught tax law.
After Kelley paid Old Republic more than $1 million to settle the lawsuit, he still had $2,581,653 in reconveyance fees in his Berkeley United account at Vanguard, according to the indictment.
In June 2011, he moved $245,000 from Berkeley United to Blackstone, his Nevada holding company. He then reported that money as gross profits on Blackstone’s IRS filing.
But instead of paying taxes on the full amount, Kelley allegedly claimed $66,147 in business expenses that year, including depreciation on two vehicles, fuel expenses, business travel, conference expenses and subscriptions.
The indictment accused Kelley of “fraudulently deducting various items as business expenses, knowing full well that the deductions were not for legitimate business expenses” but instead were mostly personal expenses.
Kelley told reporters in 2012 that Blackstone was his holding company. But in IRS filings, the feds said, Kelley maintained Blackstone was an active company engaged in document tracking.
The indictment flatly rejected the idea that Blackstone was an active corporation. It pointed out that in 2008, he had shuttered his business, laid-off his employees and later said that all of his company files had been destroyed or lost.
In 2012, Kelley allegedly moved $245,000 from Berkeley United to Blackstone and, once again, declared the money as gross profits in his tax filings. The feds said he took $60,425 in business deductions for such things as sales expenses, business travel and fuel costs — including logging 15,000 miles on a business vehicle.
That happened to be the same year Kelley was campaigning across Washington for state auditor. While the indictment didn’t allege that Kelley claimed a business deduction for miles driven on the campaign trail, it did say that many of the deductions were for “personal or campaign-related expenses.”
The expenses, the indictment said, would give Blackstone the appearance of being a legitimate business “which otherwise would have had substantial income but no reported expenses.”
Kelley continued to draw down the reconveyance funds in $245,000 increments in 2013, 2014 and 2015, according to the indictment. But after being contacted by IRS agents in 2013, the feds said the business expenses Kelley claimed “changed dramatically.” For instance, Kelley sold his business vehicle and no longer claimed depreciation, according to the search warrant affidavit.
By February of 2015, the leftover balance from the reconveyance fees was $1.36 million.
Then on March 26, 2015, 10 days after federal agents searched his house, Kelley sent the IRS a check for $447,421 to pay for future taxes. The rest of the money — more than $900,000 — he sent to a trust account at Davis Wright Tremaine, the Seattle law firm representing him.
The indictment concluded with a demand that, if convicted, Kelley forfeit $1.46 million.
Kelley Defends Himself
After Kelley’s initial court appearance on April 16, during which he pleaded not guilty to all charges, he and his attorneys crossed the street to a hotel ballroom to face reporters at a press conference. Kelley stepped before a bank of television cameras and read from a written statement.
“Thank you all for coming on such short notice today,” Kelley began. He proceeded to accuse federal prosecutors of waging a multi-year witch-hunt against him.
“In the end they’ve been able to obtain that indictment, but they are a long way from proving any wrongdoing,” Kelley said.
He concluded by announcing that he would take an extended leave of absence as state auditor but said he intended to resume his duties once the charges against him “were put to rest.”
With that, Kelley departed leaving his attorneys to field questions.
Attorney Mark Bartlett, the former number two prosecutor in the U.S. Attorney’s office in Seattle, delivered a withering critique of his former colleagues.
“The government is wrong on the facts and they’re wrong on the law,” Bartlett said. “This is an unprecedented prosecution. It is an unjust use of the government’s resources against one solitary individual, Troy Kelley.”
Bartlett praised Kelley as a loving husband, devoted father, public servant and longtime member of the military who had lived an “exemplary life.”
Attorney Robert McCallum, also a former federal prosecutor, called the case a complex “tax timing” matter that should have been resolved civilly, not criminally, with the IRS.
Why, McCallum was asked, did Kelley suddenly write a hefty check to the IRS in the weeks before he was indicted?
McCallum called it “a good faith payment.”
As the news conference wound down, a reporter asked why Kelley ran for statewide office knowing that allegations of misdeeds were in his past.
“I think that tells you more about what was in Troy Kelley’s mind than anything else,” Bartlett said. “He clearly didn’t think he’d done anything wrong, but if he had thought he had done anything wrong, the last thing he would have done is run for office.”
Asked if by running for office he believed Kelley wasn’t committing the ultimate act of hubris, Bartlett responded, “I do not.”
Drumbeat To Resign
On May 4, 2015, Kelley began an indefinite unpaid leave of absence as Washington State Auditor.
Prior to Kelley’s leave, Gov. Inslee demanded a written plan for how the auditor’s office would operate in his absence and he reiterated his call for Kelley to resign.
“You have lost the trust of the public and the agencies that your office oversees,” the governor wrote. “I urge you to put the interests of the people of the state of Washington above your own.”
Kelley refused to resign. He said his director of operations Jan Jutte would be in charge in his absence.
It was an abrupt and somewhat disorienting change of plans for Jutte who had planned to retire after 30 years with the office.
“I have worked under three state auditors,” Jutte said at a news conference in the auditor’s corner office. “I’ve never seen anything like this, so I’m finding my way too.”
One of Jutte’s first decisions as acting auditor was to end Jason Jerue’s employment with the office.
Meantime, Kelley’s fellow Democrats continued to put pressure on him.
In June, Attorney General Bob Ferguson announced that, at the behest of Governor Inslee, he was opening a criminal investigation into Kelley’s hiring of Jerue.
Later that month, 23 of Kelley’s former House colleagues signed a letter demanding that he immediately resign and hinted they might consider impeachment proceedings, something a few Republican lawmakers had been pushing for already. The letter read in part:
“The State Constitution clearly requires an elected official to execute the duties of the Office of the State Auditor. Your inability to execute these duties for an indefinite period raises serious constitutional concern that we strongly believe must be addressed.”
Their letter was hand delivered to the state auditor’s office by longtime Democratic state Representative Sam Hunt of Olympia.
Search Warrant Unsealed
As Kelley prepared to leave office, details about the search of his home by federal agents were unsealed.
In addition to computers, thumb drives and an external hard drive, agents seized boxes of documents relating to Kelley’s businesses.
In a guest bedroom closet they found a file box containing Post Closing Department documents for 2007 and 2008. Another box in the closet had records for United National and Berkeley United. In the laundry room on top of the washing machine was a third box containing documents relating to Berkeley United, Blackstone and Attorney Trustee Services.
An agent with the IRS wrote that documents found in Kelley’s home seemed to “neatly corroborate” Kelley’s claim that, “Blackstone was continuing to work on reconveyances and was incrementally earning the money that was held in an impound account.”
Investigators were suspicious the documents were a bit too convenient. In the search warrant affidavit they wrote: “A closer examination of these documents raises questions about the reasons for, and the timing of their creation.”
That prompted IRS agents to seek a judge’s permission to look inside Kelley’s computers to see if they could find evidence that would prove when Kelley created the documents that purported to date to 2008.
Agents’ suspicions were also aroused by a “bill of sale” they found for a 2012 Toyota Highlander. The document showed Blackstone selling the vehicle for $20,000 to an unnamed buyer.
But it was the date on the bill of sale — February 1, 2013 — that caught the attention of federal investigators. That was just a few weeks before IRS agents interviewed Kelley about his business expenses, which included deductions for vehicle miles and deprecation.
Had Kelley really sold the vehicle before IRS agents came knocking? If so, that would support the theory that the sale had nothing to do with concerns about “criminal exposure.” But the search warrant affidavit called the bill of sale “self-serving in content and timing.”
Spreadsheets Turn Up
In the Old Republic lawsuit, Kelley and his lawyers had repeatedly said that Post Closing’s business documents — including relevant spreadsheets — had been destroyed in the Stewart Title fire or lost when Kelley gave away his glitchy computer and shut down his Yahoo-based server.
“My understanding is that the only surviving records are tax returns, which Mr. Kelley had at his home office,” read a letter from Kelley’s attorney in 2008.
But when agents searched Kelley’s home, they found more than 200 pages of paper spreadsheets. They were grouped into five bundles held together by clip-binders.
The spreadsheets lacked column headers, but on closer examination appeared to show reconveyance files for the years 2004 to 2007, according to the search warrant affidavit.
Once again there were indications that Kelley, in fact, might be continuing to work the files as he claimed. The agents found handwritten notations that seemed to “be an indication that some sort of work was done to track and ‘complete’ that reconveyance.’”
It didn’t add up. In their search warrant affidavit, agents wrote:
“The existence of thousands of lines of detailed individual deeds of trust recording numbers and corresponding reconveyance recording data is inconsistent with Kelley’s prior statements under oath that his business records, with the exception of tax returns, business cards and a ‘few other things,’ had been destroyed in a fire … It is mysterious how Kelley was able to recreate the thousands of lines of information shown on the spreadsheets recovered from his residence.”
The search of Kelley’s house was also notable for what it didn’t turn up. Agents said they found no other evidence that Kelley was actively running a business and following up on reconveyance files. For instance, there were no letters between Kelley or Blackstone and trustees or lenders regarding reconveyances that had not been recorded.
The request to search Kelley’s computers and other electronic storage devices was approved by a judge. It’s not been revealed what federal agents found when they conducted that search and probably won’t be until a trial.
Kelley was not in Pierce County Superior Court on Friday, May 8, for a hearing in the effort to recall him from office. He was represented though, both by the Attorney General’s Office and by a private attorney.
The man behind the recall, Will Knedlik, was allowed to make his case for why Kelley deserved ouster. Knedlik outlined three reasons: Kelley lived in Tacoma, not Olympia, which he argued violated the state constitution; Kelley had not adequately audited Sound Transit; and Kelley had violated the public trust by hiring Jason Jerue.
At the end of the hearing, Judge Frank Cuthbertson ruled from the bench that the allegations against Kelley were “legally and factually” insufficient to allow the recall effort to move forward.
The next development in the criminal case against Kelley came in late May when the U.S. Attorney’s office filed a motion suggesting that Kelley’s attorney Mark Bartlett had a conflict of interest and might have to be removed from the case.
Bartlett ultimately prevailed on that question. But the episode provided him an opportunity to begin to lay out Kelley’s defense and offer an alternative narrative to the grand jury indictment.
Bartlett zeroed in on Kelley’s decision in 2008 to shutter his business in Washington. To federal prosecutors, this was the act of a man determined to run and hide from would-be creditors, even if that meant moving assets offshore. Bartlett suggested that, quite to the contrary, Kelley was acting selflessly when he closed up shop.
“In 2008, Mr. Kelley took steps to shift his focus and energy from managing Post Closing Department and its employees, to serving the citizens of the state of Washington as an elected official,” he wrote.
Bartlett also addressed the question of whether Kelley stole nearly $3.8 million in reconveyance fees from unsuspecting homeowners.
“[It] is a question emphatically disputed by Mr. Kelley … and the fact that the government alleges funds are stolen does not make it so,” he wrote.
Furthermore, Bartlett pointed out, Kelley began drawing down the money in $245,000 annual increments and paying taxes on it in 2011, long before he became aware of a criminal investigation into his actions.
Finally, Bartlett hinted that the prosecution of Kelley was vindictive and unfair. He noted that aside from Old Republic, none of Kelley’s other clients had sued him for keeping the reconveyance fees. Nor, wrote Bartlett, had anyone else in Kelley’s line of business — reconveyance tracking — been prosecuted.
“That is true not just in this district, but throughout the United States,” Bartlett wrote. “Now, however, eight years after the last fees were paid to Post Closing Department, the government is attempting to rewrite the business practices that existed at that time and convert a breach-of-contract action (at best) into a federal criminal prosecution.”
Bartlett wasn’t alone in arguing that federal prosecutors overreached in this case. As part of the grand jury investigation, Kelley’s former associate Amy Cobine said she had been called to testify. Despite their falling out, she came to Kelley’s defense.
“We’re in an industry where there’s the law and there’s the actual practice and those things might not always mesh,” she said in an interview.
Cobine said the reconveyance tracking industry was built on vague contracts, loose regulations and unwritten understandings of what was acceptable.
“Go after him for taxes all day long, the other stuff isn’t anything that everyone else hasn’t done,” Cobine said. “What they’re indicting him on seems like a civil matter … not a criminal matter.”
Kelley also got sympathy from Democratic state Representative Steve Kirby, the longtime chair of the committee that oversees real estate services in Washington.
“He was there during this period of time [when] it was the wild, Wild West,” said Kirby in an interview in the wings of the Washington House. “People made money off money … back then maybe that’s just how business was done.”
New Indictment, New Lawyer
September started with a bang. Kelley got a new attorney, Angelo Calfo, whose clients have included magician David Copperfield and the W.R. Grace and Company, the chemical giant connected with one of the biggest asbestos contaminations in U.S. history.
Then, on September 3, U.S. attorney Annette Hayes announced a superseding indictment against Kelley. This new 17-count indictment replaced the previous 10-count one and added charges of money laundering as well as additional tax counts. It also dropped a charge of attempted obstruction of a civil lawsuit.
Once again, Kelley pleaded not guilty. Afterward, Calfo spoke to reporters in the domed lobby of the federal courthouse in Tacoma.
“There’s no theft, there’s no concealment, there’s no misreporting of income,” Calfo said. He said Kelley was targeted because he’s a statewide elected official.
Kelley has remained mostly out of sight except for court appearances. But the burden of being under indictment has clearly taken a physical toll.
Kelley’s trial is set for March 2016. If convicted, he could face up to 10 or more years in federal prison.
He’s also up for re-election next year.
Regardless of the outcome of the case, the consensus in the state capitol is that Kelley’s political career is over. There’s even talk of an impeachment effort in the Washington House when the Legislature reconvenes in January.
It’s quite a fall for a man who once wrote in an email to Old Republic, “As Abe Lincoln once said, all we have are our reputations.”
Editor’s note: Troy Kelley declined through his attorneys to participate in this story. Kelley did, however, review some facts regarding basic biographical information.
Additionally, Kelley was represented in a 2010 deposition by Judith Endejan, the board chair of KUOW Puget Sound Public Radio. Endejan had no role in the reporting or production of this story.