Federal prosecutors say former Washington state Auditor Troy Kelley’s conviction for tax obstruction should be dismissed because of a recent U.S. Supreme Court ruling. However, they are opposing motions by Kelley's defense to overturn his convictions on other felony charges, including possession of stolen property.
Assistant U.S. Attorney Arlen Storm made the request for dismissal in a court filing Thursday. It came in response to a previous motion by Kelley’s defense team to have the charge dismissed based on a March ruling in a case known as Marinello v. United States. That ruling changed the threshold for convicting someone of corrupt interference in an Internal Revenue Service tax case.
In a statement, Kelley’s attorney Angelo Calfo said, “Troy’s conduct as charged in the indictment was not even a crime--you cannot obstruct the IRS simply by disagreeing.”
The final decision to dismiss the conviction will rest with U.S. District Judge Ronald Leighton, the trial judge.
In a separate, much lengthier filing, prosecutors argued against Kelley’s motion to be acquitted or granted a new trial on the marquee charge in his real estate fraud case, possession of stolen funds.
“This motion marks the sixth time Troy Kelley has moved for acquittal on Count 1,” wrote Assistant U.S. Attorney Seth Wilkinson. “The court has previously rejected Kelley’s argument five times, and for good reason.”
Kelley was convicted last December, at the conclusion of his second trial, of illegally pocketing nearly $1.5 million in real estate closing fees that prosecutors told jurors should have been refunded to homeowners.
In addition, Kelley was convicted of making false declarations and filing false tax returns. Jurors acquitted him on five counts of money laundering that each carried a maximum penalty of 20 years in prison. His lawyers say he’s now obtained dismissals or acquittals on a total of eight of the government’s original charges.
Between 2003 and 2008, during the height of the housing bubble, Kelly ran a small real estate services company called the Post Closing Department that contracted with escrow companies. PCD’s job was to ensure that lenders cleared their interest in a property after a bank loan was paid off. This is known as a reconveyance.
At real estate closings, home sellers were charged a reconveyance fee of between $135 and $150 for purposes of ensuring the reconveyance was properly recorded. Kelley’s escrow company clients would then pass along that entire fee to PCD. At trial, prosecutors said Kelley was entitled to keep a $15 to $20 “tracking fee,” but was legally obligated to refund the remaining portion of the fee if that money wasn’t needed to complete the reconveyance. In most cases it was not.
Kelley’s defense countered that homeowners knowingly paid the reconveyance fee, had no expectation of a refund and that Kelley was not obligated contractually or legally to issue refunds, even though he did pay refunds in some cases as a courtesy to customers. The defense has also argued that Kelley’s actions were consistent with industry practices at the time and have suggested he was unfairly targeted for prosecution because of his public role as state auditor.
In recent court filings, Kelley’s defense argued the evidence in the case is insufficient to sustain his conviction.
“Crucially for this case, property transferred with the consent of the owner cannot be considered stolen,” the defense wrote last month in its motion for acquittal. “The reconveyance fee … was never listed as an estimate, deposit, or holdback; instead, it was presented to the borrowers as a pure fee.”
Responding to the defense motion for acquittal, prosecutors counter that “overwhelming evidence” was presented at trial to show the excess fees did not belong to Kelley. In addition, prosecutors wrote: “Kelley was acting outside the owners’ consent when he took funds in excess of the agreed $15 to $20 per transaction.”
If the judge doesn’t grant an acquittal, Kelley’s lawyers are asking for a new trial based on several arguments including that they didn’t have time to investigate and rebut new evidence presented just before the start of Kelley’s second trial.
In response to that motion, prosecutors wrote: “Kelley has failed to identify any actual error, let alone an error that would require a new trial.”
Separately, Kelley’s defense team is also mounting pre-sentencing challenges to his conviction for making false statements in a civil deposition.
Kelley’s first trial in 2016 ended with the jury finding him not guilty of lying to the IRS and deadlocking on all remaining counts.
He was retried beginning last November. Since then, Kelley’s sentencing has been delayed several times and is now scheduled for June 29. If the trial judge doesn’t grant their motions, Kelley’s attorneys have said they plan a post-sentencing appeal to the Ninth Circuit Court of Appeals.
Kelley, a Democrat, left office in January 2017 after a tumultuous single term as state auditor during which he took a nearly seven month leave of absence following his indictment by a federal grand jury in April 2015. Previously, he was a state lawmaker. Kelley has also served as an attorney in the Washington National Guard, but a spokeswoman for the Military Department said Friday that he’s currently transitioning out of the Guard.