Washington auditor resists calls to resign office; pleads not guilty to federal indictment

Washington state Auditor Troy Kelley has pleaded not guilty to charges that could ultimately force him from office but he is refusing bipartisan calls from the state's political leaders to resign immediately.

Kelley, the elected official charged with rooting out government fraud and waste, appeared Thursday afternoon for his arraignment in U.S. District Court in Tacoma after a federal grand jury indictment charged him with filing false tax returns, attempted obstruction of a civil lawsuit and possession of more than $1 million in stolen property related to his former business.

A magistrate judge set trial for June 8.

"I did not break the law," Kelley said at a news conference after the hearing. "And I want to be extremely clear here: I never, ever thought I was breaking the law, and I still do not to this day."

The 41-page indictment, unsealed earlier in the day, alleged various misdeeds by Kelley in connection with mortgage title services companies he previously ran. Federal prosecutors said he kept more than $1 million that should have been refunded to customers and that he unlawfully avoided paying taxes by claiming personal or campaign expenses were business-related.

"Mr. Kelley spun a web of lies in an effort to avoid paying his taxes and keep more than a million dollars that he knew did not belong to him, but instead should have been returned to thousands of homeowners across this state," acting U.S. Attorney Annette L. Hayes said.

The most serious charge carries up to 20 years in prison. A felony conviction would automatically force him from office, and some lawmakers spoke about the possibility of impeaching him in light of the charges alone.

Washington Gov. Jay Inslee called on Kelley to resign, as did Attorney General Bob Ferguson and several other lawmakers, including state Sen. Mark Miloscia, a Federal Way Republican who ran against Kelley for auditor.

However, Kelley has said he would only take a temporary leave of absence beginning May 1, and that he was "determined to fight back" and ultimately return to his position.

Rep. Drew Stokesbary, a Republican from Auburn, said he and some of his colleagues have discussed the possibility of impeachment with House attorneys.

"Every single person in the Capitol thinks he needs to resign, other than himself," Stokesbary said. "He's putting his own personal and financial interests above the interests of the people of this state."

Speculation has been swirling around Kelley, a Democrat elected in 2012, since last month, when federal agents searched his home and subpoenaed the auditor's office for records concerning a longtime business associate who subsequently went to work for Kelley at the state agency.

Days after the search, Kelley wrote a $447,000 check to the U.S. Treasury Department, noting in the subject line that it would cover future tax debts, the indictment said.

Kelley's company, Post Closing Department, worked with escrow and mortgage title companies to track certain real estate transactions. According to the indictment, it was supposed to collect up to $150 in advance as a fee for each transaction; keep $15 to $20 for its services; pay any government fees required; and then refund whatever portion remained. Instead, Kelley kept the money, the indictment said — an amount that totaled at least $3 million from 2006 to 2008.

One of the escrow companies Kelley worked with, Old Republic Title, sued him in 2009. He eventually paid more than $1 million to settle the case.

According to the indictment, "Kelley gave false testimony during a deposition, lied in sworn declarations submitted to the Court, and misled Old Republic as to the whereabouts of the unlawfully retained reconveyance fees through false and fraudulent answers to interrogatories."

Attempted obstruction of a civil lawsuit carries a maximum sentence of up to 20 years. Possession and concealment of stolen property carries up to 10 years. Kelley is also charged with corrupt interference with internal revenue laws.

The government is also seeking an order that Kelley forfeit nearly $1.5 million.


La Corte reported from Olympia. Gene Johnson contributed from Seattle.