State auditor indicted; governor, attorney general, others call on him to resign

SEATTLE — Washington State Auditor Troy Kelley pleaded not guilty Thursday to federal charges of filing false tax returns, attempted obstruction and possession of stolen property.

A grand jury indictment unsealed Thursday accused him of various misdeeds in connection with mortgage title services companies he ran before his election in 2012.

Federal prosecutors say 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.

Kelley was dressed in a navy suit and flanked by his attorneys as he appeared Thursday afternoon for his arraignment at U.S. District Court in Tacoma.

As the state auditor, he's charged with rooting out government fraud and abuse.

According to the indictment, between 2003 and 2008 Kelley operated a business that was paid by real estate title companies. Kelley allegedly had agreements with those companies for fees he could change in connection with document-tracking work. Kelley allegedly kept money from transactions with the companies, resulting in more than $2 million in stolen money.

Furthermore, the indictment alleges the state auditor failed to pay federal taxes and obstructed IRS in its efforts to collect taxes from him.

Speculation has been swirling around Kelley, a Democrat elected in 2012, since federal agents searched his home last month. Kelley has insisted he did nothing wrong. He released the following statement after the indictment.

Kelley announced he will take a temporary leave of absence from his office starting May 1.

“I am obviously disappointed that the U.S. Attorney’s office has taken this action. I believe the indictment has no merit and want to note that none of the allegations touch on my work as an elected official in any way.

“For the past few years, I have been the subject of an intense investigation by the federal government about my private business practices going back more than ten years. While never confronting me with specific allegations – or the basis for those allegations – they have probed and prodded, seemingly moving from one aspect of my former career to another. Presumably they have used the secret grand jury process to construct a case against me, questioning dozens of witnesses and examining every aspect of my professional life until they could weave together an ill-conceived narrative from which to base the charges.

“In the end, they’ve been able to obtain an indictment, but they are a long way from proving any wrongdoing. Put more directly, I am very confident that I will be able to prove my innocence. 

“The government’s allegations revolve largely around agreements and dealings I had with other private businesses. In my mind, those issues should be handled through civil litigation between the parties. In fact, many of the issues brought forth by the government were addressed – and settled – years ago.  My business practices in my work around real estate and reconveyance were squarely in line with standard industry practices.

“I filed annual tax returns with the IRS on a timely basis, in adherence to the law, disclosing the existence of the funds that are a central part of the government’s case. I have been paying taxes on those funds long before the government’s interest in this case.

“The last two years have been extraordinarily difficult for my family and me. My constituents, friends and coworkers have all called for me to address the allegations and rumors surrounding the government’s investigation, but since the government has never disclosed the specifics of its allegations to me, I could not. I hope everyone now understands why I remained silent. Now that the U.S. Attorney has made the investigation public, I am determined to fight back.  Our system recognizes the power of judges and juries to sort fact from fiction, and I have confidence that this unbiased process will vindicate me.

“Beginning May 1st, I will take a temporary leave of absence from my duties as Washington State Auditor to allow my office to continue to do its important work without distraction. I fully intend to resume my duties after I put these legal matters to rest.”

However, Gov. Jay Inslee, also a Democrat, issued a statement shortly after the indictment was announced that called on Kelley to resign immediately.

“This indictment today makes it clear to me that Troy Kelley cannot continue as state auditor. He should resign immediately,” Inslee said. “An appointee can restore confidence in the office and assure the public that the Office of the State Auditor will operate at the high standards required of the post.”

State Attorney General Bob Ferguson, also a Democrat, later joined Inslee in calling on Kelley to resign.

"The many dedicated career public servants who staff the State Auditor’s Office should be able to perform their important work free of the cloud of uncertainty and distraction the Auditor’s situation now creates," Ferguson said.

"The sooner that cloud is lifted, the better.  That’s why I am calling upon Troy Kelley to resign as auditor immediately," Ferguson said.