Thursday, April 16, 2015

Whole lotta fraud: Dive into the indictment of Washington state auditor Troy X. Kelley

Posted By on Thu, Apr 16, 2015 at 12:06 PM

Not the results voters were expecting, though.
  • Not the results voters were expecting, though.

Who audits the auditor?

In Washington state auditor Troy X. Kelley's case, it's the U.S. Justice Department. Kelley was just indicted on 10 counts. That includes tax evasion, but it's far worse than that. We're talking lies, theft and fraud. The words "fraud" or "fraudulent" appear 35 times in the indictment.

Washington state is supposed to be one of the least corrupt states in the nation. But here, at least, is a big potential counter-example. 

Kelley has pled "not guilty" to the indictment. In the meantime, we've posted the entire 41-page indictment below, for those hungry for a white collar crime story. We've highlighted some of the big takeaways to whet your appetite. As you read through, keep thinking to yourself: This is the guy Washington voters elected as state auditor in 2012. 

A lot of this hinges on a process called "reconveyance." Once a person completely pays their mortgage on a piece of property, the property title is transferred from the lender to the property owner. There's an entire industry devoted to tracking the reconveyances and to help collect fees, something Kelley did for a company called "Post Closing Department." 

He's alleged to have stolen some of those fees. 
In reliance upon TROY X. KELLEY’s representations, Fidelity and Old Republic entrusted TROY X. KELLEY and Post Closing Department with millions of dollars of reconveyance fees. In truth and in fact, TROY X. KELLEY lied to Fidelity and Old Republic and did not administer the reconveyance fees as promised. Contrary to his representations, TROY X. KELLEY did not refund unused portions of reconveyance fees to borrowers, but instead fraudulently retained, stole, and converted them to his own use. 
We're talking $1.46 million dollars here that he failed to properly refund. The indictment says he did, however, begin issuing refunds when they actually complained.  
Unbeknownst to Fidelity and borrowers, and contrary to his representations and promises, TROY X. KELLEY directed Post Closing Department employees to issue refund checks in limited circumstances, typically, when an escrow company or a borrower complained that the borrower had not received a refund to which the borrower was entitled.
An employee of his allegedly manufactured a fake spreadsheet to make it appear that Kelley's company was following the law. 
After the Post Closing Department employee prepared “zeroed out” spreadsheets that falsely showed that large numbers of third-party and refund payments had been made, TROY X. KELLEY caused the spreadsheets to be provided to the Old Republic personnel who had requested the information as supposed proof that Post Closing Department was handling reconveyance fees appropriately. In truth and in fact, TROY X. KELLEY well knew that Post Closing Department had not made the payments to trustees and county recorder’s offices shown in the spreadsheets, and that it was not paying refunds as required.
And when lawsuits started cropping up around companies Kelley worked with, he started playing a shell game, the indictment says.  
In June 2008, anticipating that borrowers and escrow companies might seek the return of such fees from Post Closing Department, TROY X. KELLEY, attempted to conceal the funds by moving them rapidly between numerous bank accounts, and eventually depositing the funds into an account in the name of a newly-created shell entity controlled by TROY X. KELLEY. 
...
Within a month after learning of the class action lawsuits, TROY X. KELLEY sought to conceal $3,782,226 held in Post Closing Department’s Columbia Bank accounts by moving the money through a series of convoluted wire transfers through various newly-opened bank accounts. 
Then, in a 2009 civil lawsuit from one of those companies, the indictment says Kelley repeatedly lied. 
Old Republic sued TROY X. KELLEY, seeking the return of unused reconveyance fees. In the course of the litigation with Old Republic, TROY X. 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. 
Naturally, he was supposed to have paid taxes on his ill-gotten gains. According to the indictment, he didn't, and constantly lied to try to make his actions appear legit. 
Beginning in or before 2007 and continuing until the present, at Tacoma and elsewhere, in the Western District of Washington, TROY X. KELLEY did corruptly endeavor to obstruct and impede the due administration of the internal revenue laws by failing to declare income that he had obtained by fraud and stolen in the years in which he obtained such income, by falsely declaring a portion of that income in later years in an attempt to make the income legitimate, by claiming fraudulent deductions to reduce his tax obligation on the portion of the income that he did declare, and by making false statements to Internal Revenue Service employees who interviewed him concerning the income.
What sort of fraudulent deductions? 
...approximately $28,535.32 of the declared deductions consisted of depreciation of two vehicles, including a new vehicle purchased in 2011. TROY X. KELLEY indicated in Form 4562 that both vehicles were used 100% for the business. 

The remaining business deductions were itemized in a personally-prepared schedule entitled “Profit & Loss Statement,” and appended to Blackstone’s return. The schedule noted, for example, $5,162.21 in fuel expenses, $8,830.40 in business travel, $3,065.48 in conference education expenses, $7,402.12 in sales expenses, and $2,974.35 for subscriptions and books.

In truth and fact, as TROY X. KELLEY well knew, many of the expenses that TROY X. KELLEY declared as business deductions on Blackstone’s Form 1120s were personal expenses, and the expenses were not expenses associated with any business that Blackstone had engaged in during the tax year 2011.
And then there's this little issue... 
On the evening of June 25, 2008, a fire was reported at the Stewart Title offices in Everett, Washington. By 11:00 p.m., on June 25, 2008, Stewart Title had burned to the ground. TROY X. KELLEY subsequently represented that all of Post Closing Department’s records had been destroyed in that fire and in a subsequent crash of his computer.
and this...
On September 23, 2008, after learning of the existence of Post Closing Department, the class action plaintiffs served TROY X. KELLEY with subpoenas demanding that he produce books and records. On that same date, to ensure his ability to further conceal the funds he previously had hidden from the class action litigants, TROY X. KELLEY submitted to Vanguard an International Wire Option Form, providing him with the option of wiring funds from the Berkeley United account at Vanguard, to an account in the name of Wellington Trust at Atlantic International Bank in Belize.
Again, this is the state auditor, the guy who has been nitpicking at how Spokane's golf courses have handled their money.

Here's the full indictment: 

Troy Kelley's Big Indictment


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