A federal prosecutor argued Tuesday that $908,000 seized from indicted Washington state Auditor Troy Kelley constituted stolen funds that were directly traceable to money laundering and should not be returned.

The assertion by Assistant U.S. Attorney Richard Cohen came during his opening statement at a two-day hearing to consider whether the money was properly seized by federal authorities investigating Kelley.

Defense attorney Angelo Calfo countered in his opening statement that the disputed money was part of a contract dispute, and prosecutors don't have a viable theory to support their case.

"The money wasn't stolen from anybody," Calfo said, arguing that Kelley simply moved money among different accounts.

"That's not money laundering. That's money transferring." he told U.S. District Judge Ronald Leighton.

Federal prosecutors in September obtained a civil warrant for the money, which was being held in trust by the law firm that previously represented Kelley.

The government says the money had been commingled with money that Kelley stole from clients of his former real estate services business, and he has no right to it.

Kelley , 50, a Democrat from Tacoma, is charged with possession of more than $1 million in stolen money as well as money laundering. Calfo has said the government has not made a showing that the money is subject to forfeiture.