Jury deadlocks on key charges against state auditor

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A federal jury on Tuesday failed to reach a verdict on key charges in the fraud trial of Washington State Auditor Troy Kelley, and they acquitted him of lying to the IRS on the single count where they could agree.

Kelley was accused of pocketing $3 million in fees that should have been refunded to homeowners when he ran a real-estate services business before becoming auditor.

The jury found Kelley not guilty of one count of making a false statement in their fourth day of deliberations Tuesday, following a trial that spanned more than five weeks.

Kelley was the first Washington state official indicted in 35 years.

The charges stem from his operation of a business called Post Closing Department during the height of the housing boom before he was elected auditor, a position that entails rooting out waste and fraud in public agencies.

His trial lasted more than five weeks and featured testimony from a former employee, Jason Jerue, who told jurors that Kelley ordered him to falsify documents to hide that he wasn't paying the refunds.

Assistant U.S. Attorney Katheryn Kim Frierson told jurors that Kelley's actions included moving money among various accounts to hide the proceeds, trying to pay off a homeowner who filed a lawsuit over the retained fees, and lying in civil litigation as well as on his taxes.

Kelley, a lawyer who has taught tax law courses, faced 15 counts, including money laundering and tax evasion. The charges date to 2005 when his company tracked escrow paperwork for title companies.

Prosecutors say that to obtain business from the title companies — and get access to vast sums of money from homeowners — Kelley promised that Post Closing Department would collect $100 to $150 for each transaction it tracked; keep $15 or $20 for itself; use some of the money to pay county recording and other fees if necessary; and refund the customer any remaining money.

In tens of thousands of cases, the additional fees were not needed, but Kelley retained the money anyway. He refunded the balance only in a relatively few instances when title companies began asking uncomfortable questions or when homeowners were savvy enough to demand it, prosecutors said.

Kelley's attorneys insisted that the homeowners were never promised refunds, and therefore no one was harmed by Kelley's actions — even if they might have been unethical business practices.

One defense attorney, Angelo Calfo, sought to dismantle the government's case point-by-point in his closing argument, saying that because of Kelley's high political profile, investigators set out from the beginning to win a conviction — not to find the truth — and as a result ignored evidence of his client's innocence.

The case is "based on a fundamental premise, a fundamental misconception, and that is that Troy Kelley was dealing with other people's money," Calfo said. "He wasn't."

The most serious charge against Kelley was money laundering, which carries a maximum of up to 20 years in prison.

Kelley, a Democrat, had refused to resign, but his lawyers say he won't seek re-election.