In Unusual Move, Kelley Defense Calls Lead FBI Agent As Witness
After five weeks, the end of Washington State Auditor Troy Kelley's trial is in sight. Defense attorney Angelo Calfo has spiced up the at times eye-glazing real estate services and tax fraud trial with surprises.
After opening statements, Calfo moved for a mistrial. After the prosecution rested, he moved for most of the charges to be dismissed. The judge rejected both ploys.
Then on Thursday, Calfo did something that can fairly be called unusual for a criminal proceeding: he called as a defense witness the lead FBI agent on the case.
Calfo drilled into Special Agent Michael Brown on the question of whether real estate closing fees that Kelley kept and didn’t refund to homeowners actually represented stolen funds.
Count one of the 16-count indictment against Kelley is possession of stolen funds.
‘Stolen money … not stolen money?’
Calfo noted that after Kelley settled a lawsuit filed against him by one of his former clients, Old Republic Title, for more than $1 million in 2011, Old Republic spent most of the money on legal fees, not refunding customers.
If those were stolen funds, Calfo wanted to know, how could Old Republic use the money instead to pay its lawyers.
“They waved a wand and made [the money] not stolen, right?” Calfo asked Agent Brown with a tinge of sarcasm in his voice. The agent replied that he didn’t agree with that characterization and noted the settlement agreement allowed Old Republic to use the money for legal fees.
“So was it stolen money … or is it not stolen money?” Calfo said his voice rising.
“I believe it is stolen,” Brown said.
Looking back to grand jury testimony
Calfo also sought to show that Brown had given inaccurate testimony to the grand jury that indicted Kelley. One of the grand jurors had asked Brown if the settlement money went to the customers or the lawyers. Brown had responded that the homeowners were notified and got refunds.
“And that was false information, as you now know?” Calfo asked.
“I do,” Brown conceded.
According to Calfo, Old Republic only issued $171,000 in refunds and paid its lawyers more than $800,000.
Brown said he wasn’t aware of that at the time of his grand jury testimony and that his information about refunds had come from a lawyer for Old Republic Title.
Prosecutors waived their right to cross-examine Agent Brown, but have previously said the case hinges not on who the money belonged to, but on proving that Kelley wasn’t entitled to keep it. By contrast, Kelley’s defense has tried to frame the case as a civil contract dispute that the government turned into a criminal indictment because of Kelley’s status as a statewide elected official.
Fees, taxes and lawsuits
The sprawling case against Kelley stems from his work during the pre-recession housing bubble before he was elected state auditor in 2012. From 2002 to 2008, Kelley operated a company, the Post Closing Department, that contracted with title and escrow companies to track reconveyances. A reconveyance is when a lender clears its interest in a property after a sale or refinance. If that doesn’t happen it can create a cloud on title situation.
Typically, Kelley’s clients in Washington state would collect a $100 to $150 reconveyance fee from homeowners at closing and pass along that money to Post Closing. Prosecutors allege Kelley was entitled to keep a small $15 to $20 reconveyance tracking fee, but was obligated to refund the remaining funds if they weren’t needed to pay third party trustee or county recording fees.
Prosecutors say the funds rarely were needed for those purposes, but nevertheless in most cases Kelley kept the entire fee. By 2008, Kelley had amassed more than $3.5 million in reconveyance fees in three business bank accounts. Approximately $1.4 million of those fees are at issue in his trial.
Kelley is also accused of trying to conceal the funds and avoid paying taxes on the money.
In 2008, after consumer class action lawsuits were filed against the escrow and title industry over reconveyance fees, Kelley shut down the Post Closing Department and quickly moved the money through a series of bank transfers. Ultimately the money ended up in a bank account in the name of a new company—an account Kelley later linked to an offshore trust. That’s when Kelley first declared the money to the IRS.
Starting in 2011, after the class actions had been dismissed and the Old Republic lawsuit had been settled, Kelley started drawing down the funds in $245,000 annual installments and paying taxes on the money. Prosecutors assert that Kelley should have reported the income sooner and they allege he took tens-of-thousands of dollars in improper deductions on the money, including purchases of children’s toys and Egyptian cotton sheets.
‘I get paid for being creative’
To counter previous prosecution testimony from an IRS auditor, the defense called a certified public accountant to make the case that Kelley’s tax treatment of the reconveyance funds was legally defensible. Joseph Dawson took the stand armed with a sheaf of tax-related rulings and one-liners about the complexities of tax law.
“You can’t treat the income tax return like a comic book,” Dawson quipped at one point.
Dawson testified that Kelley was justified in not reporting the reconveyance fees as income until after the threat of lawsuits had subsided in 2011. Prior to that point, Dawson said, there were potential “claims” on the money that prevented it from being recognized as income.
As for Kelley’s plan to draw down the funds over 10 years, Dawson called that “appropriate.”
At one point Dawson held up a thick stack of papers representing three sections of the Internal Revenue Code having to do with the particular accounting method that Kelley said he had employed. “It might take you a week to read it and you wouldn’t understand three-quarters of it,” he told the jury. “I don’t.”
Regarding the tax deductions Kelley took in the later years, even though prosecutors say he wasn’t actively doing business, Dawson said that too might be justifiable. “The rules are not necessarily clear,” Dawson said, giving the example of a shipping company that had sold all its ships but still legally claimed substantial tax deductions.
Dawson did draw the line on tax deductions for Egyptian cotton sheets and toys. “I get paid for being creative … [but] no, you can’t deduct them,” Dawson said.
On cross-examination, Assistant U.S. Attorney Katheryn Frierson got Dawson to acknowledge that if the money Kelley possessed was stolen, then his delayed reporting to the IRS was not justified.
“Stolen money is considered income, isn’t that right?” she asked.
“In most situations, yes,” Dawson replied.
“And stolen money should be reported in the year it’s taken?” she followed up.
“Again, in most situations, yes,” Dawson agreed.
Refunds rarely given
Earlier in the day, the defense called a representative of Stewart Title to testify about reconveyance fees and refunds.
Kimberly McDermid, an escrow manager and vice president, said that in the past her firm had collected a $100 to $125 reconveyance fee at closings.
“How often would you say refunds were given?” defense attorney Patty Eakes asked.
“Rarely,” McDermid answered.
On cross-examination, the prosecution established that when McDermid later outsourced reconveyance tracking to a third party tracking firm it was for a flat $20 tracking fee and the vendor had to absorb any additional costs.
The defense plans to call its last witness Monday. Jury instructions and closing arguments are expected on Tuesday.
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