Troy Kelley, the first Washington state official to be indicted in 35 years, is charged with possession of stolen property, money laundering, lying under oath and tax offenses in connection with the real-estate services firm he ran during last decade’s housing bubble.

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Auditor Troy Kelley, the first Washington state official to be indicted in 35 years, faces a federal trial beginning Monday with hopes of convincing jurors that the $1.4 million he’s accused of stealing before he was in office wasn’t stolen at all.

The 51-year-old Democrat from Tacoma is charged with possession of stolen property, money laundering, lying under oath and tax offenses in connection with the real-estate services firm he operated during the last decade’s housing bubble.

Prosecutors say he pocketed fees that he should have returned to thousands of home­owners, but Kelley’s lawyer, Angelo Calfo, insists his client was entitled to keep the money.

“This is a fraud case that does not have a victim,” Calfo wrote in a trial brief. “The evidence will show that no one lost property or money as a result of the scheme alleged in the government’s indictment.”

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Kelley, a former state representative, was elected in 2012 to be Washington’s auditor, the state official tasked with rooting out fraud and waste in government operations.

Allegations of impropriety against him surfaced during that campaign, prompting federal investigators to take a look at how he ran his old company, Post Closing Department.

What they found, they said, was troubling: To obtain business from mortgage-title companies, Post Closing Department repeatedly promised it would collect fees of $100 to $150 for each deed-of-trust transaction it tracked for their customers; keep $15 or $20 for itself; use some of the money to pay county recording fees or other fees as necessary; and refund any remaining money to the customer.

But in more than 27,000 transactions handled, Kelley issued 89 refunds, investigators and prosecutors say — and that typically was only when customers were savvy enough to demand their money back, when mortgage-title company employees started asking questions about the refunds, or in one case when a homeowner filed a class-action lawsuit against one of the title companies Kelley worked with.

Another title company, Old Republic Title, sued Kelley for not refunding the fees to customers — a lawsuit he settled for $1.1 million, after making what prosecutors contend were false statements about his practices, under oath.

Kelley’s attorney noted in a court filing last week that of that money, just $171,000 made its way back to homeowners, with the company using the rest for legal fees and possibly operating expenses.

Kelley accumulated some $3.7 million by 2008, at least $1.4 million of which was fraudulently retained, the government alleges, and he shifted the money among various accounts including a sham trust in Belize in an effort to shield it from litigation.

He eventually started paying himself $245,000 a year from the proceeds, prosecutors say, and falsely declared tens of thousands of dollars in family expenses as business expenses, to minimize tax liability.

That’s especially problematic, prosecutors say, because Kelley is not only an attorney himself but has even taught tax law.

Kelley’s defense is centered on the notion that neither the title companies nor the homeowners were entitled to refunds.

He never made any representations to the homeowners that they would be provided refunds, and the government cannot show that the title companies had any ownership of the fees their customers paid to Kelley’s company, Calfo argues.

Federal prosecutors insist they don’t have to prove who the money was stolen from — only that it wasn’t Kelley’s to keep.

Kelley took a seven-month leave of absence following his indictment but returned to work in December, over the objections of state officials who have called for his resignation.

Gov. Jay Inslee’s office reiterated in an email last week that Kelley’s “ongoing legal issues are a significant distraction to the Auditor’s office. He should have stepped down a long time ago.”

Jury selection begins Monday morning in U.S. District Court in Tacoma. The trial is scheduled to last four weeks. The most serious charge, money laundering, carries up to 20 years in prison.

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