Indicted State Auditor Troy Kelley is challenging the government’s seizure of $908,000 in allegedly “tainted” funds. A two-day hearing under way in U.S. District Court in Tacoma will be the first test of the government’s case against him.

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TACOMA — The attorney for indicted State Auditor Troy Kelley spent three hours Tuesday grilling an FBI agent and challenging the foundations of the federal criminal case alleging Kelley stole money from homebuyers and then tried to hide it.

The searing cross-examination of Special Agent Michael Brown by white-collar defense attorney Angelo Calfo revealed that the practices federal prosecutors say should send Kelley to prison were apparently standard business practices among title companies operating at the time.

Brown could not name a single title company that routinely refunded title reconveyance fees, which are collected to ensure a title is clear of any problems when a home is sold. Kelley’s alleged failure to refund millions in fees collected by his reconveyance company, Post Closing Department, are at the heart of theft and money-laundering charges brought by prosecutors against Kelley earlier this year.

Federal prosecutors have also indicted Kelley on tax-evasion and money-laundering charges.

The testimony came during a hearing in which Kelley has challenged the government’s seizure of $908,000 from his former attorneys. The government claims that money is “tainted” and was stolen from homebuyers who paid as much as $140 to escrow companies to ensure the title to the property was clear.

Kelley’s business agreed to track titles through the reconveyance process for between $15 and $20 for each title. The government claims Kelley was supposed to refund the remainder of the money to the homebuyer when the sale was complete but didn’t, accumulating more than $2.5 million that prosecutors claim are ill-gotten gains.

Brown, however, squirmed when Calfo repeatedly asked him to show where it was specified the money would be returned to the homebuyers and when the lawyer introduced documents showing the companies that hired Post Closing Department never promised the money would be repaid.

Some of those title companies were later targeted in class-action lawsuits by consumers, but Brown acknowledges that all those suits were eventually dismissed, mostly under the theory the homebuyers were never promised refunds and that they had received a service for the fee.

Kelley and Post Closing Department were sued by Old Republic Title over the fees, and Kelley settled that lawsuit for just over $1 million. Ostensibly, that settlement was supposed to be paid in refunds to the homeowners, but Brown acknowledged he could not say for sure that ever happened.

He did say that if Old Republic Title did not use the settlement money — which the government believes Kelley stole — to pay back homebuyers, it would be “wrong.”

Calfo also challenged Brown’s assertion under direct examination by Assistant U.S. Attorney Andrew Friedman that Kelley attempted to hide the money by transferring it through accounts linked to various companies he had set up after Post Closing Department shut down in 2009, and eventually to a Cayman Island bank.

Brown acknowledged that Kelley’s name was associated with every account and every company.

“He did not hide the companies, did he?” Calfo asked the agent. “He didn’t conceal his association with any of those companies?”

“That’s correct,” Brown said.

Kelley, 50, a Democrat from Tacoma, shuttered Post Closing Department in 2009, just after the real-estate bubble burst. He was elected auditor in 2012. Kelley has taken unpaid leave, with a veteran employee serving as acting auditor.

A number of class-action lawsuits were filed against escrow and title companies, including the lawsuit filed against Kelley and Post Closing Department by Old Republic Title over the refunds.

However, it was a lawsuit filed against one of his clients, Fidelity Title, by a man named Frank Cornelius that has drawn the focus of the Kelley prosecution.

Shortly after Cornelius sued — alleging he and others were owed refunds for reconveyance charges — he received a letter from Post Closing Department and a cashier’s check for $250 for two real-estate transactions. In each, he had paid $140 — for a total of $280.

The $250 refund would likely have represented the money left over after the two $15 reconveyance charges had been deducted, the FBI’s Brown explained under questioning by Friedman.

Kelley was questioned about the Cornelius refund under oath during a deposition in 2010, and said he believed it had been sent by an office underling and had no specific knowledge of it.

However, Brown testified that the employee was not in Washington at the time the letter was sent. The investigation showed the cashier’s check was drawn on a bank just blocks from Kelley’s Tacoma home, and that records show Kelley made an ATM withdrawal from that bank that same day.

Prosecutors have also focused on the more than $2.5 million Post Closing Department had accumulated before closings its doors, alleging all that money should have been refunded and that it amounts to stolen property.

The $908,000 seized by agents from his attorneys came from that pot, the government claims.

Kelley, under questioning by the Internal Revenue Service in 2013, said the money was still being used to provide refunds and claimed that sometimes reconveyance transactions can take a decade to complete. He said he was holding the money until those transactions were complete, then a refund would issue.

Brown testified that PCD employees said most reconveyance transactions were completed within 90 days.