The charges, announced by U.S. Attorney Zane David Memeger, uncorked an investigation that had simmered for more than two years, and that has threatened to entangle a longtime city politician with ties to both defendants, State Rep. William Keller (D., Phila.).
DiSpaldo, 57, works as a key aide to Keller and ran her nonprofit organization, Community to Police Communications, from his South Philadelphia legislative office.
FBI agents raided that office and Mulgrew's home more than two years ago. Among other things, they sought information related to Friends of Dickinson Square, a nonprofit civic group formed in the 1990s to revitalize and maintain the historic park at Fourth and Tasker Streets in Keller's district.
Mulgrew, 55, who joined the Traffic Court bench four years ago, serves as vice president of Friends of Dickinson Square.
But the indictment said he and DiSpaldo effectively controlled that civic group and the police nonprofit, dipping into their funds and spending the money when and how they wanted.
Nearly $900,000 in state grants poured into the groups between 1996 and 2008, part of the mountain of state money earmarked each year for "economic development" that flows, sometimes unchecked, from Harrisburg to civic organizations.
In its application, the Dickinson Square group sought grants for equipment and materials to maintain the park and neighborhood. Community to Police Communications pledged to spend its money on phone equipment for city police officers and materials to secure vacant lots.
Some of the grant money was spent as promised. But according to the indictment, much was not.
Mulgrew allegedly used his stack of blank checks to lease pickup trucks and buy himself work boots, an $827 camera, and even cigarettes. He also hired an exterminator, bought a Christmas tree, and paid for what the indictment described as "waterfall equipment."
He and DiSpaldo were equally generous with others, the indictment said. Using grant money, the pair regularly passed checks totaling tens of thousands of dollars to Mulgrew's son, nephew, and others, including two unnamed people described in the indictment as "lifelong friends" of Keller's.
DiSpaldo, authorities say, also dipped into her group's grant funds to pay $12,700 to an office cleaner and "errand runner" in Keller's office.
To cover their tracks, the pair allegedly lied on the mandatory reports they filed with the state, either vastly understating their expenses or mislabeling them as such things as vendor payments or for "constituent services" for the state representative.
Keller, a 61-year-old former longshoreman, has represented his district since 1994. He did not return calls seeking comment Thursday.
His lawyer, Fortunato N. Perri Jr., wouldn't discuss the legislator's ties to the case, except to say: "I think it's clear from the facts contained in the indictment he has not been implicated in any criminal activity."
Assistant U.S. Attorney Paul Gray, the lead prosecutor in the case, declined to discuss Keller's knowledge of the alleged wrongdoing.
The probe was a poorly kept secret, but the arrest wasn't. FBI agents fanned out early Thursday to roust the defendants from their homes.
As he was led in handcuffs into court, the Traffic Court judge appeared dressed for the beach, not the bench. He wore baggy shorts, a blue golf shirt, and brown sandals.
One at a time, Mulgrew, his wife, 55, and DiSpaldo stood before U.S. Magistrate Judge Elizabeth T. Hey and pleaded not guilty to the charges. Each was released on bail.
Outside the courthouse, their lawyers declined to parse the allegations but proclaimed that the defendants were innocent. "We will vigorously defend against these charges," Catherine M. Recker, lawyer for DiSpaldo, said, echoing the common refrain.
Councilman Mark Squilla, who represents the Dickinson Square area, said Mulgrew's group was well-regarded in the neighborhood for cleaning alleys, mulching in the park, and putting local youths to work in their signature orange T-shirts.
"They did a lot of work that you couldn't get the city to do," Squilla said. "It was, to me, a positive organization."
Mulgrew's lawyer, Angie Halim, said Mulgrew intended to report to work Friday morning. Court officials weren't so sure.
Frank Keel, a spokesman for the court, said the state Supreme Court would decide whether Mulgrew can keep his post while under indictment.
Keel noted that the case was unrelated to the other ones that have roiled the city's Traffic Court and stirred the judiciary to promise reform.
In December, state Chief Justice Ronald D. Castille removed administrative Judge Michael D. Sullivan after FBI agents raided Sullivan's home in connection with an ongoing investigation into ticket-fixing.
Another judge, Willie Singletary, resigned in February after allegedly showing photos of his genitals to a coworker. A third, Senior Judge Bernice DeAngelis, was dismissed in April.
Traffic Court judges don't have to be lawyers. With six-year terms and an $89,000 paycheck each year, the positions have become political plums.
Mulgrew, who won his seat in 2007, was a member of the politically influential International Brotherhood of Electrical Workers, so the raid on his home two years ago stirred questions about where the probe could lead.
At the time, agents also searched the office of Martin O'Rourke, a public relations consultant and onetime spokesman for Keller.
But O'Rourke was not mentioned in Thursday's indictment. Nor was there any link to another personal and political ally of Mulgrew and Keller, the electricians' union boss, John J. "Johnny Doc" Dougherty.
Contact John P. Martin at 215-854-4774, email@example.com, or follow @JPMartinInky on Twitter.
Inquirer staff writers Troy Graham and Jeffrey Shields contributed to this article.