Oh you meant his epilogue, sorry I got confused and thought you meant how he originally got in prison. I totally forgot his ending.
Just found a youtube video of Suikoden 2 where Riou recruits Lorelai with Killey in the party: https://www.youtube.com/watch?v=RHnLcYTrbiw
Don't forget Killey has a sh!tty attitude even at the best of times. He nearly earned himself a beating from Viktor, Flik and Tsai when he came into the castle and attacked Alex, so he probably went around questioning people about Sindar rumors, got into a dispute with someone (maybe a rival treasure hunter? maybe a former Godwin scholar? Maybe one of the Sun palace rune keepers?) things got out of hand, and he ended up being arrested by Falenan guards.
On a side note: You'd think Killey would have sought out Takamu's assistance, as Takamu has carefully surveyed the country and his eyes have become so keen that he can see through an enchanted elfen trail. Discovering lost sindar ruins should be a piece of cake for him.