NC lawmaker gets big pay while loaning friends federal money

UPDATES:

• A more subdued LaRoque in court on embezzlement charges — NC Policy Watch (8/06/2012)
• “Stephen LaRoque, Republican Who Hired Unemployed Workers To Clean His Yard, Under Federal Indictment,” — Huffington Post (7/31/2012)
• Elections board may take second look at LaRoque campaign loans — NC Policy Watch (7/27/2012)
• Ovaska discusses LaRoque case on “News & Views” (video) — NC Policy Watch (7/25/2012)
• N.C. Rep. Stephen LaRoque resigns, denies federal charges — NC Policy Watch (7/25/2012)
• LaRoque facing more investigations by legislative colleagues — NC Policy Watch (7/25/2012)
• Editorial: No Cure – Ethics panels useless unless they act — Fayetteville Observer (7/25/2012)

KINSTON—As N.C. Rep. Stephen LaRoque tells it on the campaign trail, both state and federal government are too big, wasteful of taxpayers’ money and in the way of private business.

“Government can’t be all things to all people,” said LaRoque, a conservative Republican from Kinston, in a televised debate before his 2010 re-election. “We need more self-reliance and accountability.”

But LaRoque, who returned in January to the N.C. General Assembly after a four-year hiatus, takes aim at government waste while quietly accepting generous six-figure paychecks for running two public charities funded with $8 million in federal dollars since 1997.

He’s earned up to $195,000 a year heading the two small economic development organizations—the East Carolina Development Company and Piedmont Development Company—and used the non-profits to loan some of the public funds to his close associates and political allies. Past board members say they were kept in the dark about his pay.

“I was not aware that he was compensated at all,” said CeCe Hudson, a former board member from Sampson County. “I don’t think there’s anything wrong with being compensated fairly, but there’s a line.”

LaRoque, now in a leadership position at the N.C. General Assembly, refused to answer questions about the management of his non-profits.

“I’m not going to answer them,” LaRoque said.

When the U.S. Department of Agriculture entrusted LaRoque with nearly $7.5 million through their Intermediary Relending Program, and $582,000 more through their Rural Business Enterprise Grant program, they did so with the expectation that the money would end up with small business owners in rural areas that couldn’t get financing for their businesses elsewhere.

But, in LaRoque’s case, some of the money and proceeds also went to cover LaRoque’s big salaries and help those close to him.

A two-month N.C. Policy Watch investigation uncovered questionable management and financial dealings over the last decade at LaRoque’s federally-funded public charities. Both of the non-profits are now housed and run under a for-profit company, the LaRoque Management Group in Kinston, that LaRoque and his brother Walter run, according to the website of the company.

Among the investigation’s findings are:

• LaRoque received $100,000 to $195,000 a year in compensation as the sole employee of the small non-profit—much more than what others running similar organizations made.
• He stacked the board of directors for his non-profits with immediate family members, a move that runs afoul of both IRS and USDA guidelines.
• He used the non-profits to loan federal money to close associates, including loans of $100,000 to $300,000 to a board member, the private law firm he uses for political lawsuits, his wife and two fellow GOP legislators.
• The USDA admonished LaRoque in 2010 for making loans above a $250,000 cap on loans, including $2 million a single developer received

The investigation relied on interviews with former East Carolina Development Company board members, borrowers and USDA officials as well as hundreds of pages of federal tax documents, court records and public information obtained from the USDA. (Read more about how the investigation was conducted.)

The USDA’s national IRP program loans money to non-profit groups like LaRoque’s at a one-percent interest rate, so that the intermediaries can in turn lend out the money at reasonable rates to small businesses in rural areas blighted with poverty. Since 2003, the federal government’s given out $280 million for the program, $25 million of it in North Carolina where 17 intermediaries like LaRoque currently manage the federally-backed loans.

The program limits itself to non-profits, public agencies and tribal governments, one safeguard in place to ensure that lenders hand out the federal money with the primary goal of creating jobs in their communities, and not to use the flush of federal cash to enrich themselves.

In his initial application for funds in 1997, LaRoque promised to pay himself $30,000 in the non-profit’s first year and recruit a board of directors with community members from each rural county he offers loans in. Neither of those pledges held true over time.

Between 2002 and 2009, LaRoque received annual compensation of $100,000 to $195,000 a year as the only listed employee for East Carolina Development Company, according to publicly available tax records. The compensation is categorized as direct compensation some years, and as a contract he had with the non-profit in other years.

The pay is generous, and anywhere from $20,000 to $100,000 more than what’s earned by his counterparts in the state doing similar work. (See graphic for comparisons.)

Walter LaRoque, LaRoque’s brother and a board member of both non-profits, said Stephen LaRoque is paid through a contract based on performance and the non-profit’s assets.

LaRoque, the co-chair of the powerful N.C. House Rules Committee, turned down multiple requests to speak with an N.C. Policy Watch reporter about the investigation’s findings. He agreed to answer questions in writing on July 14, but never provided answers to detailed questions sent to his legislative email address. He also did not provide a copy of his most recent federal tax filings available for the two non-profits, despite IRS regulations that require tax-exempt organizations to make the records available for public inspection upon request.

LaRoque has defended his pay in online forums he frequently participates in, maintaining that the compensation he gets comes from funds that borrowers repaid to his non-profit and is not, in his eyes, coming from taxpayer sources. USDA records show the non-profits made loans to more than 40 businesses since 1997, a handful of which went to those with close ties to LaRoque.

“I’ve never received one cent of taxpayer money to pay my operational costs,” LaRoque wrote in June on an online comment board at the Huffington Post. “Name another non-profit that can make the same statement. I work under a contract for services with both non-profits.”

Federal officials not watching

But the question of whether the money is public isn’t as settled a matter with the USDA.

The money that borrowers repay the non-profit lenders still fall under strict restrictions within the USDA program, though non-profit lenders are allowed pay their operational fees out of the interest and repaid funds from borrowers, according to the federal rules that govern the program.

A scathing June 2010 report from the USDA’s Office of the Inspector General office found significant problems with the national Intermediary Relending Program, taking particular issue with the USDA giving contradictory messages about whether those repaid funds are public. The report called for the Rural Development division to begin defining the money as federal dollars.

The report also found $7.9 million in funds, $4 million from LaRoque’s non-profit, were loaned out improperly and called for the money’s return to USDA.

The agency expects to make a final decision in the coming weeks about whether it will demand the federal funds be repaid to the USDA, said Jay Fletcher, a Washington-based spokesman for the Rural Development division.

Inspectors looked specifically at LaRoque’s intermediary, identified as Intermediary F in the report and later identified as LaRoque in court filings. The USDA inspectors found that the non-profit exceeded the program’s lending cap of $250,000 on several occasions, including more than $2 million in loans that went to a Kinston developer.

Doug Freeman, the former developer who now runs a lawn care business, said the most of the loans from LaRoque’s East Carolina Development Company were for an unsuccessful project to built multi-family housing in Greenville. The souring economy at the start of the recent recession halted the project, and Freeman said he paid back most of the loans, and had no issues working with LaRoque. Freeman wasn’t aware his loan exceeded the cap at the time. In retrospect, Freeman said he wish he hadn’t borrowed so much.

“The economy at that time was too free, the banks were too free and the program (IRP) was too free,” Freeman said. “But the program did work, everyone was just taking off more than they could at that time.”

As for the monitoring of LaRoque’s non-profits by the USDA, the agency’s Rural Development office in North Carolina fell short in its oversight of the program until recently, N.C. Policy Watch found.

The agency neglected to conduct a required annual field visits of LaRoque’s non-profits for four years in a row. Audits submitted to the USDA each year raised concerns about LaRoque having sole control over the organizations’ finances and records, but USDA officials never demanded changes.

Program heads also said they were not aware of LaRoque’s high compensation and questionable loans until brought to their attention by an N.C. Policy Watch reporter.

Randall Gore, the North Carolina director of USDA’s Rural Development division said the agency typically depends on the structure of its participating non-profits, which have boards of directors, to thwart excessive compensation and inappropriate loans. Compensation of individual directors isn’t reviewed regularly.

“We have very little say-so as to what he paid himself,” Gore said.

Out of the loop

Three past board members say they were never made aware or consulted about LaRoque’s annual compensation, and were troubled by how little information the board was given about the management and finances of the non-profit.

Salaries and compensation for executive directors of non-profit organizations are usually decided by the non-profit’s board of directors, who take the job performance of the director into consideration as well as what reasonable pay is for a charitable organization.

If you’re a non-profit board member, you…

• Are liable if non-profit violates statutory provisions, including tax compliance rules
• Have financial oversight, and members should review non-profit’s financial statements.
• Set pay for executive director.
• Must be apprised of every meeting
• Have to disclose conflicts of interest, and act in best interest of non-profit when voting as board member
• Should attend meetings, be informed about mission, exercise independent judgment.

Source: Guidebook for Boards of Directors, N.C. Center for Nonprofits and N.C. Bar Association

The past board members—Hudson, a former banker who now runs her family’s Sampson County farm; Jeff Carver, a Republican Johnston County commissioner and executive at First Citizens Bank; and Shirley Edwards, a retired Goldsboro mental health administrator—were surprised to hear that LaRoque made anywhere from $100,000 to $195,000 for running the small non-profit, according to the publicly available tax records known as I-990s. All three served on LaRoque’s board in the early 2000s. Federal tax records show LaRoque received compensation of $100,275 in the 2001-2002 fiscal year, when the three were on the board.

“I never saw the salary of Stephen LaRoque while on that board,” Carver said, who served on the board for a little more than a year in early 2000s.

Edwards said she only served on the board for a short period, and was never fully briefed on the organization’s mission, operations or budget. The group met every few months at the Lenoir Country Club for meetings and Edwards said LaRoque told her some of the members of the board often met without her “because it was more convenient.”

Though listed on East Carolina Development Company’s tax forms as serving as both the vice-president and chair of the board, Edwards said she didn’t recall having any leadership roles with the non-profit. On the contrary, she felt she was often kept out of the loop of the non-profit’s operations.

“It would always appear they had talked about it (loans) beforehand,” she said. “I didn’t feel I had a working knowledge of what was going on.”

Edwards, Hudson and Carver all said they were never formally told when their terms expired; LaRoque just stopped contacting them about meetings.

A fourth former board member, Mark Pope, said he found out LaRoque was earning more than $100,000 and thought the compensation excessive. Pope left the board after getting his current job as the head of economic development in Lenoir County, but also because he was increasingly uncomfortable with the way the non-profit was operated.

Board members weren’t being brought into the loop early on about the non-profit’s loan activity, Pope said.

“I don’t like rubber stamping stuff,” Pope said. “We got to where (the board was) approving loans that had already been committed” by LaRoque.

“It started bothering me, and that’s one of the reasons I got off,” he said. “I felt that some of the things were not kosher.”

All in the family

One of the specific concerns Pope had was the arrival of LaRoque’s immediate family members on East Carolina Development Company’s board of directors. It’s a concern shared by the IRS and USDA when it comes to non-profits.

Immediate family members aren’t specifically banned from sitting on a non-profit’s board of directors, but IRS governance regulations do say a board “should not be dominated by employees or others who are not, by their very nature, independent individuals because of family or business relationships.”

Both LaRoque’s wife Susan, whom he married in 2007, and brother Walter serve on the boards of both non-profits, and were still listed as unpaid board members in the most recently available IRS tax filings. (To view the connections, see graphic.)

“I don’t see that as being a problem,” said Walter LaRoque.

The entire board of Piedmont Development Company now consists of LaRoques —  executive director Stephen LaRoque, his wife Susan LaRoque and brother Walter LaRoque.

Both Walter and Susan LaRoque also serve on the board of East Carolina Development Company. Walter began serving in the 2001/2002 fiscal year, and Susan LaRoque, then Susan Eatman, joined in the 2002/2003 fiscal year, according to tax records. The other two ECDC board members are Ricky Lanier, a La Grange construction and paving company owner, and John Melling, a New Bern insurance agent who did not return calls seeking comment.

Walter, Stephen LaRoque’s brother, is also the “president of real estate operations” at LaRoque Management Company, the for-profit entity that the two non-profits are housed under.

Having family members on a board is a red flag for the IRS that a non-profit may not be living up to its charitable mission, and thus may not be entitled to its tax-exempt status, said Mathieu Despard, a UNC-Chapel Hill professor of social work that runs a non-profit management program.

“It’s completely frowned upon by the IRS,” Despard said. “There’s conflict of interest, there’s lack of independence, and the broader issue is that non-profit boards are there to represent the communities that they serve and not a staff member.”

It’s also not allowed under the USDA’s lending program, according to the USDA’s Rural Development division.

USDA staff in North Carolina say they were aware of family members sitting on LaRoque’s boards, and said they are addressing it without providing specifics. The issue will come up as part of a larger response to the 2010 inspector general’s report that found issues with LaRoque’s non-profit, said Bruce Pleasant, the USDA supervisor of the North Carolina rural business programs. LaRoque has in the last year brought in an experienced loan officer, Jerry Hannah, to manage the IRP loans while LaRoque is tied up with the state legislature,  said Lisa Talley, a USDA official tasked with monitoring IRP loans in North Carolina. Hannah has been in frequent communication with USDA staff to make sure loans are handled within USDA guidelines, Talley said.

Board members have also benefited from the non-profit; USDA records show that LaRoque’s wife and board member Ricky Lanier had gotten loans of $150,000 or more before joining LaRoque’s board.

Susan LaRoque, formally known as Susan Eatman, is listed as the recipient of a $150,000 loan from LaRoque in 2001 for a Kinston carpet business she then owned, according to USDA records and filings with the Lenoir County Register of Deeds.

Stephen LaRoque did not answer questions about the loan and the nature of his and his wife’s relationship when the 2001 loan was made. The couple married four years ago, according to online postings by LaRoque.

But Pope, the former board member, said he understood that the two were dating at the time the loan was made. N.C. State Board of Election records also show that Susan Eatman signed up to be LaRoque’s campaign treasurer in July 2002, one year after the loan to Susan’s Carpets was made.

Another sitting board member also has a history of doing business with LaRoque’s non-profit.

USDA records show that Ricky Lanier, an East Carolina Development Company board member since 2003, received loans worth $307,000 in 1999 for Global Construction, the LaGrange company that Lanier owns.

Lanier, who briefly spoke with N.C. Policy Watch on the phone, said he didn’t recall receiving loans that large but then declined to answer further questions about the loans and his membership on LaRoque’s board of directors. Lanier has not returned several calls seeking further comment.

Loans to lawyers and GOP friends

USDA records also show LaRoque also used his non-profit to lend helping hands to fellow GOP legislators and the law firm he uses for political spats.

State Sen. Debbie Clary and state Rep. Mark Hilton, both received loans from LaRoque’s Piedmont Development Company of over $100,000 to help their private businesses, according to USDA records.

The loans were two of just a handful approved at Piedmont Development Company, the non-profit he set up in 2003 to serve the western part of the state.The non-profit hasn’t made any loans in recent years, and risks losing some of its federal money because of inactivity, according to a letter USDA staff sent to the non-profit.

Pleasant, the USDA official, said nothing prevents LaRoque from lending money to fellow legislators, but added that the agency didn’t receive any disclosure of a possible conflict of interest from LaRoque.

The USDA does caution against lending money to those who hold a “legal or financial interest or influence” over the lender, according to the federal rules of the program.

Clary got $101,250 for Millennium Marketing, her Shelby, N.C. marketing firm in 2006, when both she and LaRoque were serving in the N.C. General Assembly. Paperwork with the loan indicates it helped save two jobs.

Hilton received a $150,000 loan in 2007 for “Hilton Ventures,” a rental property management company he owns along with his wife, brother and sister-in-law in Conover, according to USDA and N.C. Secretary of State records. Hilton was in the legislature at the time, but LaRoque was not.

Attempts to reach Clary were unsuccessful, and Hilton did not respond to phone and email requests seeking comment.

LaRoque’s own lawyers at the Diener Law Firm in Snow Hill, the county seat for Greene County, took out two working capital loans totaling $150,000 from East Carolina Development Company in 2008 and 2009, according to USDA records.

Court records show Bert Diener has represented LaRoque in political disputes since at least 2006, when LaRoque was sued by Republican mega-donor Art Pope, who is no relation to former ECDC board member Mark Pope.

Diener, who also did not return calls seeking comment, is now representing LaRoque in a contentious defamation lawsuit LaRoque filed against Van Braxton, LaRoque’s Democratic opponent from the last election.

Pleasant said that lawyer and doctor’s offices often do take out IRP loans, though he added he wasn’t aware that LaRoque had retained the Diener Law Firm for personal matters.

The IRP program had not been a top priority for USDA inspectors for several years, as staff dedicated more time monitoring larger programs the federal agency administers, Pleasant said.

That’s changed this year, and Pleasant said USDA staff will be working closer with intermediaries like LaRoque to ensure the federally-provided money is handled properly.

“If there’s any issue related to any one intermediary or one director, we will address those issues,” he said.

North Carolina has 17 lenders that use IRP funds, and most are able to run the federal program without problems and create jobs in the hard-hit rural areas of the state, Pleasant said.

“I can’t speak for Mr. LaRoque and the non-profit that he operates in terms of their governance,” Pleasant said. “But I can say that the program itself has been responsible for a lot of jobs and the vast majority of our intermediaries are doing a great job.”

Note to readers: An earlier version version of this story indicated Walter LaRoque is a co-owner of LaRoque Management Group. He is president of the company’s real estate operations. The story has been corrected.

Questions? Comments? Reporter Sarah Ovaska can be reached at (919) 861-1463 or [email protected]