Policy Watch Investigates

LaRoque defends business practices others question

State Rep. Stephen LaRoque had plenty to say at Tuesday’s press conference, but still managed to evade questions about how much he personally profits from running two federally-funded economic development non-profit organizations.

No taxpayer money has been used to pay for any of my salaries,” LaRoque said.

LaRoque, a Kinston Republican in a House leadership role, held the press conference in his home town in response to the Aug. 3 investigation “Public money, personal gains” by NC Policy Watch that found questionable management and financial practices at LaRoque’s non-profits, the East Carolina Development Company and Piedmont Development Company . The non-profits have received more than $8 million in federal funding as part of the USDA Rural Development Division’s Intermediary Relending Program, which allows non-profits and public groups to borrow money from the USDA and lend it out to struggling businesses in rural areas.

Among the investigations findings were that LaRoque, earning up to $195,000 a year, got paid much more than what his non-profit counterparts earned running economic development non-profits. His wife and brother also sat on the boards of those non-profits, and several of the loans processed by the non-profits went to close associates of LaRoque’s, including two GOP legislators.

LaRoque said he thought the N.C. Policy Watch investigation was a “political hit piece.”

At a Tuesday press conference, LaRoque defended that high salary by saying he used some of the money to pay employees of the for-profit company he runs, LaRoque Management Group. But he wouldn’t say how much of his six-figure compensation went to pay the three employees he said he’s had since 2004. The three employees all worked for LaRoque at different times, and he didn’t say how long they each worked for him, or what they were earning.

I’m not going to say,” LaRoque said. “It’s a private corporation, it’s none of your business.”

The annual six-figure compensation LaRoque received was what he reported each year to the IRS, and says the amount is based on an existing contract the board of his non-profits signed with him. LaRoque said he had a management contract, made out to him and not to LaRoque Management, that gave him compensation based on a percentage of the non-profit’s assets and paid out of the interest and fees paid by borrowers.(Go here to see a graphic of LaRoque’s compensation.)

He maintains that the money he receives isn’t taxpayer money, but comes from the proceeds from loans provided with federal money. He’s declined to make the contract he has with the non-profit available, and USDA’s Rural Development office North Carolina was never provided a copy of one.

Best practices?

At Tuesday’s press conference, LaRoque repeatedly said he wasn’t doing anything illegal. But some of his management practices run counter to IRS and USDA policies of how to run non-profits. In the case of the USDA, he’s violating at least one requirements for participating in the USDA program.

The USDA’s Rural Development division, which has given LaRoque $8 million since 1997 as part of its Intermediary Relending Program, doesn’t allow immediate family members to sit on the boards of non-profits that are part of the USDA program.

LaRoque said Tuesday he plans on keeping his wife and brother on his boards, unless they choose to step down. The entire board of the Piedmont Management Group consists of LaRoques – Stephen LaRoque, his wife Susan LaRoque, and brother Walter LaRoque. The non-profit, which is supposed to be serving communities in the western part of the state, has approved only a handful of loans since its 2004 inception, including two that went to GOP legislators Sen. Debbie Clary and state Rep. Mark Hilton, two GOP lawmakers that serve in the state legislature with LaRoque.

Both Susan and Walter LaRoque are also on the board of the East Carolina Development Company. Walter LaRoque, a real estate agent, also began working at LaRoque Management Group, the small for-profit used to run the two non-profits.

Calls to the USDA’s Rural Development offices in DC and Raleigh for comment weren’t immediately returned. In an interview with Raleigh-based officials about LaRoque earlier this month, USDA officials said they were addressing the issue with LaRoque.

At Tuesday’s press conference, LaRoque said the board renewed a management contract with him, and that his brother and wife abstained from voting. But he did say, upon being asked, that they had voted on past contracts with LaRoque

He defended his salary, by saying he had created an entrepreneurial system where he was able to lend out money to struggling businesses, and was entitled to a portion of the profits that came back to the non-profit as the businesses repaid their loans.

If the profits increases, do I make more money? Absolutely,” LaRoque said. “But this is America and I don’t think profit is a crime.”

That comment earned applause from several LaRoque supporters who attend Tuesday’s press conference.

But the IRS doesn’t exactly encourage executive directors for non-profits to make a profit.

The agency has specific language about the need to make sure compensation is reasonable, and avoid personal profits running a tax-exempt 501 (c) 3 non-profit. (Both of LaRoque’s non-profits are registered 501 (c) 3 public charities.)

From the IRS’s compliance guide for 501 (c) 3 charities:

No part of an organization’s net earnings may inure to the benefit of an insider. An insider is a person who has a personal or private interest in the activities of the organization such as an officer, director, or a key employee. This means that an organization is prohibited from allowing its income or assets to accrue to insiders. An example of prohibited inurement would include payment of unreasonable compensation to an insider. Any amount of inurement may be grounds for loss of tax-exempt status.”

And this from IRS guidance on conflicts of interest:

Apart from any appearance of impropriety, organizations will lose their tax-exempt status unless they operate in a manner consistent with their charitable purposes. Serving private interests more than insubstantially is inconsistent with accomplishing charitable purposes.  For example, paying an individual who is in a position of substantial authority excessive compensation serves a private interest.  Providing facilities, goods, or services to an individual who is in a position of substantial authority also serves a private interest unless the benefits are part of a reasonable compensation arrangement or they are available to the public on equal terms and conditions.”

At the press conference, LaRoque also tried to refute interviews NC Policy Watch had had with three previous board members, all of whom said they were unaware of the six-figure compensation LaRoque received when they served on his board.

To do that, LaRoque put up a one-page portion of minutes from a February 1999 board meeting (slide 11 of LaRoque’s Power Point), in which LaRoque’s contract was seen as being motioned for and approved by one of the former board members quoted by NC Policy Watch, Jeff Carver.

On the slide, board member Jeff Carver is listed as motioning for and approving LaRoque’s contract.

Carver, when reached Wednesday by NC Policy Watch, said his memory of the 1999 meeting was rusty but that he would not likely approve compensation in the six-figure range for the work LaRoque was doing.

For a small start-up that was a not-for-profit that was supposed to be helping people, Jeff Carver would not have made a motion to pay someone six figures,” said Carver, a Republican member of the Johnston County Commission.

It’s not clear how much LaRoque was making in 1999, but had pledged in his 1997 application to the USDA that he would pay himself between $30,000 and $40,000. That amount went up dramatically within a few years, and he made $133,879 in the 2001-2002 fiscal year, according to publicly available tax documents. Carver was listed as a board member during that year.

Carver, who also works in small business lending, said it’s unusual to pay people on a commission scale for managing loans, and that he doubted he would have approved an arrangement like that.

That’s not how people are paid, and not for a not-for-profit company,” he said. “I’ve served on numerous not-for-profits and never would have done that.”

NC Policy Watch has asked LaRoque for copies of board minutes for his non-profits, as well as his contract, and he’s declined to provide them.

When reached Wednesday, he said he had no comment about Carver’s statements.

Tomorrow may prove to be another interesting day in Kinston. N.C. House Speaker Thom Tillis, who appointed LaRoque to be a co-chair of the powerful House Rules committee, is scheduled to hold a town hall-style meeting at noon at King’s Barbecue, 405 E. New Bern Road in Kinston.

Questions? Comments? Reporter Sarah Ovaska can be reached at (919) 861-1463 or sarah@ncpolicywatch.com.

 

Like this article?


Our work is supported by readers like you.

Help us to continue expanding our aggressive reporting and thoughtful commentaries. Make a tax-deductible financial contribution today!