The federal agriculture department has opened an ongoing investigation into state Rep. Stephen LaRoque’s two economic development non-profits, a spokeswoman for the agency confirmed.
The Kinston-based non-profits – the East Carolina Development Company and Piedmont Development Company  – have taken in $8 million in federal funding since 1997, as part of the U.S. Department of Agriculture’s Intermediary Relending Program . The program aims to combat poverty by allowing non-profit organizations to borrow money from the federal government and then lend the funds out to struggling businesses in rural areas.
Delane Johnson, a spokeswoman for the USDA’s Rural Development division in North Carolina, confirmed Wednesday that the agency is conducting an investigation into LaRoque’s non-profits.
“There is a federal investigation going on related to Stephen LaRoque and his intermediaries,” Johnson said. “I’m not at liberty to discuss him nor his non-profits at this time.”
Joe Cheshire, a high-profile Raleigh defense attorney retained by LaRoque, did not respond to recent requests for comment. LaRoque has declined requests to speak with N.C. Policy Watch about his management of his non-profits on several occasions, but said in an August press conference that he has nothing wrong and ran the non-profits according to federal agriculture department rules.
An N.C. Policy Watch investigation  from last summer found LaRoque, a Kinston Republican serving as a co-chair of the powerful House Rules Committee, received a plump salary (up to $195,000 a year) from the federally-funded charities and had members of his immediate family in key roles on the non-profit’s board of directors. Loans were given out to close associates, including two fellow GOP legislators, and LaRoque loaned his own for-profit business $200,000  from the non-profit, a potential violation of IRS tax laws that prohibit non-profit leaders from receiving personal or excessive benefits from tax-exempt charities.
Johnson, the USDA spokeswoman, referred further comment to the USDA’s Office of Inspector General. The OIG office did not confirm nor deny the existence of an investigation.
“We simply don’t comment on investigative matters or acknowledge whether we have something ongoing,” said Paul Feeney, a Washington-based spokesman.
The OIG office has two branches for conducting investigations, an audit division as well as an investigation division where law enforcement agents look to see if matters run afoul of criminal laws. No information was available from USDA about the nature of the probe into LaRoque.
In addition to the USDA investigation, LaRoque is also facing the possibility of an inquiry into his actions by his fellow legislators, after N.C House Minority Leader Joe Hackney asked N.C House Speaker Thom Tillis in November to refer the matter to the Legislative Ethics Commission for review. Tillis has asked  the bipartisan Legislative Ethics Committee to decide if looking into LaRoque’s federally-funded non-profits falls under the committee’s jurisdiction.
Those legislative committees work largely in secret, and the status, scope and nature of any probe is not publicly known.
LaRoque’s wife signed his contract
Documents recently made available to N.C. Policy Watch also reinforce the existence of a cozy relationship he enjoyed with his board directors, with both his wife and brother in key roles on the board of directors.
When LaRoque needed his lucrative management contract with an economic development non-profit organization renewed, it was his wife Susan LaRoque – the chairwoman of the non-profit – that signed the contract on behalf of the federally-funded charity.
A copy of the 2009 contract was obtained by N.C. Policy Watch through attorneys representing a past Democratic opponent sued by LaRoque, a Kinston Republican, for defamation. (To view a copy of LaRoque/s contract with the non-profit, click here .)The lawsuit LaRoque filed against former state Rep. Van Braxton was dismissed by LaRoque  in mid-November, with LaRoque agreeing to have the non-profit pay more than $17,000 in contempt of court fees to the opposing side’s lawyers.
At an August press conference, LaRoque indicated that East Carolina Development Company had a contract with his fon-profit company, not him personally, and said he was paid only out of interest and fees paid by the companies repaying the non-profit, and not overall assets.
“We’ve never received one dime of taxpayer money or grant or foundation money to pay our operating costs, something that not many other non-profits can claim,” LaRoque said at his press conference. “Our contract is derived from interest and fees.”
But the actual contract appears to show LaRoque is also entitled to a portion of the federally-funded non-profit’s assets, as well as a portion of the interest and fees collected by the non-profit. It gives him 3 percent of the non-profit’s total assets, half of all the loan fees collected by the non-profit and 10 percent of the annual profit of the company. (The 2010 tax return for the East Carolina Development Company can be viewed here .)
The contract signed by Susan LaRoque is a clear violation of the laws that govern non-profits, said Thomas Kelley, a professor at the University of North Carolina’s law school who specializes in non-profit law.
Tax law does not allow insiders of non-profits to benefit personally from the non-profit’s funds, and LaRoque’s wife, as a director, would be hard-pressed to set aside her and her husband’s personal financial interests, Kelley said.
In addition, tax returns for LaRoque Management Group obtained from Braxton’s lawyers also show that the company operated at losses of $40,000 to $100,000 from 2006 to 2009, which resulted in the state lawmaker’s for-profit company paying little or nothing state or federal income taxes in those years, according to copies of the tax returns.
Past probes by OIG
The USDA’s OIG has looked into the finances of LaRoque’s non-profits before.
A critical June 2010 audit  from the USDA’s Office of the Inspector General office found significant problems overall 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 final decision about whether the money will have to be returned hasn’t been made, more than 18 months after the audit was published.
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 developer to built multi-family homes in Greenville. The developer has said he repaid the loans to LaRoque after the souring economy made the project not feasible.
A final decision has not been made by USDA about whether it’ll require the money that was improperly leant out to be paid back immediately, but a decision is expected soon, said Jay Fletcher, another USDA spokesman.
“The final recommendation is nearing its completion,” Fletcher said.
Questions? Comments? Reporter Sarah Ovaska can be reached at (919) 861-1463 or [email protected]tch.com .