Political spat during campaign starts case that now dogs Stephen LaRoque

Federal charges born of defamation suit and watchdog reports

cjarvis@newsobserver.comJuly 22, 2012 

On Tuesday, a federal grand jury indicted him. On Wednesday, the top Republican in the state House advised him to resign, and by Thursday others were urging him to go.

But state Rep. Stephen LaRoque is known as much for his stubbornness as he is for his other traits. Detractors describe the Kinston Republican as hot-tempered and confrontational. Others say he has successfully represented the people of Lenoir, Wayne and Greene counties, and praise his work making federal loans to struggling rural entrepreneurs.

Prosecutors say LaRoque used his re-lending enterprise as an elaborate scheme to disguise ill-gotten federal funds in his bank accounts. The theft and money-laundering indictment says he spent some of the more than $7 million in federal loans to pay himself a hefty salary and contribute to his campaign committee, buy Faberge eggs, jewelry and an ice rink in Greenville for his wife, a rental house for his stepdaughter, two vehicles and provide loans to his attorney, two colleagues in the General Assembly and other associates.

LaRoque’s defiant streak also helped lead to the federal charges against him. Not only did he lose his bid for re-election after the allegations surfaced, but LaRoque’s insistence on pursuing a lawsuit against a political opponent over campaign rhetoric opened the lid on his complex finances. It invited a persistent lawyer in a Kinston law firm to carve a path that reporters and federal investigators followed.

LaRoque’s attorney says LaRoque tried to show investigators that his finances were legitimate, and was disappointed they didn’t agree. LaRoque would not be interviewed for this story.

Whether LaRoque beats the charges or stays in office until his term expires at the end of the year remains to be seen. But his alleged mismanagement came to light at least in part because of his own miscalculation during a 2010 political campaign.

“He is a smart man,” says former state Rep. Van Braxton, the Democratic incumbent LaRoque sued. “In a lot of cases, the bottom line is he was his own worst enemy.”

Defamation suit filed

Braxton says he didn’t go looking for dirt on LaRoque, but during his 2010 re-election campaign for state House it came to him. A friend of a man who used to own Chaps, a popular barbecue restaurant in Lenoir County, wanted to talk.

He told Braxton that restaurateur Bruce Patterson had borrowed close to $380,000 from LaRoque’s nonprofit firm, East Carolina Development Company. But Patterson had fallen on hard times and defaulted. ECDC foreclosed on Chaps and on Patterson’s home in 2006.

LaRoque in 2010 had been campaigning on his job-stimulating loans, boasting of his extensive experience in economic development. LaRoque worked as a banker and then as a loan officer and eventually administrator for the Neuse River Council of Governments in New Bern. That’s where he learned about the U.S. Department of Agriculture’s Rural Development Division’s financing program that provided low-interest loans that could be re-loaned at whatever rates intermediaries could negotiate.

He started the nonprofit entity in 1997 with $2 million in federal money and over the next 15 years learned how to keep that money rolling in, ultimately securing 10 loans and four grants, at times exceeding the limit on making individual loans and at other times applying for more funds than he needed, according to the indictment.

In 2003, he created a second nonprofit entity, Piedmont Development Corp., which drew additional funds. He set up a for-profit entity, LaRoque Management Group, to run the loan programs and claimed to have paid himself a salary based on a percentage of the loan money sitting in his bank accounts, prosecutors say.

It was a lucrative business model, which paid him a high of $317,800 in compensation and nearly $20,000 in expenses during a year in which ECDC made fewer than 10 new loans, including to his own management firm and to his attorney, the indictment says. Investigators say LaRoque received nearly $2 million in compensation and $134,000 in expense reimbursement over the past 15 years.

Braxton in 2010 saw an opportunity to offset LaRoque’s economic success claims by putting out a campaign flier about Patterson’s foreclosure, saying he had put 35 people out of work and questioning his management of federal funds. “LaRoque stole my business. He stole my home” the ad said.

LaRoque sued for defamation, claiming the campaign material had harmed his reputation and that of his businesses. And that’s where the case against him began.

Even though LaRoque won the election, he pursued his lawsuit against Braxton.

“Lots of times these campaign lawsuits are settled after the election,” Braxton said. “Being the way he is, he decided he wasn’t going to drop it. He was going to press forward with it.”

Braxton turned to someone he’d known since high school, a lawyer at the 20-attorney firm of White & Allen in Kinston named John Archie. The lawyer began trying to figure out more about LaRoque and his East Carolina Development Co.

Online, he found a new report from the Office of Inspector General that criticized the lack of oversight in the federal program and recommended millions of dollars in loans to intermediaries be repaid.

Although LaRoque and his nonprofits weren’t named in the report, Archie was able to pull out the loans identified as North Carolina transactions and match them with deeds in several counties connected to ECDC projects. All of them appeared to coincide with loans that the inspector general had examined.

“We felt comfortable they had looked at ECDC,” Archie said. “It turned out to be true.”

Archie turned next to LaRoque’s filings for tax-exempt status and noticed something right away. “It appeared that LaRoque was being paid in some form or fashion as an independent contractor substantial sums of money, which raised our interest,” he said.

‘Follow the money’

A legal theory began to take shape. Truth is a defense against a defamation claim, and it was beginning to look like there might be evidence that LaRoque had, indeed, misused federal money. “That opened the door to us to look for information that would prove the truth of the flier,” he said.

The law firm began subpoenaing extensive records, sparking protracted fighting in court as Braxton’s lawyers complained LaRoque wasn’t turning over what he should. It reached the point that the judge began imposing a $250-a-day fine on LaRoque for contempt, court documents show. LaRoque relented only after the contempt fine reached $17,250, which he eventually paid and then dropped the suit rather than turn over more records.

Meanwhile, Archie and his team had been gathering records from banks and other sources and the puzzle grew more intriguing. “The more they dug, the more they found,” Braxton said of the lawyers.

By June 2011, Sarah Ovaska, a reporter for N.C. Policy Watch, a liberal watchdog group in Raleigh, had independently been pursuing tips about LaRoque’s businesses. In August, Policy Watch published a series of stories online with links to voluminous source material questioning LaRoque’s management of the re-lending enterprise. Subsequent stories drew on material that surfaced in the Braxton lawsuit.

The stories were soon picked up by news media, which prompted LaRoque to put on a public PowerPoint presentation in Kinston to demonstrate that he had done nothing wrong.

By the end of August, questions about LaRoque were very public. Federal investigators swung into action with a team of state and federal agents. In September, they subpoenaed LaRoque’s financial records. The U.S. Attorney’s Office took the case to a grand jury sitting in Raleigh.

On Tuesday, the grand jury signed off on a 72-page indictment that is long on narrative but concise on the charges: four counts of theft and four of money laundering.

LaRoque’s attorney, Joseph B. Cheshire V, in a written statement was dismissive of the lengthy indictment, which he called “as much a piece of advocacy as it is a charging document.” Cheshire said LaRoque looks forward to proving his innocence.

Archie noted that federal investigators were able to go much deeper than he had into LaRoque’s enterprises. The indictment still leaves questions unanswered, he said, including the parts that refer to several associates who benefited from his enterprises, such as LaRoque’s wife, his brother, his attorney, former Sen. Debbie Clary of Shelby and Rep. Mark Hilton of Conover. None of them have been accused of wrongdoing.

“I don’t know if they’re still looking at it,” he said of federal prosecutors. “But it’s what we said from the beginning: Follow the money.”

Jarvis: 919-829-4576

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