Raleigh officials warned of business incubator problems in 2011

ccampbell@newsobserver.comAugust 16, 2013 

  • Early warnings

    Here’s when top Raleigh officials learned of potential problems at the Raleigh Business and Technology Center:

    Nov. 15, 2011: The city’s lead auditor, Martin Petherbridge, emails Chief Information Officer Gail Roper warning of “RBTC’s precarious financial position.” He suggests a city-led audit.

    January 2012: City officials partner with IBM on a grant that helps develop a long-term strategic plan for the incubator.

    April 19, 2012: Raleigh Area Development Authority Director Wallace Green sends a memo to Roper, saying the city’s funds to the nonprofit “are not benefiting small business.” He proposes a series of changes to the incubator.

    Late April 2012: Raleigh officials apply for two AmeriCorps VISTA positions to serve the incubator.

    May 8, 2012: Chief Finance Officer Perry James emails Petherbridge, saying that City Manager Russell Allen is interested in “some internal audit effort.”

    June 18, 2012: Raleigh City Council approves budget that includes $162,000 for the RBTC.

    Feb. 18, 2013: Allen approves audit plan and authorizes work to begin.

    June 27, 2013: Allen receives audit report and cuts ties to the incubator, sending the group an eviction notice.

    July 2, 2013: City audit report released to Raleigh City Council.

  • The story so far

    Police are investigating possible fraud at the Raleigh Business and Technology Center after a city audit, released last month, turned up financial irregularities. Auditors found unexplained cashier’s checks and payments to the incubator’s tenants, and they discovered that the agency’s nonprofit status had been revoked. Bob Robinson, the incubator’s longtime director, resigned after auditors found he’d drawn $65,000 in teller checks from the incubator.

    Raleigh leaders had allocated the center $162,000 a year, and it occupied a city-owned building without paying rent. After reading the audit, then-City Manager Russell Allen ended the contract and sent the nonprofit an eviction notice. The incubator’s leader, former Raleigh assistant city manager Lawrence Wray, is fighting the eviction in an ongoing lawsuit.

    A partnership of governments and Southeast Raleigh colleges built the 18,000-square-foot building in 2000 at South Wilmington Street and Martin Luther King Jr. Boulevard. The incubator holds 30 small office suites and resources to help startups get going. It also offers classes and other services for small business owners.

— Newly released emails show top officials at Raleigh City Hall were warned of problems at the Raleigh Business and Technology Center as early as 2011, but the city continued to allocate funding to the incubator and help it obtain grants. A complete, city-managed audit did not begin until February of this year.

Raleigh leaders are now trying to take back the city-owned building south of downtown, but the eviction is mired in a lawsuit. Released last month, the city’s audit found that more than $65,000 in cash is missing, and identified other irregularities, such as large payments to tenants and groups tied to the incubator’s leaders.

The city’s lead auditor, Martin Petherbridge, first pointed out financial troubles Nov. 15, 2011, in an email to city Chief Information Officer Gail Roper. She took on city oversight of the incubator after assistant city manager – and incubator board member – Lawrence Wray retired in late 2010.

“I understand there are concerns that the current management group, Raleigh Business & Technology Center Inc., (RBTC) is not providing a quality environment for business incubation,” Petherbridge wrote, noting audit reports from the incubator that showed the center was operating in the red. “I suspect that few services are now being offered to the client businesses because of RBTC’s precarious financial position.”

Petherbridge suggested a city-led audit, but he wasn’t given a green light to start one for an additional 15 months, when then-City Manager Russell Allen authorized the audit. Petherbridge emailed Roper three months later to return her folder of incubator-related documents; no email records show an immediate reply to the auditor’s recommendation. Efforts to reach Allen were unsuccessful.

In April 2012, Roper got another warning that the incubator might be falling short of its mission, this time from Wallace Green, director of the Raleigh Area Development Authority, who helped start the incubator’s Pacesetters business training program.

In a one-page memo, Green wrote that the city-owned incubator building wasn’t “being properly managed,” pointing to issues with rent collection. Incubator board members later learned that some tenants weren’t being required to pay rent. Green said also that “city funds are not benefiting small business constituents as originally intended.”

Green, whose agency is an economic development nonprofit, went on to recommend a survey of former incubator program participants, a review of the center’s audit records, changes to RBTC’s board of directors, and increased involvement from the two institutions that were instrumental in its founding, St. Augustine’s University and Shaw University.

Roper sent a copy of the memo to Southeast Raleigh City Councilman Eugene Weeks, but several other council members said they weren’t notified of problems until this year. Chief Finance Officer Perry James contacted Petherbridge a few weeks later, again raising the possibility of an audit, emails show.

“The manager seemed interested in you all’s looking into things there even if it changed some of your currently planned audit plan priorities,” James told the auditor May 8, 2012, asking him to stop by for a meeting.

The next month, the city council approved a budget that included $162,000 for the incubator – $12,000 more than the center was paid the previous year, according to budget documents. While other arts and human services grants from the city must be vetted and approved each year by a council-appointed commission, the incubator’s funding didn’t go through that process.

“I asked, ‘Do these items go through the same kind of vetting as somebody applying for a grant?’ and the answer was, ‘Yes,’ ” Mayor Nancy McFarlane said in an interview Thursday.

Help with grants

City officials also helped the Raleigh Business and Technology Center obtain outside grants. In early 2012, the incubator finished up a strategic planning process funded by IBM. James said Friday that the grant didn’t have a set dollar amount because IBM provided staff to lead the planning efforts.

In a March 18, 2012, email to Roper, incubator director Bob Robinson said IBM’s grant helped forge a partnership to provide temporary solar panel installers for Strata Solar of Chapel Hill. That contract was later outsourced to the National Youth Chamber of Commerce, a group Robinson founded that received $290,000 in undocumented payments from the incubator.

City leaders touted the IBM grant as recently as this past spring, noting in the budget document that it helped create “a clear mission and vision for the center to operate as a business incubator.”

And as Green’s memo was circulated in April 2012, Raleigh officials were working closely with the incubator to seek two AmeriCorps VISTA staff positions. VISTA puts volunteers on year-long assignments to nonprofits or public agencies. It’s unclear whether the grant was awarded.

In emails later in 2012, Roper proposed new accountability measures for the incubator.

“We will base new fiscal-year payments from the city of Raleigh based on the completion of performance goals identified” in the new strategic plan, she said. Email records, however, show the payments continued in full until this past May – despite Robinson’s failure to provide detailed documentation. He filed quarterly reports that listed the exact targets for job creation and benchmarks listed in the city’s contract. No further records were provided to show how jobs were created.

Robinson has declined to comment, citing the advice of an attorney.

Out of the loop

McFarlane said Thursday that the City Council wasn’t informed of problems at the incubator in 2011 and 2012.

“I do not remember being notified about anything until I was told (in April 2013) there was an audit being done,” she said.

The mayor said she’d like to see more oversight of outside agencies that get city funds.

“If they’re not being required to present financials, then they need to,” she said.

James, now interim city manager, said he thinks city officials handled the incubator concerns well.

“I feel like the city acted in a businesslike way to re-look at that organization and the city’s contract with that organization,” James said. “It all was fitting in a series of steps the city was taking, apprising the people who needed to know. … There needs to be a due process.”

James declined to comment further or make other city staffers, such as Roper and Petherbridge, available for an interview, citing the ongoing lawsuit from the incubator.

Campbell: 919-829-4802 or @RaleighReporter

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