Anatomy of a Fraud: Inside the Audit of the Raleigh Business and Technology Center | Eastern North Carolina Now

        Publisher's note: This post, by Lee Brett, was originally published in the Corruption & Ethics, Economy, Justice & Public Safety section(s) of Civitas's online edition.

    This is Part I of a two-part series. The first part will detail the audit of the Raleigh Business and Technology Center. The second part will describe the growth of "economic development" in government, and its dangerous consequences.

    Background

    Last week, Civitas wrote about how a city audit uncovered widespread cronyism and financial misconduct at the Raleigh Business and Technology Center. While mainstream media outlets like the Raleigh News and Observer and WRAL reported on the scandal, their information was based on only a brief summary of the audit. We weren't content with that. Today, we've got the whole story: It is a disturbing glimpse inside one of the many "economic development" nonprofits that have proliferated across the state in recent decades.

    The Raleigh Business and Technology Center (RBTC) opened in 2000, when the City of Raleigh committed to establishing a "small business incubator." "Business incubators" try to shelter start-up small businesses from failure by providing rent space, technical equipment like computers and phones, and logistical support - all at a steeply reduced rate.[i] Of course, there is very little evidence that business incubators actually serve their intended purpose. A legislative inquiry by Washington State concluded:

    After conducting an extensive review of the literature and visiting incubators in Washington State, we found no analysis that answers the key question: 'if not for the incubator, what would have happened to the firms using its services?'[ii]

    Despite the fact that the economic effect of "business incubators" is questionable, City of Raleigh officials moved ahead with their project. The city secured $500,000 from the federal Economic Development Agency. It also provided $907,000 of its own funds for land and a new building.[iii] Each year, Raleigh renewed its contract with the RBTC. By 2012, the City of Raleigh had paid over $1.2 million to the RBTC, averaging $124,000 a year.[iv]

    City officials remained blissfully unaware of any wrongdoing at the RBTC until November of 2011. In that month, Internal Audit Manager Martin Petherbridge warned Gail Roper, Raleigh's chief information officer:

    I understand there are concerns that the...Raleigh Business and Technology Center is not providing a quality environment for business incubation ... RBTC is in financial difficulty and on September 13, 2011 the auditors wrote that they have substantial doubt about the ability of RBTC to continue ...

    "Concerns" notwithstanding, the City did not begin its own audit until February 2013. This may have been due to opposition from City Councilman Eugene Weeks and Wake County Commissioner James West. Both elected officials represent Southeast Raleigh, the primary beneficiary of RBTC services.[v] When asked to comment, Martin Petherbridge, the Internal Audit Manager, acknowledged that there was "sensitivity" regarding the audit's "higher political concern." Petherbridge explained that there were "vested interests," but refused to comment further.

    The Audit

    Once the audit had commenced, city auditors quickly discovered major problems with the RBTC's financials. First and foremost, the RBTC was in violation of its contract with the City. Although it was required to maintain nonprofit status in order to receive city funding, the RBTC lost its tax exempt status for failing to file the proper forms with the IRS for three consecutive years.[vi] Additionally, the scope of RBTC services exceeded the scope of services mandated by the City's contract: many of the things that the RBTC claimed to be doing were not normal business incubation practices at all.[vii]

    All told, RBTC services were atrociously administered. Among the "small businesses" enjoying reduced rents and taxpayer-subsidized services at the RBTC were several organizations that did business with the RBTC, several businesses founded by a board member, and nonprofits like the International Association of Bishops and the NC Institute of Minority Economic Development.[viii]

Selected "Small Businesses" Funded by City


    Business practices at the RBTC were questionable at best and criminal at worst. The RBTC did not even have a monthly financial budget.[ix] Instead of developing a plan to become self-sustaining, they relied almost exclusively on funding from the City. RBTC also failed to track program outcomes, meaning that the City had no meaningful metrics by which to judge program success or failure.[x]

    Money routinely changed hands to and from board members and officers of RBTC. Staccato Powell was a board member at RBTC, as well as the pastor of Grace AME Zion Church and the director of the Grace Community Development Corporation. His church received a $13,000 loan in 2009. Bob Robinson, the director of the RBTC, used $290,000 of the RBTC's funds to pay the Youth Chamber of Commerce (YCC), an organization that he co-founded. The YCC had a contract with the RBTC, but it was only for $5,000. The graphic below illustrates these conflicts of interest, along with others identified by city auditors. It depicts an extensive web of officers and board members mixing their personal interests with their organizational finances, including two board members loaning personal funds to the RBTC, and RBTC lending funds out directly to board members and organizations run by current board members. [xi]

    RBTC conflicts

    Oversight by the board of trustees at the RBTC was almost nonexistent. But the board's real value may have been its political connections: board members had close ties to the political establishment, particularly in Southeast Raleigh. An interim president of Shaw University, the president of Saint Augustine's College, and a president emeritus of Saint Augustine's all sat on the board. Board members frequently pulled double-duty with other influential "economic development" organizations - Sherrie Duncan, a manager at Duke Energy, also served on the board of the Minority Supplier Development Council. And Joseph Sansom, a bank director at Mechanics and Farmers Bank, sat on the boards of the Downtown Raleigh Alliance, the Southeast Raleigh Assembly, and the Wake County Economic Development Commission. Finally, Lawrence Wray, the secretary of the board, exercised a substantial amount of political influence: he was an assistant city manager for over twenty years, retiring in 2010. [xii]

    The audit was released to the public in late June. Bob Robinson, the executive director, resigned after reading the report. His cohort Lawrence Wray, the former Assistant City Manager and the secretary of the RBTC board, blamed everything on Robinson. He claimed: "I had no idea what was going on."[xiii] But audit papers suggest that Lawrence Wray did in fact know what was happening - since he was intimately involved with RBTC operations as the secretary of the board.

    Wray capitalized on the city audit in order to seize control of the organization. Even as the audit was still in progress, Wray hired a marketing firm to try to shore up his position. From public email records:

    Mr. Wray ordered Mr. Calloway to transfer loan funds to a certificate of deposit. These dollars were earmarked for tax payments. During the audit period, Mr. Wray had the CD liquidated and gave approximately $12k to a consultant who would prepare a statement to the City of Raleigh Auditors and City Council. Several thousand dollars were also transferred to a business that Mr. Wray brought into the Center for technical support.[xiv]

    After the city audit was released, city officials tried to cut ties with the Raleigh Business and Technology Center. But Wray temporarily blocked them in the courts - when the City served the RBTC with an order of eviction, Wray retained the legal services of Dan Blue, a state senator.[xv] As of this writing, the RBTC case remains unresolved.

    In the next part of this article, we'll talk about the Raleigh Business and Technology Center in a larger context. The audit of the RBTC is an insight into a much more pervasive problem - the rise of "economic development" programs by the government. Far from assisting economic growth, these programs are often vehicles for waste and corruption. Stay tuned to Civitas for more next week.

    [i] State of Washington Joint Legislative Audit and Review Committee, Small Business Incubators: Review of State Policy, Funding, and Incubator Performance (Olympia, WA), 2.

    [ii] Ibid., 1.

    [iii] City of Raleigh, Internal Audit Report: Raleigh Business and Technology Center (Raleigh, NC), 1.

    [iv] City of Raleigh, Internal Audit Report: Raleigh Business and Technology Center Working Papers (Raleigh, NC), "Financial Analysis, B4."

    [v] Martin Petherbridge, email message to Gail Roper, February 20, 2013.

    [vi] City of Raleigh, RBTC Working Papers, "Tax Issues, C6a."

    [vii] City of Raleigh, RBTC Working Papers, "RBTC Programs and Services, C3a."

    [viii] City of Raleigh, RBTC Working Papers, "Tenant List, C4d(1)."

    [ix] City of Raleigh, RBTC Working Papers, "Finances Best Practices, C4f."

    [x] Ibid.

    [xi] City of Raleigh, RBTC Working Papers, "Conflict of Interest Policy, C6d."

    [xii] City of Raleigh, RBTC Working Papers, "Raleigh Business and Technology Center Organization Chart, A8b."

    [xiii] Josh Shaffer, "Fraud Investigated at Raleigh Business Development Center," Raleigh News and Observer, July 3, 2013.

    [xiv] Shirley McFadden, email message to Martin Petherbridge, July 18, 2013.

    [xv] Colin Campbell, "Raleigh Business Incubator Gets 10-Day Reprieve from City's Eviction," Raleigh News and Observer, July 31, 2013.