UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NORTH CAROLINA EASTERN DIVISION No.

4:12-CR-88-1H(2)

UNITED STATES OF AMERICA MOTION TO DISMISS COUNTS 1-8 AND INCORPORATED MEMORANDUM OF LAW Fed. R. Crim. P. 12(b)(3)(B)

v.

STEPHEN A. LAROQUE

Defendant Stephen A. LaRoque respectfully moves this Court, pursuant to Fed. R. Crim. P. 12(b)(3)(B) and the Fifth and Sixth Amendments to the United States Constitution, to dismiss Counts 1 through 8 of the Second Superseding Indictment. The ground for this Motion is that the theory of prosecution does not describe conduct that is a violation of the criminal statute charged, and thus Counts 1 through 8 fail to state an offense. SUMMARY OF ARGUMENT Counts 1 through 4 of the Indictment allege that Mr. LaRoque stole money from or defrauded ECDC, not by defrauding the board members, but by obtaining permission from the board of directors of ECDC for each transaction allegedly comprising the illegal scheme. Because the boards of ECDC and PDC were not defrauded, however, neither ECDC nor PDC was defrauded. Similarly, because the boards authorized the transactions, and because Mr. LaRoque was the rightful owner of the funds at issue, the funds were not stolen. Merely making a contract retroactive is not illegal, and neither fraud nor theft convictions may be based solely on violations of fiduciary duties or organization policies, or upon knowingly receiving too

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much compensation. Therefore, the prosecutions theory, even if true, does not constitute criminal conduct, and Counts 1 through 4 fail to state an offense. Counts 5 through 8, which allege that Stephen knowingly spent the criminal proceeds of the fraud/theft, relies entirely on proof of the fraud or theft alleged in Counts 1 through 4. Because Counts 1 through 4 fail to state an offense, Counts 5 through 8 also fail to state an offense. BACKGROUND A grand jury in the Eastern District of North Carolina first issued subpoenas to Stephen LaRoque, ECDC, PDC, and LMG in August 2011. These subpoenas were issued shortly after the publication of articles by North Carolina Policy Watch, a Democratic-leaning internet media outlet, which discussed comments made by Mr. LaRoque, then an outspoken Republican member of the North Carolina Legislature, as well as his operation of the private not-for-profit organizations ECDC and PDC. 1 Ten months later, after delving into every aspect of Mr. LaRoques life, in July 2012, the grand jury handed up its first indictment [DE-1], a 72-page document containing a 68-page Introduction and Counts 1 through 8, which are the subject of this motion.

Under the regulations of the United States Department of Agriculture Rural Development Intermediary Relending Program, which was the primary program these organizations operated, these organizations never held federal funds for more than 30 days, and did so only when those funds were to be transferred directly to a borrower. Consequently, none of the funds at issue in this case were federal funds, but rather were exclusively the funds of the private organizations. See 7 C.F.R. 4274.302 (defining revolved funds, which are the repayments received from borrowers by the organizations, and stating, Revolved funds shall not be considered Federal funds.); 1951.884 (Non-Federal fundsOnce all [USDA]-derived loan funds have been utilized by the intermediary for assistance to [borrowers] . . . assistance to new [borrowers] . . . shall not be considered as being derived from Federal funds and the requirements of these regulations will not be imposed on those new [borrowers].) 2
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On December 20, 2012, five months after its initial indictment and fifteen months into its investigation, the grand jury handed up a superseding indictment [DE-16], which added four additional countsa false statement count, a concealment count, and two tax evasion counts. On April 3, 2013, Mr. LaRoque filed motions to dismiss the false statement and concealment counts (Counts 9 and 10), [DE-23] [DE-24]. On April 17, 2013, a grand jury handed up a second superseding indictment [DE-32]. This indictment did not add additional counts. The following day the prosecution responded to Mr. LaRoques pretrial motions. In those responses, the government outlined its theory of prosecution, which had not been clearly defined in the 224 pages of charging documents. In one response, the prosecution stated, . . . [T]he Defendant engaged in a scheme to defraud ECDC of $300,000. To effectuate this scheme, on January 22, 2009, . . . [t]he Board . . . voted unanimously to create a compensation agreement between ECDC and the Defendant . . . . The ECDC Agreement . . . purports to be retroactively effective back to 1998. . . . [T]he creation of such a contract, if valid, would have created an accounts payable owed by ECDC to the Defendant in the sum of approximately $200,000. [Next, the PDC board approved a similar agreement, which] if valid, would have created an accounts payable by PDC to the Defendant in the sum of approximately $100,000. . . . In order to access the $300,000 accounts payable fraudulently created by the Defendant on January 22, 2009 . . . , Mr. Stephen LaRoque asked the Board to approve a loan to LaRoque Management Group, Inc. (LMG) based on earned income not yet distributed to LMG. A brief discussion was made . . . . The motion passed unanimously. . . . Based on ECDCs Board approval, the Defendant made five withdrawals (totaling $300,000) from ECDCs bank account[.] Governments Response to Motion to Dismiss Count 9, Pp. 5 -8 [DE-35]. In another response, the prosecution again outlined its theory, stating, The essence of the Defendants scheme was to simply use his control of the ECDC and PDC Boards to approve 3
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their payment of approximately $300,000 to him. . . . [He] achieved his theft under the guise of compensation contracts made retroactively effective[.] Governments Response to Motion to Strike Surplusage, P. 3 [DE-39]. This pleading characterizes the above conduct as the

mechanism [used] to defraud the two non-profits, and labels the compensation owed under the contracts criminal proceeds and ill -gotten gains. Id. Thus, the prosecution has now made its theory abundantly clear. Its theory is that Mr. LaRoque defrauded ECDC (or stole funds from ECDC) by using his control of the boards to obtain the boards approval of retroactively effective compensation contracts, which made Mr. LaRoque the rightful owner of the funds he allegedly stole. Notwithstanding the factual

inaccuracies of many of the additional allegations in these descriptions of the scheme, such as the inflated amount of additional funds owed to Mr. LaRoque created by the 2009 compensation agreements that the boards approved,2 the prosecutions theory admits that the board authorized every transaction comprising the alleged scheme. Rather than alleging that Mr. LaRoque misled the board members, the government bases its theory of prosecution on an alleged violation of a fiduciary duty or organizational policies, or simply on the prosecutions belief that Mr. LaRoque received too much compensation. For the reasons that follow, this theory of prosecution must fail and Counts 1 through 8 should be dismissed for failure to state an offense.

While the prosecution claims that these new contracts created $300,000 in additional funds owed to Mr. LaRoque, its own investigation has revealed that Mr. LaRoques prior compensation contracts, which were in effect since shortly after the founding of ECDC in 1997 and PDC in 2003, entitled Mr. LaRoque to three percent of the assets held by those organizations annually. Therefore, the new compensation agreements, which the boards of ECDC and PDC approved on January 22, 2009, increased the funds owed to Mr. LaRoque by less than $50,000not by $300,000 as the prosecution implies. 4
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LEGAL STANDARD [A]t any time while the case is pending, the court may hear a claim that the indictment or information fails to invoke the courts jurisdiction or to state an offense. Fed. R. Crim. P. 12(b)(3)(B). A charge in an indictment fails to state an offense and must be dismissed when the governments theory of prosecution does not describe conduct that is a violation of the criminal statute charged. See Russell v. United States, 369 U.S. 749, 764-65 (1962). For, [where] the basis for [a] defendant[]s motion is . . . that the facts alleged do not state an offense as a matter of law . . . , it would be improper and a waste of resources for everyone involved to conduct a lengthy trial . . . and submit the case to a jury only to rule on post-trial motion that the governments theory of criminal liability fails . . . . United States v. Bongiorno, 2006 WL 1140864, *4 (S.D.N.Y. May 1, 2006). See also United States v. Izurietai, 710 F.3d 1176, 1178-84 (11th Cir. 2013) (court sua sponte dismissed case on appeal for failure to state an offense where criminal conviction had erroneously rested on a Food and Drug Administration regulatory standard that was civil in nature). Because of the immense expense incurred by this defendant and the taxpayers of the United States to this point, the Defendant chooses to make this argument now, rather than during trial or at the close of the evidence, in hopes that the Courts time and the parties monies will not be further expended on counts with no legal basis. DISCUSSION BECAUSE MR. LAROQUE WAS THE RIGHTFUL OWNER OF THE PROPERTY AT ISSUE AND WAS AUTHORIZED TO WITHDRAW IT, HE DID NOT COMMIT THEFT. Under 666(a)(1)(A), whoever . . . embezzles, steals, obtains by fraud, or otherwise without authority knowingly converts to the use of any person other than the rightful owner . . . property wrongfully takes such property under the statute. (Emphasis added). Thus, absent fraud on the board, a person who was authorized by the organizations board to receive the funds 5
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cannot be guilty of a wrongful taking under 666(a)(1)(A); nor can a person who is the rightful owner of the property. Obtaining approval for compensation contracts from a board that the defendant controls is not fraud or theft, even if the right to the funds was obtained through retroactively effective contracts, and violation of a fiduciary duty or organization policy alone is not a violation of 666(a)(1)(A). See United States v. Graham, Nos. 07-4106, 4332, 269 Fed.Appx 281, 282-287 (4th Cir. March 13, 2008) (per curiam) (unpublished). In Graham, a case remarkably similar to the instant case, the Fourth Circuit overturned a defendants conviction for violating 666(a)(1)(A), finding the evidence insufficient to support a conviction. The facts of Graham, as stated by the court, were as follows: For over two decades, Graham was the Executive Director of two nonprofit organizations, COA and All Care Home and Community Services, Inc., (All Care). The organizations worked together to identify and provide services reimbursed by the state and federal programs, including Medicaid, to qualified recipients. Both COA and All Care shared the same board of Directors (the Board). . . . Until 2001, Graham did not have a written contract with either COA or All Care. This changed in December 2001, when Graham provided the Board with two essentially identical employment contracts for himself, one for each agency (twin contracts). The Board president signed both contracts. For the purposes of th[e] case, the relevant provision in each of the twin contracts concerned Grahams sick leave: SICK LEAVE/PERSONAL BUSINESS: From the date of employment sometime around May 1975 till the termination of employment, Employee shall be entitled to one day per month of accumulating Sick Leave, beginning on the first date of Employees employment. Sick leave may be accumulated and carried over from year to year. Sick leave benefits may be converted into cash compensation if used for illnesses or upon the termination of this contract. . . . In preparation for the January 27, 2003, Board meeting, Graham sent out Directors Notes in which he wrote, in part: I am requesting to buy out some of my sick leave. It shows in the books as an accrual. I can already but [sic] out my vacation. 6
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The minutes from that Board meeting stated that the Board unanimously approved Grahams request to buy accrued leave. On the same day, Graham cashed out 1200 hours of accrued sick leave which totaled $106,728 (gross) and $56,953.16 (net). Subsequently, Grahams Directors Notes for the next two board meetings on March 27, 2003, and May 14, 2003, included [two] request[s] to continue buying out his accrued leave[.] . . . The Board approved both requests. Unlike his previous cash outs in January, Graham did not cash out accrued sick leave immediately after either of these Board Meetings. . . [Ultimately,] [t]he total amount of accrued sick leave Graham cashed out in 2003 and 2004 was $191,221.81 (gross) and $107,788.56 (net). Id. at 284. In addition to the above facts, the court noted that the Board rubber stamped all of Grahams decisions . . . , and that Graham effectively controlled the Board[.] Id. at 284, n. 4. Nonetheless, the court found that, because Graham received the Boards permission to cash out an indeterminate amount of his accrued sick leave . . . , Grahams conviction could not stand. Id. at 286-87. In so doing, the court explicitly rejected the governments arguments that criminality was established because Graham took advantage of a Board that was comprised of elderly, disabled, and uneducated men and women who rubberstamped all of his decisions, and that Graham should have explicitly informed the Board about how much sick leave he was actually going to cash out and made certain that the Board understood . . . his request[.] Id. at 285. Moreover, the court recognized that Graham used some of the sick leave cash out money to buy things for his girlfriend and that cashing out accrued sick leave [may have been] inconsistent with the written policy of COA. Id. at 285 n. 5. But the court noted, While these facts may demonstrate that Graham is not eligible for the priesthood, they are irrelevant so far as the . . . determination of guilt is concerned. Id. (emphasis added). Ultimately, despite that Graham [may have] failed miserably to fulfill his duties as a public servant, engaging in conduct that squandered public resources and adopting a life-style that reflected discredit upon [the nonprofits], their directors and employees[,] [b]ad conduct in

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and of itself . . . does not equal criminal conduct. Id. Quite simply, Grahams cash outs . . . were not contrary to the authority given to him by the Board. Id. at 286. Therefore, the Graham could not be convicted of violating 666(a)(1)(A). Id. at 287 Thus, Graham illustrates that, absent fraud on the board, board authorization is a complete defense to a charge of violating 666(a)(1)(A), even if the defendant controlled the board and utilized retroactively effective compensation contracts. 666(a)(1)(A) supports this holding. The plain language of

As noted above, the statute applies to whoever . . .

embezzles, steals, obtains by fraud, or otherwise without authority knowingly converts . . . . 666(a)(1)(A) (emphasis added). Thus, a person who obtains funds with authority has not

wrongfully obtained funds in violation of 666(a)(1)(A). The statute continues, whoever . . . knowingly converts to the use of any person other than the rightful owner . . . , thereby illustrating that when the defendant is the rightful ownersuch as when the defendant has obtained the contractual right to the property in questionhe cannot have wrongfully taken the property in contravention of the statute. 666(a)(1)(A) (emphasis added). Cf. Morissette v. United States, 342 U.S. 246, 272 (1952) (To steal means to take away from one in lawful possession without right with the intention to keep wrongfully. (emphasis added)) . Graham also shows that violation of a fiduciary duty or written policies of the organization does not alone constitute a violation of 666(a)(1)(A). This finding is consistent with the statutory language, which does not include the deprivation of honest services theory of wrongdoing. Even if individuals could be convicted based on such amorphous theories as violations of fiduciary duties or corporate policies under honest services wire fraud, which of course the Supreme Court has rejected, 666(a)(1)(A) does not incorporate honest services wire fraud. See United States v. Riley, 621 F.3d 312, 339 n. 20 (3d Cir. 2010) (honest services

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doctrine does not apply to the fraud of property of 666(a)(1)(A)).3 Cf. Skilling v. United States, 130 S.Ct. 2896, 2932 (2010). Graham applies this distinction by rejecting the

governments theories of criminal liability based on violation of organizational policies, abuse of the trust of the board, and breach of fiduciary duty. Thus, the analysis in Graham squarely addresses and forecloses the governments theory of prosecution against Mr. LaRoque. The government has summed up its theory as follows: The essence of the Defendants scheme was to simply use his control of the ECDC and PDC Boards to approve their payment of approximately $300,000 to him. . . . [He] achieved his theft under the guise of compensation contracts made retroactively effective[.] Governments Response to Motion to Strike Surplusage, P. 3 [ DE-39] (emphasis added). This theory attempts to establish that Mr. LaRoque defrauded ECDC, not by defrauding the board membersbecause he did notbut based on the concept that he controlled the board, utilized retroactively effective contracts, and possibly engaged in violations of his fiduciary duty or the policies of the organizations. As Graham illustrates, however, these theories are insufficient for a conviction under 666(a)(1)(A). A corporation can only act through its board. Cf. N.C. Gen. Stat. 55A-8-01(b) (2012). Thus, without defrauding the board, Mr. LaRoque could not have defrauded ECDC. The

government admits that the board approved the contracts with Mr. LaRoque and does not allege that he defrauded the board members. The contracts that the board approved made Mr. LaRoque
3

Because 1346 is only applicable to the mail and wire fraud chapter of Title 18, the honest services doctrine does not apply to the fraud of property of 666(a)(1)(A). Section 1346 states, [f]or the purposes of this chapter, the term scheme or artifice to defraud includes a scheme or artifice to deprive another of the intangible right of honest services. 18 U.S.C. 1346. This chapter refers to Chapter 63, Mail Fraud and O ther Fraud Offenses. Section 666, on the other hand, is in Chapter 31, Embezzlement and Theft. Riley, 621 F.3d at 339 n. 20. 9
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the rightful owner of the property he is charged with wrongfully obtaining. The prosecution attempts to cast the contracts as invalid, stating that the contracts purport[] to be retroactively effective and noting that the contracts, if valid, would give Mr. LaRoque the legal right to the funds he is charged with wrongfully withdrawing. Governments Response to Motion to

Dismiss Count 9, P. 6 [DE-35]. However, the prosecution has no authority to declare the contracts void. While the Nonprofit Corporation Act outlines circumstances under which the contract may be voidable by the corporation due to a conflict of interest transaction, the statute confers no right for the executive branch of the federal government to declare a private contract void. See N.C.G.S.A. 55-8-31 (West 2012) (emphasis added). Nor does state contract law. Moreover, a finding of contract invalidity would have to be made by a court, not by a prosecutor. Therefore, the contracts are valid, and entitled Mr. LaRoque the funds he is charged with wrongfully obtaining. Because he was the rightful owner of the funds, he did not steal them and the prosecutions theory is insufficient to state an offense. In an effort to overcome this fatal flaw in its theory, the prosecution attempts to rely on the amorphous theories of a violation of a fiduciary duty or organization polices, or its opinion that Mr. LaRoque just got too much compensation, to establish the criminality of the actions. These efforts fail as well, however. The prosecutions Response in Opposition to Defendants to Motion to Strike Surplusage [DE-39] alleges that Mr. LaRoque stole money from non -profit entities to whom he owed a fiduciary duty. P. 2. The inclusion of this reference to a fiduciary duty would be superfluous if the conduct would have been theft absent this duty. Thus, the government has forecasted its intention to rely on this duty as a key factor in the establishment of the illegality of the conduct in question. However, the existence of a fiduciary duty does not transform otherwise legal

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conduct into criminal theft. At worst, mere violation of a fiduciary duty exposes the actor to civil liability. Similarly, the prosecution has alleged that each of the Directors who voted on the action had a conflict of interest[.] Governments Response to Motion to Dismiss Count 9, P. 7 [DE-35]. While this may be relevant in the context of a civil proceeding against the board members, such a conflict does not transform otherwise legal conduct into criminal theft. Finally, the prosecutions attempt to establish criminality based on its belief tha t he received too much money must fail as well. The indictments and the prosecutions pleadings repeatedly discuss the amount of compensation Mr. LaRoque received. For example, the

prosecutions Response in Opposition to Defendants Motion to Dismiss Count Nine [DE-35] states that the 2009 contracts obligate ECDC to pay the Defendant significantly more money for the preceding decade than the ample amount he had actually paid himself . . . , and includes as an exhibit a chart showing the funds Mr. LaRoque received as compensation. P. 6 (emphasis added). In its Response in Opposition to Defendants Motion to Strike Surplusage [DE-39], the prosecution states, By January of 2009, the Defendant ha d become accustomed to living on a lucrative salary . . . , [and] although [his] salary remained at a high level . . . , ECDC operations were in decline. Notwithstanding his lucrative salary . . . he stole . . . from ECDC. P. 3 (emphasis added). But the concept that, because the prosecution believes that Mr. LaRoque received ample funds and a lucrative salary, any increase in his salary by the board is theft, is a defective theory of prosecution. Theft is taking funds without authority. Here, Mr. LaRoque had authority. Therefore, there was no theft. To find otherwise would expose to conviction under 666 every contractor or employee of an organization over which the federal government could exercise its prosecutorial jurisdiction if a jury believes that the person knowingly received too much

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compensation. This too may be a basis for a civil proceeding against Mr. LaRoque, but it is a wholly insufficient basis for an attempt to put him in prison. It is also unconstitutionally vague, as it both fails to give sufficient notice to people about what conduct would violate the lawhow much is too muchand lends itself to arbitrary and discriminatory prosecutions. See Skilling, 130 S.Ct. at 2933 (citing Kolender v. Lawson, 461 U.S. 352, 357 (1982)). Therefore, Counts 1 through 4 fail to state an offense and should be dismissed. As should Counts 5 through 8, because they rely entirely on proof of the wrongful takings alleged in Counts 1 through 4. CONCLUSION For the foregoing reasons, the Defendant respectfully request that the Court dismiss Counts 1 through 8 of the Second Superseding Indictment. Respectfully submitted, this the 22nd day of April, 2013. CHESHIRE PARKER SCHNEIDER & BRYAN, PLLC

/s/ Joseph B. Cheshire V Joseph B. Cheshire V N.C. State Bar # 5543 P. O. Box 1029 Raleigh, NC 27602 Phone: (919) 833-3114 Fax: (919) 832-0739 Joe.Cheshire@cheshirepark.com

/s/ Elliot S. Abrams Elliot S. Abrams N.C. State Bar# 42639 Elliot.Abrams@cheshirepark.com Attorneys for Defendant

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CERTIFICATE OF SERVICE I hereby certify that I have this day served a true and correct copy of the foregoing MOTION through the electronic service function of the Courts electronic filing system, as follows: Dennis Duffy Assistant United States Attorney 310 New Bern Avenue Federal Building, Suite 800 Raleigh, NC 27601-1461 This 22nd day of April, 2013. /s/ Joseph B. Cheshire V Joseph B. Cheshire V CHESHIRE PARKER SCHNEIDER & BRYAN, PLLC P. O. Box 1029 Raleigh, North Carolina 27602 Tel: (919) 833-3114 Joe.Cheshire@cheshirepark.com (Dennis.Duffy@usdoj.gov)

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