In a crowded sandwich shop at North Hills, John Kane enthuses easily about the $1 billion redevelopment project that’s been hailed as “Raleigh’s new midtown.” The fledgling mecca of shopping, dining, working and living has just launched its first holiday season. New stores and restaurants are bustling with customers; office buildings, condos and a hotel are under way. Business is good, and Kane is talkative.

But when the subject turns to his former close friend and business partner Clifford A. “Mickey” Clark, the proprietor of Kane Realty Corporation chooses his words much more carefully. Clark, Kane’s former president and chief financial officer, acknowledged in 2002 that over seven years he’d withdrawn nearly $1.5 million from the company’s coffers, according to state real estate regulators and a contract that settled the matter privately.

“We were very good friends,” Kane says with chagrin. “I was quite surprised.”

Clark’s tenure at Kane Realty–and a friendship that had endured nearly three decades–came to an abrupt and highly confidential end three years ago. A lengthy legal document spelled out Clark’s agreement to pay Kane back and severed all other connections between the two men, including the stipulation that Clark withdraw and resign from 27 separate partnerships. It was a painful separation, both professionally and personally, Kane acknowledges; Clark is even the godfather to one of Kane’s children.

The private history between the two men drew the attention of N.C. Real Estate Commission regulators who were examining Kane Realty’s finances in response to an unrelated 1998 complaint. The commission, which licenses brokers and enforces real estate laws, documented the disappearance of the money in an investigation that spanned six years, eventually resulting in disciplinary action against Kane and a referral of the matter to the Wake County district attorney.

“This letter . . . concerns the Real Estate Commission’s discovery of a substantial embezzlement of client monies from Kane Realty Corporation in Raleigh,” Tom Miller, the special deputy attorney general who heads up the legal division at the Real Estate Commission, wrote to District Attorney Colon Willoughby in June. “A trust account defalcation of this magnitude is alarming to this office.”

Willoughby declined to pick up the investigation on his end; Clark has since moved on to a similar job at a publicly held technology firm in Charlotte.

But starting Jan. 1, Clark’s former boss will pay a public price for not having proper mechanisms in place to protect his clients’ and tenants’ money. The founder of a homegrown Raleigh real estate giant and the entrepreneur behind the enormous North Hills project has temporarily lost his license to practice his trade.

Kane’s license was suspended for two years, with all but the first six months stayed. In the meantime, neither state regulators nor Kane expect there will be any impact on Kane Realty Corporation’s day-to-day operations. The company’s corporate real estate license (as opposed to Kane’s personal one) was suspended for two years as well, but the entire suspension was stayed pending no further problems. Another broker in Kane’s firm will take over as the broker in charge until July 1.

As the person in charge of protecting tenant security deposits and other funds entrusted to him by Kane Realty’s clients and tenants, Kane drew the disciplinary action because he is ultimately responsible, says Miller.

“His accounting system was not set up with really good controls,” Miller says. “It was not set up in accordance with real estate practices, which left the system extremely vulnerable to the kind of abuses that then, in fact, occurred.”

Citing confidentiality agreements with Clark and Kennedy O’Herron, another prominent Raleigh businessman who bailed Clark out of his debts, Kane is reticent to discuss too many details about the circumstances surrounding the dissolution of his relationship with Clark, which he told investigators was “a huge shock” because Clark had been “a trusted friend.”

Clark is currently employed as the chief financial officer and vice president for finance at Market Central, a Charlotte area company also known by the name Scientigo, a publicly traded technology firm with about 340 employees and total assets of about $3.6 million. He declined over the telephone to answer questions and later did not return repeated phone calls.

But documents collected by state regulators–including transcripts of interviews with Kane Realty employees, copies of the company’s bank statements and ledgers, and the confidential settlement–tell the story of a personal and business relationship soured by the withdrawals of large sums from various Kane Realty accounts. The records also show Kane’s efforts to protect his other partners and clients from the impact of the withdrawals, such as borrowing $400,000 from a friend to reimburse the owners of Chapel Hill’s University Mall, which Kane Realty manages.

Real Estate Commission investigators initially began looking into Kane Realty’s finances in response to a complaint filed in late 1998 by one of Kane and Clark’s business partners, Roy Rodwell. An investor with Kane and Clark in two shopping malls in Roanoke and Blacksburg, Va., Rodwell alleged that the pair had cheated him out of proceeds he was due from the refinancing of the two malls in late 1997. Rodwell also accused Kane of commingling funds belonging to tenants, such as security deposits, with operating funds of Kane Realty, along with other financial improprieties. In a battle chronicled in letters between the two parties’ attorneys, Kane and Clark adamantly denied Rodwell’s claims.

A civil lawsuit Rodwell filed in Wake County alleging the same accusations later settled out of court, and Rodwell formally withdrew his complaint in April 2000.

Investigators continued their examination of Kane Realty Corporation’s financial system, however, eventually conducting a comprehensive 18-month-long audit that revealed a lack of state-mandated checks and balances. That lack of controls left the door open for Clark’s withdrawals to go undetected over seven years, Miller says–and ultimately led to the commission suspending Kane’s license.

“The public has to be able to have confidence in real estate brokers, and that confidence comes partly from a system of safeguards built into licensing laws and commission rules for safeguarding clients’ money in brokers’ hands,” says Miller. “When a broker fails to employ those safeguards, the public confidence is eroded.”

At the heart of the problem, Miller says, was Kane’s fundamental error in not treating Kane Realty’s accounts as brokerage accounts, both in setting them up initially and in monitoring them over time.

“Had they followed the rules, it would have been very difficult for Mr. Clark to do what he did, and to do it for so long without getting caught,” Miller says.

After it was discovered, Kane took losses from his own pocket to replace clients’, partners’ and tenants’ cash and prevent other parties from being victimized, Miller says. “We certainly took into account Mr. Kane’s responsible conduct in reaction to the problem,” Miller says. “But this went on for a long time. And had those safeguards been in place, it would have been found out much sooner.”

As president and chief financial officer of Kane Realty, Clark had full access to the ample funds in the company’s accounts, which he diverted to other side businesses he controlled, including an Apex flooring company called Carpet Market, according to the commission’s findings. The withdrawals began in 1995, with Clark “borrowing” large sums from Kane Realty’s accounts and later paying back part or all of each debit, records show. The withdrawals were hidden in complicated accounting transactions that regulators eventually unraveled.

A former certified public accountant who forfeited his license in 1986 for failing to keep up his professional training, Clark “was the CFO and he controlled the books,” says Emmett Wood, the commission’s audits and investigations chief. “He would review anything that went to Kane.”

According to the state’s investigation, some of the money was used to buy supplies and materials for flooring jobs by Carpet Market, a company co-owned by Clark and O’Herron in which Kane says he had no financial interest.

In February 2005, Clark told investigators “a lot of the money went to Carpet Market because that company was not doing well financially.” Asked three times by investigators whether Kane had given him authority to borrow money from Kane Realty’s accounts, Clark replied, “I’m not the one to ask.” Although other employees interviewed reported they thought Kane was aware that Clark was drawing money for outside purposes, Kane has consistently and adamantly denied knowing about it until, he says, Clark told him about it in early 2002.

In an interview with the Independent, Kane says Clark’s betrayal was complete–and carefully calculated.

“I had absolutely no knowledge until he confessed to me,” Kane says. “I trusted him to handle the finances of the company. In retrospect, it’s clear that he structured things to keep me at a distance from the financial aspects of the company in order to control access to the funds.”

Investigation documents note one exception: Kane told regulators in May 2005 that Clark had told him in 1997 or 1998, “in a casual conversation that he [Clark] had borrowed some money from KRC, but that he had subsequently replaced it.”

The withdrawals didn’t end there, however. Over time, Clark moved larger sums of money more frequently, while his repayments ebbed and eventually stopped altogether, the company’s ledgers show. Clark revealed the extent of the withdrawals to Kane when they eventually prevented Kane Realty from having enough cash to pay its own legitimate bills, according to interviews and documents the commission collected.

One of those documents is a report by an independent CPA Kane says he hired to decipher what had happened. Accountant Kevin Neuman determined that Clark had made a total of roughly $2.2 million in unauthorized withdrawals from Kane Realty’s accounts as of the end of 2001. He’d redeposited some of the funds, but according to Neuman’s analysis, about $1.4 million was still unaccounted for as of the end of 2001.

The case is one of the largest that the Real Estate Commission has ever investigated, says Wood, the state investigator.

Neuman told state regulators in December 2004 he “was quite impressed that all the parties were able to work together to resolve the matter without anyone going to jail.”

In July 2002, Kane, Clark and Clark’s partner in Carpet Market and other businesses, Kennedy O’Herron, signed a confidential legal agreement that explicitly detailed Clark’s debt to Kane Realty Corporation and laid out a plan for Clark to make restitution–with O’Herron’s help.

O’Herron, whom the agreement makes clear was not involved in the redirecting of Kane Realty’s funds, owns a Raleigh investment firm, O’Herron and Co., and since March 2002 has also served as president and CEO of 3TEX, a high-tech textiles company in Cary. Spun off from N.C. State University in 1998, the firm specializes in fabrics used in bulletproof vests, protective headgear and boat hulls, a niche that drew a complimentary feature story in Fortune magazine last December.

In return for what he described to investigators as a “handshake agreement” that was “uncollateralized,” O’Herron agreed to pay back the bulk of the money that Clark admitted he’d transferred from Kane Realty’s accounts to Carpet Market accounts and elsewhere. In a complicated arrangement, the three men agreed to a deal where O’Herron took responsibility for a promissory note Clark gave Kane for $1.2 million, the amount the two agreed was the outstanding balance between them at the time of the contract.

To satisfy the obligation, O’Herron agreed to pay Kane Realty $400,000 in three cash installments over several months and to cancel a $300,000 debt that Kane and Clark owed his family. Separately, Clark promised to do $500,000 worth of flooring work for Kane Realty “at cost” and transfer all of his shares of stock in a particular company to Kane.

The agreement was drafted privately by attorneys and includes a strongly worded confidentiality clause prohibiting any of the parties from disclosing the contents to anyone, “including but not limited to, any media or press.” The document became public record as part of the real estate commission’s research.

Kane declined to discuss details of the settlement, except to say, “We weren’t fully reimbursed for the amount of money that was taken.”

Earlier this year, Kane told investigators that he received only about $700,000 in restitution. Clark had not done the promised $500,000 in flooring work, Kane told the commission, except one job at Imperial Athletic Club in Research Triangle Park that Kane characterized as “a disaster.” Kane also told state regulators that the promised shares of stock were “essentially worthless.”

O’Herron did not return repeated phone calls. But he told investigators that as of May 2005, Clark still owed him the $1.2 million he’d put up.

“That’s most interesting, isn’t it? There’s more to that than I will ever know,” says Wood, who asked O’Herron directly about why he would give Clark $1.2 million on a “handshake” and was told O’Herron “had known Clark for many years and decided to bail him out.”

As a follow-up to the investigation, N.C. Real Estate Commission staffers began working with Kane and his bookkeepers earlier this year to identify specific changes the company needed to make to align its accounting practices with state requirements. Kane says the changes have been implemented already; Miller expects his office will find the company’s books completely in compliance when they do a review prior to reinstating Kane’s license next summer. Under the terms of the suspension, Kane must also complete 16 hours of classes by the end of June on such topics as “Basic Trust Account Procedures” and “The Fundamentals of Commercial Real Estate for the Good of All.”

For his part, Kane is looking to put the matter behind him and get on with the business of business at North Hills and across the Triangle.

In addition to developing and managing the various components of the North Hills project that Kane owns (along with several partners, including his wife), Kane Realty also develops and manages commercial properties for other owners, including two in Chapel Hill: University Mall, where Kane directed a comprehensive and well-received redevelopment in 2002, and Ram’s Plaza, where he will undertake a conversion from traditional shopping center to a mix of retail, office space and housing next year.

In the next few weeks, Kane expects to go public with plans for yet another North Hills parcel.

And so, while he may be uncomfortable talking about the dissolution of his longtime relationship with Mickey Clark and the ensuing disciplinary action from the commission, Kane lights up like a mall Christmas tree when asked how things are going with the 100-acre project that surrounds him for several blocks in almost every direction from the sandwich shop where he sits down for an interview.

Respected across the Triangle and throughout his industry, the 53-year-old developer has undertaken the most ambitious project in his 25-year career with North Hills, which he says will take another decade to complete. At the same time commission investigators were reading his accounting ledgers, trade magazines and the business sections of local newspapers were busy writing gushy reviews of Kane’s project.

Business Leader, an RTP journal, named Kane its “business leader of the year” for 2004, welcoming North Hills warmly to Raleigh’s landscape. In May 2005, Metro magazine devoted its cover and a 16-page special section to North Hills’ redevelopment, even chronicling such details as the number of tulips in the landscaping.

Kane himself describes his vision for North Hills with the confidence of a guy who sees not only the present successes–restaurants serving diners and stores readying for their inaugural holiday rush–but also the future, when condos now under construction fill with residents, offices across the street buzz with workers, and the suspension of his real estate license is behind him.

“Things are going great,” he says.