Haslam faces complex inquiry

Four years ago, as most of the trucking industry grappled with the recession, Jimmy Haslam ordered top sales executives of his truck stop empire from around the country to come to a meeting at the company headquarters in Knoxville, Tenn.

He brought in his national sales director, Brian Mosher, from Bettendorf, Iowa. He invited two top regional sales managers, one from Illinois and the other from Texas. And he included Mark Hazelwood, a lifer at the Haslam-family-owned Pilot Flying J, who had worked his way up to the position of company president.

Despite the difficulties in the U.S. economy in general and in the trucking industry in particular, Pilot was doing well. Its profits were steady even as its sales of diesel fuel were dropping. One of the first things Haslam did at the meeting of his top people was express his gratitude to Mosher for "saving money for the company," according to papers later filed in court. It was a strange thing to say to a sales executive who had no authority to cut costs and focused instead on increasing sales and company income. Two hundred miles away in Nashville, at another family-owned trucking firm, things were not so good. The company, Western Express, Inc., was suffering a dramatic loss in income, dropping from $600 million in revenue in 2008 to $400 million in 2009. It was facing $4.5 million in default fees and penalties on loans that the previously successful company suddenly could not pay, according to papers later filed in court.

It seemed obvious to Western's owners then in 2009 that their problems were a direct result of the recession. But, after a dramatic FBI raid on Pilot's headquarters this past April and assertions from the government that Pilot was defrauding its customers by shortchanging them on promised discounts, the executives at Western have reconsidered. They now blame Pilot for their troubles.

Western is one of hundreds of customers that, according to the FBI, were victims of "intentional and deceptive" manipulation of discounts by Pilot. When Haslam told sales executive Mosher at that meeting in 2009 that he was grateful for the money Mosher was saving for the company, Haslam may have been referring to Mosher's reductions in rebates Pilot was paying to its fuel customers.

Although Haslam insists that he is "making it right" with his customers who were shortchanged on their rebates, the FBI investigation continues. Agents and prosecutors are sifting through what one lawyer involved in the investigation said are "literally millions of pages of emails and documents."

At least 11 former Pilot employees already are cooperating with the FBI and offering evidence against Pilot. Seven of them have entered guilty pleas to fraud charges, and four have obtained immunity from prosecution in return for their cooperation. Late last month, federal prosecutors, in a major signal, arranged to postpone the sentencing of the seven to allow the FBI to continue its probe. The delay shows that the investigation is growing beyond earlier expectations, say lawyers and an investigator involved in the probe who spoke to ESPN.com on condition of anonymity. The court cases are now scheduled for a report to the judge on Feb. 3.

The sequence of guilty pleas shows that the federal agents are working their way up the ladder of Pilot management. Cathy Giesick, one of the sales executives at Haslam's 2009 meeting, already has agreed to offer evidence against Pilot and has received immunity from prosecution. If others from the senior management at Pilot join her, Haslam himself will become the focus of the investigation. Three lawyers involved in the investigation, speaking anonymously because of their obligations to their clients, told ESPN.com that they expect Haslam to be charged. If fraud charges were filed against Haslam, it would be the most significant fraud case against a professional sports team owner since John Rigas, who operated one of the nation's largest cable TV companies and owned the Buffalo Sabres, was convicted of bank fraud in 2005 and sent to the penitentiary in 2007. Rigas, now 89, is incarcerated in a minimum security facility in Allenwood, Pa., and is scheduled to be released in January of 2018.

Whether or not Haslam is charged with crimes, it's easy to see why Western would blame Haslam himself for its problems. While Haslam was congratulating his top executives for preserving company profits, Western was purchasing 90 percent of its diesel fuel from Pilot. In a lawsuit Western filed against Pilot in August in Civil District Court in New Orleans, Western asserts that it was shortchanged on every gallon of its purchases for the past 10 years and that the Pilot-produced extra fuel costs led directly to an emergency refinancing that has now cost Western $68.7 million in addition to the penalties and default fees of 2009.

The emergency refinancing costs included suddenly higher interest rates and other onerous new terms on longstanding loans from JP Morgan Chase and Key Principal Partners, as well as enormous fees paid to investment bankers and lawyers who assisted Western in saving the company. The banker and attorney fees were $10.9 million, and the change in interest rates, projected over the length of the financing, are $57 million, according to the lawsuit.

Western, which operates 2,500 tractors and 6,500 trailers from seven locations throughout the U.S., suffered the largest and most painful loss as the result of what the FBI calls a "culture of fraud" at Pilot, and it may be Haslam's most painful and difficult challenge as he tries to make peace with hundreds of angry customers. Western purchased more than $1 billion in diesel fuel from Pilot over the past 10 years, according to Western's lawsuit, and the senior management of the two Tennessee-based companies were friendly. After Western founder Wayne Wise died in 2010, it was Pilot's Hazelwood who walked Wise's daughter down the aisle at her wedding.

A few months later, according to the FBI affidavit describing its investigation of Pilot, Hazelwood, Haslam, and two other top executives were laughing and joking about what they were doing to Western.

Western is one of 27 trucking companies that have sued Pilot and demanded payment of the discounts they were promised. There's also a class-action lawsuit filed in Little Rock, Ark., on behalf of all Pilot customers in which Haslam and Pilot have made a major settlement offer. But as enormous as his problems with his customers might be, Haslam's biggest problem is the FBI's continuing investigation.

According to the sworn FBI statement filed in federal court in Knoxville, the probe began when an individual known only as Confidential Human Source 1 (CHS1) told the FBI that an employee of Pilot had described to CHS1 a vast scheme in which Pilot officials "had been intentionally defrauding" Pilot customers by withholding amounts due to customers in the form of monthly rebate checks. Instead of sending the promised rebate on the fuel purchased by the customer, Pilot employees reduced the amounts of the rebates to increase company profits and to increase their sales commissions.

Agents quickly located a Pilot employee now known as CHS2, who told them that "the fraud occurred with the knowledge" of all four of the Pilot executives, including Haslam, who attended the meeting in 2009 when Haslam expressed his gratitude to his national sales director for saving the company money during the recession.

After agreeing not to prosecute CHS2, the investigators found Pilot employees who have now admitted their frauds in their agreements to plead guilty, described and handed over secret, hand-written spreadsheets that displayed the reductions in customer rebates, said that they tried to avoid e-mail when communicating about the rebate scheme, and admitted that they "were doing what they had been told to do, thereby creating a culture of fraud-acceptance within Pilot's sales division."

One of the employees who among the first to admit her guilt pulled a spreadsheet with a long list of fraudulent rebates out of her desk drawer during the FBI's raid of Pilot headquarters on April 15 and handed it to an agent.

Others told the agents about conversations with sales executives in which they were told to reduce the amounts of the rebate checks they were preparing.

A salesman who has now admitted guilt told the FBI a top Pilot executive insisted that he reduce the rebate owed to a big customer and that if the salesman refused to cooperate, the executive would reassign the customer, thereby reducing the salesman's commissions.

A basic element of the scheme, according to the FBI affidavit and one of the plea agreements, was to identify customers who were "too unsophisticated to catch that the agreed-upon discount deal with Pilot was being changed to benefit Pilot without their knowledge." One executive said in a sales meeting recorded by the FBI that "if the customers aren't smart enough to know what they're getting, then they don't deserve the rebate."

In a sales seminar devoted to techniques for identifying targets for reduced rebates and recorded by the FBI, another sales executive said, "It's an art; it's a feel; it's do what you can."

According to the guilty plea agreements of Pilot employees, the scheme also included a series of instructions on what to do if a customer diagnosed the deception -- tell the customer it was a computer glitch, talk about a mistake in the central office in Knoxville or explain that it was a misunderstanding on applicable taxes. When necessary, according to one plea agreement, office personnel fabricated documents to back up the statements made in explanation of the reduced rebates.

With the descriptions of the rebate scheme gathered from 11 former Pilot employees who have entered pleas of guilty or obtained immunity from prosecution, the agents are now working their way up into the senior management, according lawyers with knowledge of the investigation who did not wish to be named during the investigation.

Included in the group now under FBI scrutiny are two of the Pilot executives who attended Haslam's meeting in 2009 -- Mosher, the national director of sales, and Hazelwood, the president. Also under scrutiny is John Freeman, the vice-president of sales. All three of these Pilot officials have hired criminal defense attorneys. If any of these top executives agree to plead guilty and to testify for the government, Haslam would be one step closer to prosecution for fraud.

In addition to Haslam's expression of gratitude to Mosher for saving the company money and preserving profits, the FBI has gathered other evidence that implicates these three executives, according to the 120-page FBI affidavit filed in federal court in Knoxville. Some of it came from James (Jay) Stinnett, who was a top executive at Pilot and was responsible for sales strategies. In his guilty plea in June, he claimed that "Pilot senior management were (sic) aware of the rebate reduction scheme."

Stinnett told the FBI that one of his duties was to identify targets by "selecting (Pilot) customers whom he believed did not or could not reconcile their monthly rebate amounts against their daily fuel purchases."

Stinnett attended most senior management meetings, according to his plea agreement, including an all-day planning and strategy meeting for sales executives at Freeman's lake house in Rockwood, Tenn., in October of 2012. According to an FBI recording of the meeting and Stinnett's statements in his guilty plea, Freeman and Mosher spent considerable time planning a seminar in November for younger salespersons on "manual rebates," the shorthand description of the technique that Pilot employees used to reduce rebate checks without the customer's knowledge. Mosher would teach breakout sessions, the executives agreed, offering instruction to the younger people on "how to defraud without detection."

As they planned the seminar with the FBI recording the session, Freeman offered stories of his successes in reducing rebates and described his basic approach to Pilot's customers as "F--- 'em early, and f--- 'em often."

Hazelwood, the Pilot president, joined the lake house meeting late but expressed his approval of the breakout sessions at the November meeting that would describe the procedures that led to reducing rebates below what was promised to the customer.

The FBI investigation also includes recordings of Mosher's lectures in the breakout sessions in November, lectures in which Mosher warned the sales staff not to victimize "sophisticated customers who track their daily prices," but assured the staff that "very few" of Pilot's customers "ask for back up, only about 10 percent."

Stinnett's admissions together with the FBI's recording of sales meetings place Freeman and Mosher at the center of the rebate scheme. The two sales executives are mentioned in the FBI's 120-page affidavit describing its investigation more often than any other Pilot employee and are clearly now the focus of the FBI probe.

At a meeting in February recorded by the former employee known as CHS2, Freeman explained that Western Express unexpectedly caught him cheating on rebates.

"I called Jimmy (Haslam) and told him I got busted at Western Express," Freeman said. "He knew all along that I was cost-plussin' this guy (another Pilot shorthand expression for reducing rebates without the customer's knowledge). He knew it all along and loved it. We were makin' $450,000 a month" on Western.

Freeman then bragged to CHS2 that he persuaded Western to take $1 million back in settlement even though "we did it for five years. We made $6 million on (Western), and it cost us a million bucks."

The evidence from the seven plea agreements and the four cooperating former employees is piling up against Freeman and Mosher. Will the government file charges against the two Pilot executives? If they are charged, will they engage in a lengthy and expensive fight to prove their innocence? Or, like 11 other Pilot employees involved in the scheme, will they seek leniency in an attempt to negotiate a plea of guilty and offer testimony against Hazelwood and Haslam?

Hazelwood seems to have made his decision. There is evidence that he was involved in the scheme. He participated in the 2009 meeting in which Haslam expressed his gratitude to Mosher. He approved the breakout sessions on rebate reductions in November of 2012. And he was in the process of proposing a two-tier pricing system, one for vigilant customers who could not be fooled on rebates and another for customers whom Pilot could deceive, when the FBI intervened with its raids.

Hazelwood has hired Rusty Hardin, the trial lawyer from Houston who successfully defended former MLB pitcher Roger Clemens against perjury charges, a sure sign that there will be no negotiation and that Hazelwood, if he is charged, plans to fight to establish his innocence in front of a Knoxville jury.

While Freeman, Mosher, and Hazelwood, face decisions on their responses to the FBI probe, government prosecutors must make some difficult choices of their own.

Proving that Pilot and Haslam were guilty of criminal conduct will not be easy. Prosecutors will face serious difficulty describing Pilot's business procedures. The price formula for Pilot's diesel fuel is highly complex, involving prices that change each day in the truck stop plazas, discounts that vary from customer to customer, an elusive cost benchmark determined by the Oil Price Information Service, a bewildering array of wholesale and retail prices, and a difficult determination of the cost of delivering fuel to each plaza.

The price formula in the hand of a master trial lawyer like Hardin could easily become the kind of "reasonable doubt" that results in jury verdicts of not guilty.

The prosecutors' most difficult choice will be what to do with Haslam. Most of the lawyers involved in the investigation refuse to discuss the situation, but four lawyers who agreed to speak about it as long as their names were not revealed during the investigation agreed that they expect the government to charge Haslam and Hazelwood.

The prosecutors may also consider the idea of charging Pilot as a corporate entity and not charging Haslam or Hazelwood individually. A charge against the company would give both sides opportunities to negotiate a settlement to what Haslam has admitted is a "humiliating and embarrassing" setback for his family business and what for the government is a massive and daunting investigation.

What appeared to be recession-related difficulties for companies like Western Express have now resulted in 27 lawsuits against Pilot and a massive FBI probe with millions of documents, seven pleas of guilty and four immunity agreements for people who sold fuel for Pilot and are now offering evidence against Pilot, an embarrassing series of recordings of Pilot sales meetings, and the possibility of the most serious criminal charge against an owner of a professional sports team in a generation.