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Search warrants: Haslam knew about scheme to defraud customers

11:03 AM, Apr 19, 2013   |    comments
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Video: Jimmy Haslam addresses Pilot Flying J investigation

 PDF Document: 2 Order to seal  PDF Document: 3 Petition and Order  PDF Document: 7 Order to Unseal  PDF Document: 1 Motion to seal  PDF Document: 5 Search Warrant Issued  PDF Document: 6 Motion to Unseal  PDF Document: 4 Affidavit  PDF Document: 4 Affidavit Attachments

Search warrants reveal new and potentially damaging information about the investigation into Knoxville-based Pilot Flying J, including that top executives like CEO Jimmy Haslam knew about the alleged scheme to defraud commercial customers.

On Monday, federal agents raided the Pilot property in West Knoxville.  On Tuesday, Jimmy Haslam said they were shocked at what happened on Monday and that the company's number one value is "do the right thing all the time and we believe we've done that."

In addition to the Knoxville headquarters, search warrants were issued for three private residences, one in Nashville, another in Hebron Kentucky and a third in Iowa. 

According to the affidavit, investigators believe they had evidence of a "conspiracy and scheme to defraud executed by various Pilot employees to deceptively withhold diesel fuel price rebates and discounts from Pilot customers, without the knowledge or approval of the customer, for the dual purposes of increasing the profitability of Pilot and and increasing the diesel sales commissions of the Pilot employees participating in the fraud."

Not every customer was targeted, according to the documents, just those "deemed too unsophisticated to catch that their agreed-upon discount deal with Pilot was being changed to benefit Pilot."

The FBI was first made aware of the alleged scheme on May 4, 2011, when an informant told them about a conversation with a current Pilot employee that Pilot was intentionally defrauding some customers, "by deliberately charging these customers a higher price than the contractually agreed upon price, and then concealing the fact and nature of this increased price from these victimized customers."

That unnamed Pilot employee and a former sales manager named Cathy Giesick were given immunity from prosecution in exchange for information in the investigation.  Giesick said one of the reasons she left Pilot was because she was uncomfortable with this practice.

According to the documents, the alleged scheme worked like this: Pilot offers discounts to trucking companies based on how much diesel fuel they purchase from Pilot.  The more they buy, the bigger the discount.   Investigators say they have evidence that in some cases, managers, including Vice President of Sales John Freeman and Director of National Sales Brian Mosher, would reduce the amount of those rebates without telling the customer.  In case they did notice, the documents show managers told employees to blame it on a computer glitch.

According to the documents, "Pilot employees have conspired and schemed to engage in Rebate Fraud for many years."

The discount fraud, according to one of the FBI's confidential sources, was referred to at various times as "managing the discount," and "jacking the discount," the affidavit states. The rebate fraud was also called by various names, including "manual rebates," "manny" "trimming," and "cost-plussing." 

As an example of how the fraud occurred, federal officials describe how a truck company was owed a rebate of $10,000. Instead of paying the whole amount, however, a Pilot employee made a payment of $7,500, directing the remaining $2,500 to the company, which directly boosted the employee's commission.

In one particular case mentioned, a company called Morehouse Truckline discovered in June 2012 that "it had been shorted, over a period of seven years, rebates totaling $146,564.55 arising from 4,187,558.44 gallons of diesel fuel purchased from Pilot."

A number of Pilot employees are named in the documents as having knowledge of the case, including top executives, "Rebate Fraud has occurred with the knowledge of Pilot's current President Mark Hazelwood and Pilot's Chief Executive Officer James A, "Jimmy" Haslam, III, due to the fact that the Rebate Fraud-related activities have been discussed during sales meetings in Knoxville, Tennessee, in which Hazelwood and Haslam have been present."

In one case, Giesick said that in a meeting three to four years ago, where Jimmy Haslam "thanked Mosher for saving Pilot money."

Jimmy Haslam released the following statement Thursday night:

"I've read the affidavits. I now understand more clearly the questions the federal investigators are exploring.

"I maintain that the foundation of this company is built on its integrity and that any willful wrongdoing by any employee of this company at any time is intolerable.

"We will continue to cooperate with the federal investigation and continue our own investigation in these allegations.

"I value the relationships we have with our customers, our vendors and our team members across this country and regret that they have to go through this with us, but I trust and believe their faith in this company and its principles has never been misplaced."

Thursday night, Governor Bill Haslam's spokesperson, Dave Smith, released the following statement:

"The governor is aware of the affidavit. He has faith in Pilot to do the right thing, and he continues to have absolute faith in his brother's integrity.

This investigation is in the early stages, and the governor would encourage people to withhold judgement until all of the facts are known.
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On Wednesday, Pilot Flying J spokesperson Tom Ingram told 10News that the rebate program has been in place for a number of years and the company paid its rebates. He said they are not sure what the investigator's issue is with them.

Ingram said the warrants involve a sliver of the trucking companies with which they do business. The affected companies are ones whose rebates are calculated manually. Those trucking companies are usually smaller and their business fluctuates from month to month. Most of the company's other rebates are calculated automatically.

The Tennessean contributed to this report.

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