Next Victim, Please…

It took a while, but the Department of Justice is about to take aim at Browns’ owner Jimmy Haslam. The US government just unsealed the third tier of indictments in the fraud case at Pilot Flying J. This time it dropped the hammer on the senior executive team:

  • Mark Hazelwood, President and COO
  • John “Stick” Freeman, the VP of Sales– the guy who devised the scheme
  • Scott Wombold, the VP of Fleet Sales (meaning “trucking companies”)
  • Vicki Borden, Sales Support Supervisor
  • Regional managers John Spiewak, Katy Bibee, Heather Jones and Karen Mann

Since I haven’t written about this in a while, and I’ve picked up a few readers since then, let me explain what the case was about.

1. Pilot Flying J operates a chain of truck stops. The chain makes some money selling to automobile drivers who who need to buy gas. They get a nice chunk of change from selling cigarettes, snacks and in the restaurants in the big ones.

But most of their income comes from selling diesel fuel to commercial trucks– which carry the majority of goods that get transported in this country.

2. To try to lock in the business, Pilot’s sales staff called and visited trucking companies across the country, offering discounted prices if their trucks refueled at Pilot. The more fuel they bought, the greater the discount.

The companies signed contracts with Pilot, with a volume discount schedule. If they bought X thousand gallons per quarter, they got a percentage of the purchase price rebated. If they bought 5X, the percentage went up, and so forth.

It’s the same thing your credit card company does with “cash back” program.

3. Every quarter, Pilot would send companies a report– total number of gallons purchased, price paid, amount of discount. Companies could ask to have a check mailed to them or have the rebate direct-deposited in their bank account.

That’s all legal. But now we get to the scam: Pilot deliberately underpaid some companies.

If the business kept their own set of books– or they did an audit and complained– Pilot would say “Whoops– our bad! Computer error– must have punched the wrong number into Excel. Sorry!!!” They’d send the correct amount with back payments and quit cheating them.

If the company never noticed, Pilot kept cheating them.

4. To make this even more contemptible, Pilot didn’t underpay everyone— and they also didn’t underpay by a fixed amount. They made the decision based on the sales staff’s estimate of how badly-run a company was. A company that seemed well-managed got the full discount.

If the people keeping the books seemed understaffed, sloppy or stupid, Pilot held back as much as they thought they could get away with.

5. The government found out about it when a Pilot employee went to them and confessed about what was going on.


 

It would be difficult for me to explain just how contemptible I think this is. But I’ll give it a shot.

Aside from being pretty good at football, Delay of Game is the blog most qualified to discuss this case. I work as a technology consultant. One of my past projects was some work on a point of sales system for TravelCenters of America, a Westlake-based chain of truck stops that competes with Pilot.

Before I set up in business for myself, I spent five years working for TMW Systems in Mayfield Heights, which makes management system software for trucking companies. I wrote TMW’s first manual. I was their first full-time tester. I did implementation, support and designed custom software.

Trucking companies move nearly 70% of the goods offered for sale in the US. The average semi will run 45,000 miles a year– a fully-booked one will run 100,000 to 150,000.

A state-of the-art tractor– one engineered for fuel economy– gets about 8 miles a gallon on level ground. Most get about 5. (The Obama Administration just bumped the minimum to 7.2.) That number goes down if the trailer is loaded– it drops even further if the driver is going up a hill.

If you’re interested, Popular Mechanics has a good article.

The average margin in trucking– the percentage of profit– is about 5%. 95 cents of every dollar they take in goes back out in expenses. The single largest expense, as you can probably guess, is fuel. (Driver salaries are #2, equipment purchases and maintenance #3. A tractor can last about 300-500,000 miles.)

The typical trucking company has between 5 and 20 tractors. They’re very small businesses– half a dozen to a dozen people in the building– and are usually run by a former driver, his wife and kids. They’ll do anything to save a penny here or there on fuel.

So when a salesman from the nation’s largest chain of trucks stops shows up offering to save them money on their #1 cost, it’s like shooting fish in a barrel.

And, no, they don’t check their statements. Going over driver receipts and entering them into the computer is a couple of hour’s work every day. If they had the time to do that, they’d be calling local businesses looking for loads.

Part of the reason firms sign a contract is that it saves them paperwork. Every quarter,a trucking company has to report (a) how much fuel the bought in each state, (b) how many miles they drove in each state and (c) if the amounts are not equal, pay a fuel tax or request a refund.

That’s done for every state they travel into.

Plus, why would they check? Probably you check your credit card and bank statements. But do you check your utility bills every month to verify that the number of feet of gas or total kilowatt hours are correct– that you’re paying the contracted rate?

Probably not. You probably assume that they have it right. If you get an electric bill for $1,200 a month, you complain. But if it’s normally $150 and this month it’s $168, you let it go.

Plus, Pilot is a billion-dollar company– why would you think they’d cheat you?

In my opinion, Jimmy Haslam isn’t one whit different from the con artists who go door-to-door looking for seniors who own a home, offering to save them hundreds of dollars on heating bills by adding aluminum siding and insulation for only $29 a month. He’s a contemptible SOB who belongs in prison.


And he’s one step closer to getting there. I’ve also worked for both consumer credit services and law firms (Jones Day, among others). Let me give you a little more background detail.

If you inform someone you’re mailing them a check for the full amount of their payment– and you know you’re not sending the correct amount– it’s a crime. It’s called “mail fraud”. Same thing if you mail a bogus statement.

If you direct-deposit the payment– or email the statement– that’s “wire fraud”.

If you don’t write the check or perform the transfer– but you either (a) order someone else to do it or (b) know that it’s being done– that’s called “conspiracy.”

Mark Hazelwood– the Pilot president– the guy who reported directly to Jimmy Haslam– was indicted for conspiracy to commit wire fraud and mail fraud. They’re also indicting him for witness tampering (telling people either not to talk– or to lie).

The other seven were all charged with conspiracy to commit mail and wire fraud.

Wombold, Mann, Jones, Bibee and Freeman were also charged with wire fraud– meaning they actually did the transfers or sent false information. Wombold is also charged with three counts of lying to the FBI and the IRS Criminal Investigation Division.

Wombold will be there a long time. Government agents do not like being lied to. You don’t get to cut deals if you do that.


Why wasn’t Haslam indicted– why hasn’t he been? Because they haven’t gotten to him yet.

A federal investigation is a fairly simple process. They start with the lowest person on the totem pole, show them all the evidence they have collected and threaten to send them up the river for 500 years and fine them $20 million.

Unless the person agrees to cooperate. If they tell the Feds everything they know, help them find smoking guns that can convict their bosses— and agree to testify in court against the higher-ups– they can plead out to a reduced charge.

Once the government thinks they have everything the person knows, they move to the next-highest rung on the ladder and repeat the process.

So far, 10 people have been permitted to plead guilty. If you look at the job titles, you can see they were all little fish. If I remember right, they did it in two batches– the five people at corporate and the five in the boonies.

Now they’re all inside corporate– and they’re one step higher.

I don’t know how long it’ll take them to get the dirt on Haslam. But they’ll be able to put a gun to the heads of these people. In the last round of pleas, Brian Mosher, the director of sales in the Iowa regional office agreed:

“to a loss calculation of $20 million and a maximum victim count of 250 firms. Those figures boost his penalty range 24 levels under federal sentencing guidelines. Probation is no longer an option as a result. A sentencing chart suggests a penalty range of five to 10 years for Mosher.”

And that was a regional director. Freeman and Wombold are both VPs– Hazelwood is the President. The only guy left who’ll be left after they plead is the CEO.

I’ll take questions now.

Isn’t this double jeopardy? Haslam settled the case.

No it isn’t and no he didn’t. Newspapers– especially sports pages– don’t do a good job when the story requires precision. Let me explain this piece by piece:

  • Pilot Flying J– the corporation– settled the class-action suit (the civil case) brought by the victims. Some companies declined to participate in the suit and are going to trial separately.
  • Pilot Flying J also paid a $92 million fine to settle the criminal case against the corporation. The settlement says the government can’t take any further action against the company– but it clearly states that the government can prosecute the employees for their part in the fraud.

Jimmy Haslam is part-owner of the business. But he is also the CEO– an employee of Pilot. They can still go after him.

That seems incredibly unfair

Why? Don’t you think employees should be held responsible for their actions?

Other than being fired, none of these people who got indicted last month have been punished for their part in cheating people out of tens of millions of dollars. They need to be. The only way you stop white-collar crime is to put the people who commit it in prison.

Why did Haslam agree to settle the criminal case,
but leave himself open for prosecution?

Because he had to. If he hadn’t, he might have been sued and gone bankrupt.

I’ll can explain this, but it gets a little hairy and I can pretty much guarantee you will hate this. Corporate governance and liability is much worse than salary cap stuff.

1.Pilot Travel Centers was founded by the Haslams. It has grown by using leverage. They’ve purchased other companies and done mergers. They have sold part of the company to other investors to fund the growth.

2.Much of the company’s growth came when the Haslams sold 50% of Pilot Travel Centers to Marathan Petroleum. Marathon also agreed to give Pilot its Speedway-branded Truck Stops; Pilot agreed to buy all its fuel from Marathon at a special wholesale price.

3.Early in 2008, the Haslams bought back Marathon’s 50% with cash. To get the money, they sold 47.5% of Pilot to CVC Capital Partners.

4.In 2010, the Flying J chain was going through bankruptcy and Pilot Travel Centers decided to buy them. They gave the Flying J owners a chunk of cash and part ownership in the merged company.

Why do I need all these names and dates?

If you want to understand exactly why Jimmy Haslam settled, you need to have those dates in your head.

5.According to the FBI’s 128-page request for a search warrant, Pilot started the rebate fraud in late 2008. That means the fraud began before they sold the 47.5% interest to CVC, and way before the Flying J merger.

If you want to read that document, it’s posted here. Normally the FBI does not release this stuff– they go to court to fight requests for documents. But when Jimmy Haslam denied the crime so sweepingly and contemptuously– be called it a clerical error– they decided to publicly blow up his alibi. With bells and whistles.

The minute Haslam saw the document– it has names, dates, lists of victims, transcripts of tape recording– he hired a lawyer, started offering settlements and quit pretending this was a trumped-up witch hunt.

That’s why Pilot settled the criminal suit. It had to. It obviously failed to disclose the rebate fraud to the buyers.

I don’t understand.

If you’re sold a home, you’re familiar with the principle. If you sell a home that has a material defect– a leaky roof, termites, anything the buyer might have to fix– you have to tell them about the flaws. It’s called “disclosure.” If the buyer finds out, they can cancel the sale and owe nothing.

If you’re operating a business that is committing a crime– and you sell part-ownership of the business to someone else without telling them— you’re getting them involved in your criminal activity without giving them fair warning and a chance to back out.

That permits the buyer to sue you– to ask the court to invalidate the sale and force you to refund 100% of the purchase price. Maybe with interest, expenses and with court costs. Maybe with damages.

The minute the feds presented the warrant in 2013, CVC and Flying J could threaten to take the Haslams to court. Once Pilot settled the criminal case and the civil suits, CVC and Flying J had less grounds to sue.

It appears that CVC also forced Pilot to buy back its share. It bought back half the investment in January of 2015 and will buy the rest in June, 2017. The purchase price has a profit worked into it– maybe also a lump sum for the settlement fees.

Flying J, which was about to declare bankruptcy, obviously figures they’re better off with the Haslams.

Obviously Jimmy Haslam would have preferred to pay more to the government and get his own “Get Out of Jail Free” card included. But CVC and Flying J would have objected to paying for it. And the feds would probably not have agreed to do it.

So he’s still on the hook.

So you think he’s going to prison?

Yes.

The original whistleblower (the employee who originally went to the FBI) agreed to wear a wire when he went into meetings The FBI has more than 200 hours of tape of meetings and conference calls that Haslam attended. On the tape, they have employees– Hazelwood and Freeman– talking about the fraud, and mentioning Haslam’s name.

Haslam’s voice wasn’t on the first set of tapes disclosed. He might not have been in the room at the time– CEOs often show up at a one-hour meeting for five minutes and then leave the underlings to do business.

But people who reported directly to Jimmy Haslam say he knew. And if they don’t provide evidence and testify against him, they’re going to jail.

Haslam says he didn’t know– he had no idea his trusted employees would do such a thing. In the words of Claude Rains in Casablanca, he’s shocked to learn there was gambling in the casino.

Maybe he isn’t guilty?

The CEO of the company didn’t know there was fraud? Yeah, right. The CEO of Enron tried using that defense– he got convicted on charges that could have sent him to prison (he died before sentencing) for 50-100 years.

Plus, Pilot is a family-owned business. Haslam is the majority owner– the grandson of the founder. You really think he’s that much of a delegator?

Here’s another point. All of the underlings were on salary. They didn’t keep the money they were stealing– it went back to the company. You think the CEO didn’t notice that the company was making tens of millions of dollars– which might have been off the books?

It almost certainly was. This case wasn’t brought solely by the FBI– the IRS is also investigating. That almost certainly means tax fraud and hidden money. But let’s give Jimmy benefit of the doubt.

But here’s the most damaging piece of evidence– circumstantial, but highly damning. The transcripts show that the crooked executives talked about the need to keep the company’s Chief Financial Officer in the dark, so he didn’t find out what they were doing. But in the transcripts, they say Jimmy Haslam is thrilled that it’s going so well.

I’m not sure I get it.

Why would crooks talking between themselves– who don’t know they are being recorded– talk about what an old lady the bean counter is, but brag about the boss’s involvement?

I don’t know if Haslam will get convicted, or guess at how much time he’ll serve. But I can guarantee you that he’ll be indicted.

How long it takes, I don’t know. Haslam won’t be in the clear until after some time after every case in this set of indictment has been closed. At that point, the government no longer has leverage on Hazelwood, Freeman and Wombold, and they’re much less likely to cooperate. It might be another year– maybe two.

The odds are that Hue Jackson will be with the Browns longer than Jimmy Haslam will.

Can he just pass the team onto his family?

He’s already trying to do it. Notice how every press release and public statement now quotes “Jimmy and Dee Haslam”. That’s a very recent development.

Whether he gets to do it after he is sentenced depends on how warmly Roger Gooddell and the other owners perceive him. I doubt it, but I have no idea. Eddie DeBartolo Jr. wasn’t tossed out– he traded the team to his sister in return for other assets after serving a one-year suspension.

That said, DeBartolo was the small fish in that case. He pled guilty to “failing to report a felony” (a former governor was trying to extort money from him in exchange for a casino license).

His penalty (a $1 million fine and two years of probation) was the bargain he got in return for testifying against the governor– who went to prison for eight years. He could have been tried for conspiracy and gone to prison.

I get so tired of reading this sort of stuff

As opposed to me– who loves writing about it. I do this during my day job– the blog was supposed to be a way to have fun.

But this case is likely to be more important to the future of the team than any other development. It’s the most likely end to Jimmy’s reign of error.

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