For more than a year, the informant met secretly with FBI agents. He repeatedly slid into a dark sedan with tinted windows, sharing a narrative that would rock the family business of Cleveland Browns’ owner Jimmy Haslam.
Morgan Stanley Smith Barney financial adviser John Verble described to agents in 2011 how employees of Pilot Flying J, the nation’s largest operator of travel centers, were fleecing trucking companies out of tens of millions of dollars in a rebate scam.
After agreeing to be an informant, Verble obtained hours of hidden recordings of one of his clients, a Pilot Flying J sales executive, who had revealed to him how the scheme worked, according to court filings.
In a trial scheduled to begin Nov. 6, prosecutors will reveal how those clandestine meetings kick-started an investigation that led to charges against Haslam’s former top lieutenants. Four former employees, including president Mark Hazelwood, are scheduled to go before a judge and jury, charged with fraud and conspiracy in U.S. District Court in Chattanooga, Tenn.
Already, 14 Pilot Flying J employees have pleaded guilty and are cooperating with prosecutors. The company has paid a $84 million settlement to trucking companies shorted in the scam, and a $92 million penalty to the U.S. Justice Department.
Haslam, Pilot Flying J’s CEO, has not been charged. He has said he had no idea of the allegations until after authorities raided the company’s headquarters April 15, 2013. An FBI affidavit, however, said the scheme came up in meetings Haslam and Hazelwood attended.
The trial comes weeks after Warren Buffett’s Berkshire Hathaway agreed to become a minority investor in Pilot Flying J by acquiring 38.6% of its shares, while Haslam’s family will keep 50.1%. FJ Management, a private holding company in Utah, will retain 11.3%. Haslam will remain Pilot Flying J’s CEO.
By 2023, Berkshire Hathaway’s share will increase to 80%, with Haslam’s family keeping 20%. Haslam will continue as the CEO.
An informant’s role
Verble, 58, began his career as a therapist. He is a licensed marriage counselor with a doctorate in psychology from the University of Tennessee. He later became a financial adviser with Morgan Stanley in Knoxville in 2006. To many, he was known as “Dr. John.”
Federal records filed last month show that between November 2006 and May 2011, Verble became aware of numerous criminal activities that caused him “high anxiety and a great moral concern.”
In late 2010, a client named Vincent Greco, Pilot Flying J’s director of sales for the western region of the United States, told Verble that some of the company’s sales employees had been manipulating diesel fuel rebates since about 2003, which earned the company millions of dollars a year through fraud, according to the records Verble’s attorneys filed.
Unlike a client speaking to a criminal defense attorney or a person speaking to a Catholic priest in a confessional, conversations that must remain confidential, there is no confidentiality or privilege standard when a client meets with a financial adviser, legal and financial officials said.
In simple terms, that means if a client discusses illegal activity, it can be turned over to law enforcement officials.
In most cases, however, financial advisers go through their companies’ compliance department when they learn of suspected criminal activity. Verble, however, went to the FBI on May 4, 2011, with what Greco had told him. Verble feared that if he reported the information to Morgan Stanley officials, he would be admonished and told to keep quiet, according to documents that his lawyers filed.
That was when agents recruited Verble to work as an informant and wear a recording device to learn more from Greco, Verble’s attorneys said in documents. Verble recorded Greco, without the executive’s knowledge, from June 2011 into 2012, records show.
During a meeting in Knoxville in November 2011, Greco admitted to Verble that he had lost out on a promotion at Pilot Flying J because another sales executive, John Freeman, had generated more money for the company, much of it from the fraud, according to records Verble’s attorneys filed. Freeman has pleaded guilty to fraud charges and is cooperating with authorities.
How the scheme worked
The fraud worked like this, prosecutors said in documents: Companies received rebates based on the amount of fuel they bought. The more fuel they bought, the greater the rebates they received.
If a trucking company was due a monthly fuel rebate of $10,000, some members of Pilot Flying J’s sales staff would issue a check for $7,500 and create false documents that said that was the amount the company was owed.
The sales employees sought to defraud companies that were less likely to catch onto the scam, prosecutors said. Trucking companies typically drive millions of miles a month, making it difficult for small businesses with fewer resources and less sophisticated accounting practices to monitor rebates.
The scheme saved the company tens of millions of dollars, a pittance compared to Pilot Flying J’s $20 billion in annual revenues. The members of the sales team who were part of the scheme benefited as their compensation was based on the company’s net profit, according to documents prosecutors have filed.
Verble also wore a hidden recorder when visiting a former employee of Pilot Flying J in the fall of 2011. The former employee told Verble that he “left the company because he couldn’t handle the stress that came with all of the fraudulent activity,” according to records filed by Verble’s lawyers.
Based on Verble’s work, FBI agents approached Greco on Oct. 4, 2012, about his involvement in the scheme, according to the FBI affidavit. He agreed to cooperate, and prosecutors promised that he wouldn’t be charged. He also later would wear a hidden recording device to capture conversations with Pilot Flying J employees about the scheme. Greco became the first to turn on his co-workers.
Authorities also gained the cooperation of Cathy Giesick, a former regional sales manager for Pilot Flying J. She had worked for Greco. Giesick, who said she also left the company over her fears about the scheme, provided names and more information about the rebate fraud, the FBI affidavit said. Giesick was the second person to turn on her former co-workers, and her agreement with prosecutors allowed her to avoid charges.
Verble’s work as an informant soon became risky.
In November 2012, a colleague at Morgan Stanley saw Verble get into a black sedan with tinted windows accompanied by federal agents, according to documents that Verble’s attorneys filed.
The colleague asked whether Verble was working with the FBI, the records show. Verble lied, saying he was meeting with the staff of a Knoxville politician.
In March 2013, the colleague again saw Verble climb into a black sedan with tinted windows, the records show.
Within weeks, federal agents raided Pilot Flying J’s headquarters in Knoxville and the company’s satellite offices.
That prompted Morgan Stanley officials to question whether Verble was working as an FBI informant, based on his access to Greco and other executives at the company.
A month after the raids, Morgan Stanley fired Verble from his $350,000-a-year job. The company said Verble had entered into an improper agreement involving an NFL player years earlier.
In documents, Morgan Stanley’s lawyers said Verble had referred the player to an agent. For the referral, the agent agreed to pay Verble half the commissions he earned for signing the player to an NFL team. The firm banned such arrangements, according to documents its attorneys filed.
“In reality, Verble’s employment was terminated for a simple reason: He accepted a six-figure kickback from a third-party and then lied about it,” the firm’s lawyers wrote.
Morgan Stanley sued Verble in April, stating that Verble owes the company more than $200,000 from a loan. That case is in arbitration.
Verble’s attorneys refused to allow him to speak to The Plain Dealer, citing Verble’s pending litigation against Morgan Stanley and the criminal case.
Informing for the SEC
Unrelated to the Pilot Flying J investigation, Verble contacted the FBI about a troubling situation at Morgan Stanley. He had realized that many of the firms’ clients had invested heavily in a Knoxville oil company, Miller Energy. Verble told the FBI that he had learned from Morgan Stanley officials that the oil company had inflated the value of its oil reserves and real estate in filings with the Securities and Exchange Commission, records show.
A commission investigation found the company overstated its assets by $400 million, which prompted the agency to fine Miller Energy $5 million, according to the commission’s records.
In December 2015, Verble sued Morgan Stanley, claiming the company fired him because he was a whistleblower involving Pilot Flying J and Miller Energy. Judges rejected the case, in part, because of a lack of detail about his role as a whistleblower. Verble’s attorneys stressed that they could not divulge his role as the investigations were pending.
In September, Verble’s attorneys filed a request in U.S. District Court in Knoxville to re-open his case. In it, the attorneys detailed Verble’s work as an informant, and much of his role became a matter of public record. They are seeking his return to his old job or damages that could amount to twice his salary at Morgan Stanley, or more than $700,000.
Verble’s attorneys Jackie Sharp and Richard Neely claim the Pilot Flying J case, from the criminal charges to the settlements, would never have happened without Verble’s work.
A spokeswoman for Haslam declined to discuss Verble, saying the company “has no insight into his role.”