Don’t feel guilty about shorting customers on rebates, Pilot Flying J executives preached to sales staffers: They deserve it.
“Some of ‘em don’t even know what a spreadsheet is,” Brian Mosher, Pilot director of national sales, told a group of sales reps at a November 2012 training session. “I’ve made my peace with it. ... (The average trucking customer) doesn’t know what cost-plus pricing means, and he’s not going to take the time to find out. He’s lazy. He doesn’t deserve (a rebate).”
Mosher’s boss, Scott Wombold, sat in the meeting that day, former sales rep Janet Welch testified Nov. 8 in U.S. District Court. He listened to Mosher’s words again as federal prosecutors played the tape recorded by an undercover informant at the meeting, this time before a jury.
He and former Pilot president Mark Hazelwood don’t deny they sat in such meetings and got all the emails. But that doesn’t mean they kept up with every detail, their lawyers say.
Defense: Pilot CEO Jimmy Haslam knew
And what Wombold and Hazelwood knew, so — according to the defense — did their boss, Pilot CEO Jimmy Haslam, brother of Gov. Bill Haslam and owner of the Cleveland Browns. Jimmy Haslam denies any role and has never been charged.
“There was no question who was in charge of that company, was there?” Hazelwood’s lawyer, Rusty Hardin, asked Janet Welch, a former senior sales rep.
“No, sir,” Welch testified. “They (Haslam and Hazelwood) knew everything that was going on.”
Wombold, Pilot’s former vice president of national sales, along with Hazelwood and former sales reps Karen Mann and Heather Jones, are standing trial on charges of conspiracy to commit wire and mail fraud in what prosecutors describe as a multimillion-dollar plot to cheat trucking companies across the nation out of promised diesel rebates.
Wombold faces additional charges of lying to agents with the FBI and IRS Criminal Investigation Division. Hazelwood is also accused of witness tampering.
Hazelwood and Wombold insist they didn’t know about the fraud and didn’t participate. Jones and Mann say they just followed orders and did their jobs.
Testimony in the case began this week. Welch and Mosher have already pleaded guilty to their roles in the scheme.
What is cost-plus?
The fraud depended on an arrangement known as “cost-plus,” in which clients would be promised a rate based on wholesale fuel cost plus a pumping fee, usually of a few cents per gallon. Between wholesale costs that fluctuated daily and the various state and local gas taxes, most customers couldn’t keep up to verify they got the deal promised.
“That’s the beauty of it,” Mosher said on the tape. “It’s index-based pricing, and it changes every day.”
Customers might be promised a price of cost-plus 3 cents, pay twice that amount and never know it. Sales reps calculated the figures themselves, a process known as the manual rebate.
“I would bill them more than they thought they were paying and make more money for our company and more commission for myself,” said Arnie Ralenkotter, who oversaw diesel sales in the Midwest and East Coast states and also has pleaded guilty in the case.
Keeping the lies straight made for a headache, Welch testified.
“We could make the rebate whatever we wanted it to be,” she said. “But you wanted to keep up with the information you were sending the customer, because you could get caught.”
Just before federal agents raided Pilot’s corporate headquarters in West Knoxville on April 15, 2013, Welch noted misgivings about the growing gap between promises and practice.
“This makes me nervous,” she wrote in a January 2013 email.
No time for fraud?
Hazelwood’s attorneys argue an ever-busy, on-the-go corporate honcho like the former Pilot president didn’t have the time or attention to police such deals. But his memos to the senior sales staff tell a different story.
Hazelwood told his staffers repeatedly to keep him informed of every detail. He specified what sales report formats to use, how often to check in and warned he’d be looking over their shoulders to make sure they met sales goals.
“I want to see all trip reports every week,” reads a Dec. 11, 2006, email to all staff. “I will monitor these reports.”
Prosecutors say the scheme began as early as 2007. Using Welch’s emails, Assistant U.S. Attorney Trey Hamilton showed the nation’s largest diesel fuel retailer changed its manual in 2008 to formally set up a plan to offer discounts to trucking firms that shifted business away from competitors. Sell more gallons, was the constant message companywide.
On cross-examination, Welch said she never heard Wombold or Hazelwood specifically tell anyone to cheat a customer.
“Manual rebates themselves were not necessarily a fraudulent thing, were they?” Wombold’s attorney, Eli Richardson, asked.
“Some of them aren’t,” Welch said. “The majority were fraudulently calculated.”
Pilot Flying J’s board of directors has admitted responsibility for the fraud via a criminal enforcement agreement in which the firm agreed to pay out $92 million as punishment. The board also paid out $85 million to settle related lawsuits and is paying the defense tab for Hazelwood and the three others.