Fraud trial update: Defense to focus on Jimmy Haslam's relationship with conspirator
CHATTANOOGA, Tenn. —
The fraud trial of former executives and sales representatives at the truck stop chain run by Cleveland Browns owner Jimmy Haslam is wrapping up its first week.
The attorney for the company's onetime president has signaled the relationship between Haslam and one of the chief conspirators will become a focus of the defense.
The Knoxville News Sentinel reports that the lawyer for former Pilot Flying J President Mark Hazelwood raised the issue Thursday in the cross-examination of a former director. The ex-director is one of 14 executives and sales representatives who have pleaded guilty in the case.
Haslam has denied any prior knowledge about the scheme to defraud unsophisticated trucking company customers and has not been charged in the case.
Hazelwood and three others are on trial in Chattanooga, Tennessee.
The trial headed into its third day Wednesday. Pilot Flying J was founded by the governor's father, Jim Haslam, and is run by his brother, Cleveland Browns owner Jimmy Haslam.
None of the Haslams have been charged in the investigation that has led to guilty pleas by more than a dozen former members of the Pilot sales team and to the ongoing trial of the four former Pilot employees, including its onetime president.
Bill Haslam has not held an active role at Pilot since he was elected Knoxville mayor in 2003. He said he was not aware whether Jimmy Haslam will testify.
"I don't know," Haslam said. "I'm not involved at all."
Fourteen former members of the Pilot sales team have pleaded guilty charges related to ripping off trucking company customers they deemed too unsophisticated to realize they weren't receiving the rebates they had negotiated.
The details of the investigation into Pilot first came to light after an April 2013 raid of the company's headquarters in Knoxville. A 120-page FBI affidavit produced in support of the search warrant included transcripts of undercover recordings of Pilot employees discussing the scheme, often in crass terms.
Pilot ultimately agreed to an $85 million settlement with most of the defrauded customers as well as a $92 million penalty to the government.
Those facing trial in Chattanooga are former Pilot President Mark Hazelwood, former vice president Scott "Scooter" Wombold and two former saleswomen, Heather Jones and Karen Mann. Their lawyers said in opening statements that they should not be found guilty by association and that they didn't knowingly commit illegal acts.
But prosecutors allege that that the two executives were at meetings and copied on correspondence about the scheme and that the more junior sales representatives served as "lookouts" and a first line of defense if trucking customers became suspicious about not receiving their rebates they expected.
The government's first witness was Janet Welch, a former Pilot employee who pleaded guilty early in the investigation. Welch testified that she worked in the Knoxville headquarters with defendants Mann and Jones, and that together their colleagues they were known as "the girls," who supported "the sales guys" who operated around the country.
Welch said it was her role to do the paperwork on the deals struck with trucking company customers, and detailed how two sets of books were kept at Pilot: one with the prices that the customers thought they were getting, and another with the higher prices they were actually being charged.
Welch explained that there were two major types of arrangements with the trucking companies made to entice them into buying their fuel at Pilot. One was calculated in terms of "cost plus," or the wholesale price of diesel plus an agreed-upon number of cents per gallon. The other was "retail minus," or a certain number of cents discounted off the posted prices at truck stops.
Assistant U.S. Attorney Trey Hamilton on Tuesday guided Welch through a series of internal documents that she said showed how she was instructed to change the rebates that trucking customers thought they were getting in the internal billing system. The point, she said, was "to make the customer think they were getting a price lower than they really were."
Attorneys for two former executives at the Pilot Flying J truck stop chain told jurors on Tuesday that their clients shouldn't be found guilty by association with other members of the company's sales team who pleaded guilty to the scheme to defraud customers through diesel fuel rebates.
The rebate scam caused the company to pay a $85 million settlement to jilted customers and a $92 million penalty to the government. Pilot is controlled by the family of Cleveland Browns owner Jimmy Haslam and Tennessee Gov. Bill Haslam, who have denied any prior knowledge of the scheme and have not been charged.
Defense attorneys presented their opening statements on behalf of former Pilot President Mark Hazelwood, former vice president Scott "Scooter" Wombold and two former saleswomen, Heather Jones and Karen Mann, on the second day of the trial Tuesday. Federal prosecutors have said some of the 14 former employees who pleaded guilty will testify against their onetime Pilot colleagues.
"What motivates them on the witness stand?" said Wombold attorney John Kelly. "It used to be money; now it's something a lot more important."
Kelly said his client did not participate in the scheme, and even saw his professional prospects dim as others who were directly involved in the fraud rose to positions of prominence within Pilot.
Wombold may have had knowledge about the illegal practices, but did not engage in them, Kelly told the jury.
"He didn't like it, didn't do it, didn't encourage it," Kelly said.
"The government's case against Mr. Wombold is guilt by association," he said. "You need more to find someone guilty of a crime. Knowledge is not enough."
The attorneys for Wombold and Hazelwood noted that both men came from modest means in their Ohio hometowns, each working their way up from truck stop jobs to become senior managers at Pilot. Both took immense pride in helping the company become the nation's largest diesel retailer, and had no interest in damaging the company by hurting its customers, they said.
Hazelwood attorney Anthony Drumheller said executives at Pilot had been hearing rumors for a month or so before federal agents descended on the company's Knoxville headquarters in April 2013. Hazelwood had been on the way to the airport to go complete the acquisition of Mr. Fuel, a smaller competitor in Missouri, when he received a call from agents asking him to return to headquarters.
Drumheller also invoked Jimmy Haslam's name before the jurors, saying that after Hazelwood returned to coordinate the response to the raid, Jimmy Haslam told him to travel the country as Pilot's "ambassador," tasked with smoothing out relations with angry customers.
"Make no mistake about it, Jimmy Haslam III and (his father) Jim Haslam II were in charge of this company," Drumheller said. "This was a family company they owned and strongly managed."
Wombold was the supervisor of Brian Mosher, a former Iowa-based sales director whose guilty plea agreement says he held break-out sessions during an annual sales meeting to show colleagues how to defraud trucking companies without getting caught. Wombold's attorney described Mosher as a "lone wolf" whose connections to the upper reaches of the company granted him wide autonomy to strike deals and change them without the customers' knowledge.
Lawyers for the two sales representatives based at Pilot's Knoxville headquarters said they were not aware of any conspiracy.
"She did not intend to defraud her customers," said Jones' attorney Benjamin Vernia. "There were aspects of these deals that she wasn't intended to know about."
Pilot sales directors had a habit of striking oral deals with customers, a practice that a 2007 audit recommended ending, Vernia said. But the company did not follow suit.
Mann attorney Jonathan Cooper said his client "trusted these men" she worked with, and that adjusting the rebates was an arduous process that was not worth the extra $20 to $30 in monthly commissions she gained.
Federal prosecutors on Monday outlined their case against former Pilot Flying J executives and sales representatives as being the result of an "infection of fraud" at the truck stop chain controlled by the family of Cleveland Browns owner Jimmy Haslam and Tennessee Gov. Bill Haslam.
Assistant U.S. Attorney David Lewen told jurors in his opening statement that the four defendants participated in a widespread scheme to undercut competitors, boost company profits and reap the rewards in terms of personal compensation.
Lewen said the case will show that the sales team set out to target unsophisticated trucking customers they deemed unlikely to recognize they weren't receiving their negotiated rebates, and to furnish them with manipulated invoices if they started asking questions.
The goals could be summarized as "identify, cheat, lull," Lewen told the jury. Leaders of the sales team trained junior staffers on how to participate — and shielded off colleagues who they suspected of not being on board, he said.
"There was an infection of fraud within the sales department," Lewen said, adding that the case will illustrate "the power of pennies," in which slight adjustments to negotiated rebates for unwitting customers resulted in huge windfalls for the company.
Several of 14 former Pilot colleagues who have already pleaded guilty in the investigation will be called to testify, though Lewen warned jurors that their role in the scheme to rip off unsuspecting trucking company customers may give them pause.
"These witnesses you are going to hear from are criminals," Lewen said. "They've pleaded guilty ... There are no swans in the sewer."
Attorneys for the defendants — former President Mark Hazelwood, former vice president Scott "Scooter" Wombold and two other former members of the sales team, Heather Jones and Karen Mann — declined to give opening statements.
The trial, which is expected to last up to six weeks, follows a 2013 raid by federal agents on the Knoxville headquarters of privately-held Pilot.
Pilot earlier agreed to an $85 million settlement with most of the defrauded customers as well as a $92 million penalty to the government. The Haslam brothers have denied any prior knowledge and have not been charged with any wrongdoing.
The company's former president and three members of the sales team are being tried in Chattanooga, about 100 miles (160 kilometers) southwest of Pilot's headquarters.
Pilot was founded by family patriarch Jim Haslam, a former University of Tennessee football player, with a single gas station in 1958. By the time of the raid, the company had grown to become the country's largest diesel retailer, with annual revenues of $31 billion. In a surprise development last month, Pilot announced that it was selling a major share — and ultimately a majority stake — in the business to Warren Buffett's Berkshire Hathaway. At the time of that announcement, Pilot said it had $20 billion in annual revenues.
The Haslam family will keep its controlling stake until 2023, when Buffett's company will take over 80 percent of the company.
A 120-page FBI affidavit produced in support of the search warrant for the 2013 raid included transcripts of undercover recordings of Pilot employees discussing the scheme, often in crass terms. In one recorded meeting of regional sales directors at the lake house of John "Stick" Freeman, the Pilot vice president of sales told younger colleagues they should carefully select their customers.
"Some of 'em don't know what a spreadsheet is. I'm not kiddin'," Freeman said. "So, again, my point is this: Know your customer."
Freeman, who was described in court documents as the architect of the scheme, was among four former members of the Pilot sales team who pleaded guilty in July and agreed to cooperate with federal authorities.