NASHVILLE, Tenn. (AP) - When federal agents descended on the Knoxville headquarters of Pilot Flying J on April 15, it was the first inkling the public and company executives had of an FBI and Internal Revenue Service investigation that began nearly two years ago.
After the country's largest diesel retailer sought to downplay the probe, federal officials took the unusual step of unsealing an affidavit that helped authorize the raid before any charges have been filed. The sworn statement recounts internal Pilot conversations that led investigators to conclude there was a widespread scheme to defraud trucking company customers in order to boost company profits and pad sales commissions.
The privately held company with $31 billion in annual revenues is run by CEO Jimmy Haslam, who also owns the NFL's Cleveland Browns. The Haslam family, including brother Tennessee Gov. Bill Haslam, holds a majority stake.
The investigation started May 4, 2011, when the FBI was contacted by someone who said he had been told by a Pilot regional sales manager that customers were being cheated out of contractually set price rebates.
The affidavit gave no details about whether the person, identified in the document only as confidential source No. 1, was a colleague, customer or how they were connected to Pilot.
The source agreed to cooperate with the FBI, and the next month began secretly recording conversations with the sales manager, who outlined how two top sales officials at Pilot would withhold portions of money due to customers in a process most often referred to as "manual rebates."
The recorded conversations also pointed agents to a former regional sales manager, Cathy Giesick.
Federal agents contacted both the sales manager and Giesick in the first week of October 2012. Both agreed to cooperate and confirmed that their supervisors reduced rebates due to customers.
Giesick and the current sales manager, identified as source No. 2, were granted immunity for their cooperation.
Giesick told agents she left Pilot in part because of her discomfort with the rebate-lowering scheme. She provided an example, saying if a customer was due a $10,000 rebate, her supervisor, national sales director Brian Mosher, would cut that payment to about $7,500.
No charges have been filed in the case. While Jimmy Haslam has denied any wrongdoing, he has suspended several members of the sales team, but it's unclear exactly has been suspended. The company has not made any of its other workers available and Haslam has made statements, but not taken questions from the media.
Haslam has called for the review of all 3,330 trucking customer contracts and making all billing and payments electronic.
Giesick said the fraud "was typically directed at smaller accounts where the customer would not have the capability to catch the reduction," according to the affidavit.
If a customer complained, Giesick said Mosher told her "blame the error on a computer glitch."
Meanwhile, source No. 2 began secretly recording conversations with other colleagues on Pilot's sales team. On Oct. 17, Omro, Wis.-based sales manager Rob Yurnovich was recorded as saying the rebate reductions can become difficult to manage.
"I wouldn't say it's unethical. I'm just uncomfortable with it," Yurnovich said on the recording. "And the fact that when you get caught you have to do so much back peddling, you lose a ton of credibility whether you can cover it with a story or not."
Later that month, source No. 2 recorded a regional sales directors meeting at the Rockwood, Tenn., lake house of John "Stick" Freeman, Pilot's vice president of sales.
Freeman told younger colleagues that they should carefully target 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.
"If the guy's sophisticated and he truly has gone out and gotten deals from the other competitors and he's gettin' daily prices from us, don't jack with his discounts, "cause he's gonna know, okay?"
Freeman regaled his colleagues with a story of being caught withholding $1 million in rebates due to client Western Express. Freeman said Pilot had to pay up that amount but laughed because the company still came out $6 million ahead.
source No. 2 later asked Freeman what Jimmy Haslam's reaction had been.
"He knew it all along. Loved it," Freeman said. "We were makin' $450,000 a month on him - why wouldn't he love it?"
"Did it for five years, cost us a million bucks," he said. "I mean, we made $6 million on the guy, cost us a million bucks."
Although the affidavit doesn't include any conversations with Haslam, Special Agent Robert H. Root said the transcripts don't cover every recording.
At the training session, Mosher cautioned his colleagues to be careful about how they described what was happening with rebates.
"It's only manual rebate amongst, in this room, amongst our folks," he said. "To the customer it's just a rebate, okay?"
The instructions from the senior sales staff drew differing reactions from more junior staff.
"Welcome to the gray side," Holly Radford, a regional account representative based at Pilot headquarters, said to laughter from her colleagues.
Jason Holland, a sales manager based in Nashville, followed up with, "I'll be honest, I'm struggling with the gray part."
Mosher responded that keeping the rebate steady will avoid confusion among customers when prices - and margins - spike or fall. A customer accustomed to receiving a $25,000 rebate will raise questions when it suddenly surges to $75,000 and then back to $15,000, he said.
"So my answer is, why put him in that situation, where he needs to even ask?" Mosher said with a laugh. "Don't ever pay him the 75!"
In a Nov. 28 conversation, regional sales manager Kevin Clark of Lee's Summit, Mo., recounted how managers of Omaha, Neb.-based Morehouse Trucking had failed to keep track of how much money was due in rebates.
"The dumb (expletive) never checked, I guess," Clark was recorded as saying. "I felt like sayin', "Well you're the moron that didn't check it!"'
At a Dec. 8 overnight meeting at the posh Blackberry Farm resort in the Smoky Mountains, source No. 2 recorded a conversation between Mosher and northeastern sales director Arnie Ralenkotter about contracts for the U.S. Postal Service.
Ralenkotter described that rebate deal as "legitimate."
"You know why?" he said. "I do not want to get thrown in jail."
"That's a pretty good point," Mosher said.
After source No. 2 returned from a two-week vacation on April 1, he found Pilot had launched an internal audit about manual rebate practices, stirring concern among the sales staff.
By April 9, source No. 2 had told the FBI that the Pilot Flying J general counsel, Kristen Seabrook, was requiring all information needed to approve rebates be submitted by April 12, with the next round of payments scheduled to be sent April 15.
That's the day the FBI and IRS agents raided Pilot's corporate headquarters, the building housing its computer services and the homes of sales team members Mosher in Bettendorf, Iowa, Ralenkotter in Hebron, Ky., and Nashville-based sales director Kevin Hanscomb.
The three men did not return telephone calls from The Associated Press.