Monday, April 22, 2013

Jimmy Haslam's Little Rebate Problem

Posted By on Mon, Apr 22, 2013 at 4:56 AM

I read through the whole affidavit for the search warrant for Pilot Flying J, which was raided last week by the FBI and IRS.

As The City Paper and Associated Press explain:

Cleveland Browns owner and Pilot Flying J CEO Jimmy Haslam on Friday again denied any wrongdoing and said he wasn't stepping aside, even as federal authorities alleged that he was aware of a widespread scheme to defraud customers of the truck stop chain.

According to court documents, sales team members said Haslam, who is the older brother of Tennessee Gov. Bill Haslam, was aware of at least some instances of employees withholding diesel price rebates and discounts from Pilot customers to boost the company's profits and sales commissions.

The scheme, as outlined in the affidavit, seemed to consist of two strategies for reducing the amount of rebates Pilot Flying J gave to their customers. One relied on the knowledge that Pilot's customers would often ask for terms from Pilot not because it was in their best financial interest, but because they had heard those terms from other vendors.

On page 59 of the affidavit, Brian Mosher, director for sales of national accounts, says:

But if this is a case where the guy's willin' to take a rebate check, again, and he is not sophisticated, he got the buzz word from ComData guys went in there and said, "Hey, you oughta be buyin' our cost-plus, all the guys your size are buying on cost-plus."

So it appears what they were counting on is that some people were asking for "cost-plus" without really knowing what it meant, period. Which meant that Pilot seems to have been setting the "cost" in "cost-plus" at not the actual cost of the fuel to Pilot, but a more nebulous cost that included a few cents here or there to make their sales numbers look better.

"Cost" did not always mean what the customer thought "cost" meant, if the customer had any idea at all, in other words. And often it appears that Pilot was saying, for example, "Sure, you can have this gas at cost+3" — but, knowing that these customers had no good way to track from day to day what the cost really was, they'd charge them, say, cost+8. This part of the fraud was just a few cents a gallon and very hard to trace, even if people had a sense that something wasn't right.

But the part of the fraud that seems a little more audacious and at which they seemed to be getting caught by customers more regularly worked thusly. If a customer was getting fuel at cost-plus, the amount of rebate they might be due from Pilot could vary wildly from month to month depending on, obviously, fluctuations in the price of oil and other variables. So as Arnie Ralenkotter, director of sales for the Northeast Region, explains on page 50, "If the guy's been getting $100,000, $100,000, $100,000, now you send him $180,000, and then the next month you send him 75. He thinks you're fuckin' em. So you might as well be fuckin 'em."

And allegedly, fuck them they did. Rather than, say, sending them that $180,000, Pilot might send that customer, say, $120,000 — enough that the customer felt like he'd gotten a good deal because of decreased costs, yet not so much that if the next month went down to $75,000 it seemed too odd and Pilot kept the $60,000.

Most telling is the story of John Freeman, Pilot's Vice President of Sales, who ended up buying a plane for a million dollars from Western Express here in Nashville, when it discovered it had been shortchanged. I'll let the Cleveland Plains-Dealer explain:

When Western told Pilot Flying J about the shortfall, the two companies negotiated an unusual settlement: John Freeman, Pilot Flying J's vice president of sales, offered to cut the business a check. Instead, according to the affidavit, Western asked Pilot Flying J to buy a plane, which Western owed $1 million on.

"So I bought the (expletive) airplane," Freeman said, according to the FBI affidavit.

Oh, but that's not the juicy part. Back to the affidavit, page 81. CHS stands for "confidential human source." Jimmy is Jimmy Haslam:

CHS-2: What does Mark and Jimmy say about shit like that? Do they even catch it or do they know?
FREEMAN: Fuckin' A. I mean, I called Jimmy and told him I got busted at Western Express.
CHS-2: What'd he say?
FREEMAN: Oh he knew it.
CHS-2: Oh did he?
FREEMAN: Absolutely. I mean, he knew all along that I was cost-plussin' this guy. He knew it all along. Loved it. We were makin' $450,000 a month on him
CHS-2: Holy shit!
FREEMAN: — why wouldn't he love it?
CHS-2: Yeah.
FREEMAN: Did it for five years, cost us a million bucks. I mean, we made $6 million on the guy, cost us a million bucks.

Here's Haslam's problem, as I see it. After reading the affidavit, I'm convinced you'd have to be an idiot to not know there was a major problem in your company when your vice president of sales calls you up and admits to defrauding a customer, defrauding this customer so much that the way he gets out of it is by buying an airplane. You'd have to be an idiot to not know that this airplane incident had become a company in-joke and that sales people were warned to not get caught or they also might have to buy an airplane.

In fact, you'd have to be an idiot to not wonder why, if, in a month when all of your customers were getting discounts and some of those discounts were steep, they all weren't. (In other words, that $120,000 month that should have been $180,000 might not have stood out to the customer, who isn't seeing what all the other customers their size got in rebates, but it should have to the dude who sees those numbers.) You'd have to be an idiot to not know that a practice as widespread as this seemed to be was going on. You'd basically have to be an idiot to not know this was happening in your own company.

Jimmy Haslam doesn't strike me as an idiot. Far from it.

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