NASHVILLE, Tenn. -- Before 2013 is over, Pilot Flying J expects to open at least 16 truck stops in North America, continuing its full-speed-ahead approach that made it the sixth-largest privately held company in the U.S. last year.
But the smooth highways the company once traveled have now been replaced by considerably more uncertain terrain amid an explosive FBI investigation.
Beyond the possibility of prison time for Pilot employees who have already reached plea bargains with the feds looms a potential for millions of dollars in legal fees, criminal fines and lawsuit settlements, experts say. That's on top of the costs that could come from rebuilding an organization if key executives are removed.
The financial survivability of Pilot Flying J is of particular interest in Tennessee because its owners include Gov. Bill Haslam and his brother, company CEO Jimmy Haslam, who also owns the Cleveland Browns.
The company says it's on firm financial footing right now. And no charges have been filed against it.
Jimmy Haslam noted to The Tennessean in a statement Friday that in the past five years, Pilot Flying J has opened an average of 10 to 11 stores per year.
"This year we will open 16," he said.
But three months since the federal investigation was revealed in April, Pilot Flying J has had its $4 billion in debt put on watch for a downgrade. Experts say the debt level is manageable for a company of Pilot's size with $29 billion in revenue, but the credit watch could lead to higher borrowing rates.
Then there's the direct financial impact of the federal investigation itself. Through last week, 17 civil lawsuits had been filed in federal court by trucking companies claiming they were victimized by the rebate scheme and seeking millions in damages.
As the legal fees begin to accrue, Pilot has vowed to reach out to the trucking customers who were wronged by the scheme and pay back what they are owed plus interest. At one point, Haslam said as many as 250 companies might be owed money.
The criminal investigation, meanwhile, has already picked up plea bargains with five sales employees, including Arnold Ralenkotter, who was in charge of direct sales for the Northeast region, and senior sales director Jay Stinnett.
Stinnett and others described in their guilty pleas how sales staff promised fuel rebates to certain trucking customers who they thought would not notice when they later shorted them.
Significantly, Stinnett in his plea agreement said that Pilot's top management was aware of the rebate scheme.
Similar claims were made by a federal informant in the 120-page affidavit filed by the U.S. Attorney's Office in April, leading legal experts to believe the federal government could be in position to bring criminal charges against the company itself. Such charges could lead to millions of dollars in fines and sanctions.
"If the company is charged, it may have to shell out millions," said Gerard Martin, a Baltimore defense attorney and former federal prosecutor. "It could be gigantic."
Despite the investigation, Pilot spokesman Tom Ingram painted the picture of a company continuing its steady growth. Last year, Forbes reported that Pilot had $29.2 billion in annual revenue. The company says it has 23,000 employees and 650 truck stops.
"The company's financial position is very healthy," Ingram said.
The U.S. Attorney's manual lays out the guidelines for when criminal charges against a company are appropriate, including the pervasiveness of the wrongdoing within the corporation. The guidelines also factor in whether the company has a history of criminal activity, whether it cooperates with the investigations and seeks to pay restitution.
Health care giant HCA, British oil and gas company BP and the now-defunct accounting firm Arthur Andersen are among prominent companies to be criminally charged by the government. The criminal fine against BP was a staggering $4 billion, and HCA had to pay a $1.7 billion fine.
Evidence that top executives at Pilot knew about the scheme would make it more likely for prosecutors to charge the company, experts say.
In fact, excerpts of conversations secretly recorded by the FBI informant indicate that top Pilot executives were aware of the rebate scheme. At one meeting, Pilot President Mark Hazelwood discussed with Vice President of Sales John Freeman a two-tiered pricing structure that would impose higher prices on less sophisticated customers.
The company never went forward with those plans, but Hazelwood's alleged participation in the discussions could lead prosecutors to believe the scheme was pervasive inside Pilot, according to legal experts.
In one of the transcripts of secretly recorded meetings in the affidavit, Pilot sales executives boasted that as many as 150 trucking firms were being shorted on rebates at one time. About 30 trucking companies were cited by name in the affidavit.
The affidavit also includes details of cases in which companies figured out they weren't receiving their proper rebates and Pilot was forced to make up the difference. One trucking company alone was shorted on rebates on 4.1 million gallons of diesel fuel, according to the affidavit. Another trucking firm was paid $146,564 after discovering skimmed rebates.
Freeman bragged in one of the recorded conversations of skimming $450,000 per month in rebates off one company.
"There have been five indictments thus far," Gerard Martin said. "That doesn't augur well^ @for upper management. They are moving up the chain. That's obviously what the government intends to do. They probably already have enough evidence to bring charges against the company."
Besides criminal charges, prosecutors may pursue civil or regulatory enforcement sanctions, which also can bring millions of dollars in fines.
Nashville attorney Bill Farmer said it could be months before the U.S. Attorney's Office presents its case to the grand jury in Knoxville. More plea agreements are possible.
"Prosecutors on other cases have occasionally been known to describe this early period of time of plea offers as a time when 'the train is leaving the station,' " Farmer said. "They tend to say that early pleas get better offers since doing so saves the government time and expense."
There are limited direct references to Jimmy Haslam's involvement in the scheme in the investigation documents made public to this point. However, the FBI said in its April affidavit that various reports, including diesel sales profitability reports, were sent by email to Pilot's management, including Haslam. And it had probable cause to believe that "documents related to the conspiracy and scheme to defraud ... will be contained in computers, including desktops, laptops, or tablets, found inside the 5508 Lonas Drive Property that are used by Pilot CEO Jimmy Haslam, Pilot President Mark Hazelwood, Pilot CFO Mitch Steenrod, Pilot employee Jay Stinnett."
"(Jimmy) Haslam's only hope at this point is to continue to cooperate fully, take full responsibility for all wrongdoing, communicate humbly, openly and often with stakeholders, and move forward with a renewed sense of transparency and determination to change the company culture," said John Krajicek, executive professor and assistant director of business communication studies at the Texas A&M Mays Business School. "His promise to make repayments is certainly a step in the right direction."
Meanwhile, Pilot has launched its own internal investigation and Ingram said the company is making great progress and will report soon.
"When we provide an update, which we expect to do soon, on the progress we've made on the internal investigation and other activities related to the internal investigation, there will be more information regarding employees," Ingram said in response to questions about employees who had been put on leave or let go. "However, there will not be information on any specific employees as Pilot Flying J is a private company and does not discuss personal employee matters."
Nate Rau and Walter F. Roche Jr.