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They don’t call.

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Michael Clayton knows.  The FBI doesn’t call before entering your data center.

UPDATE:  For a second look on the PFJ saga, after release of the search warrant affidavits, see Cleveland Schadenfreude post. 

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The FBI and IRS locked down Jimmy Haslam’s Pilot Flying J headquarters Monday in the service of court ordered search warrants; a second warrant was executed on another building Tuesday.  (Update:  it was a total of four warrants; one for each Knoxville building.  One of the buildings housed their data center.)  The reason for the extraordinary use of force to obtain evidence is unknown other than that it pertains to a criminal investigation.

I’ve worked enterprise-sized accounts for a high tech company for decades.  Outside of the financial service industry, I’ve never heard of this happening.  The ones I’ve heard of:  AIG, Lehman, Enron.. I don’t have to tell you how it turned out for them.

Admission: Kanick is not a fan. We’re going to soften this statement to, “there are things that bug us about Haslam,” see note here.

I let my conspiratorial side fly over on Frowns’ forum yesterday.  Why not?  It’s mock draft season; the time for conjecture on subjects we’re barely qualified to talk about but do so anyway and with gusto.  There have been quite a few oddities with the Haslam acquisition of the Browns and his short tenure as owner; I let fly with most every misgiving that has crossed my mind.  (Obligatory caveats of ‘this is speculation’ and ‘it’s early’ apply.)

* What kind of NFL owner/billionaire needs to purchase a team on an installment plan?  Lerner still holds 30% of the team and in 2016 Haslam needs to come up with $315,000,000 to complete the purchase.  I always thought that deal was squirrely; that’s a hell of a balloon payment.

* You don’t buy a home in Bratenahl and six months later decide that you really want to ‘take care of your first love’ in Knoxville. You just don’t.  Moreover, I have a problem with people who offer jive explanations like that and assume the audience will buy it on face value.  In addition to being a preposterous statement, the very making of it indicates a person who’s been insulated with yes-men for far too long.

* Browns salary cap now 31st in league. Under NFL cap rules, you can take this headroom with you, but just for one year and only on new players. –Or– you take the leftover cash and put it in your pocket.  I think it’s not out of the question that this (plus the installment purchase plan) (plus IRS-related shenanigans) could indicate a cash flow problem.   He wouldn’t be the first NFL owner with inadequate cash on hand to run his operations in spite of a strong paper net worth.  Could be that we’re under the cap because Haslam simply needs the dough?

* Haslam sold his 12.5% stake in the Steelers last week.  It seems very coincidental that the raid on his HQ took place roughly two business days after closing.  Maybe now the feds figure that Haslam has the cash equivalent of 12.5% of the Steelers in his bank account this week (at least $125,000,000) and thus now is the time to start serving warrants and freezing assets.

These are items that I’ve thought and wanted to get expressed.  But today I want to explore what on the wide wide world of sports could be the nature of a criminal investigation that prompts three law enforcement agencies to don combat-gear and attack the sixth largest privately-held American business’ headquarters.  We’re talking about dozens of armed men entering a business and ordering 1600 employees to turn off their cell phones, power down their computers, and leave the building.

That shyte does not happen over the insignificant application of rebates and we might not even be writing this blog post today if Haslam hadn’t suggested such a ludicrous reason for the raid.  Which brings us to our first point.

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WHO THE HELL HOLDS A PRESS CONFERENCE TO DISCUSS THEIR ON-GOING FBI/IRS INVESTIGATIONS?

339554

Profiles in hubris.

This ties back to the apparently way-too-insular world Haslam seems to have been in for way too long.  Was there no advisor at the conference table yesterday to tell Haslam, before his press conference:  “Yes, Jimmy, you’re a smart guy.  Yes Jimmy you’re a great leader, the face of PFJ.  But there is no good to be done by discussing your company’s criminal investigation by the FBI/IRS.  There is only risk.  Don’t do it.”

But Jimmy came out and finessed the questions from local media.  Set the stage for throwing some sales guys under the bus.  Here’s how he explained Monday’s remarkable raid yesterday:

“It appears to be centered on a very insignificant number of customers and the application of rebates — that the rebates owed to the customers were not paid,” CEO Jimmy Haslam said at a short news conference Tuesday.

“We of course disagree with that. It does not involve any tax issues. To my knowledge, there was no evasion of state or federal taxes involved.”

O RLY?

I ask you:  if you’re an FBI or IRS investigator and you read Haslam’s jive spin that includes the word ‘insignificant’ in relation to your investigation, will you be:

a. more likely or,
b. less likely

to want to nail this d-bag’s balls to the wall?  Haslam just called you out.  You don’t need to be a wordpress.com blogger to figure out the response from the FBI/IRS:

Very insignificant Jimmy?  We’ll see about that.

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Criminal investigation of… “application of rebates to a small group of PFJ trucking company customers.”  ?!

There have been reports that the probable cause behind a judge’s issuing of search warrants centers on rebates.  The FBI needs to show probable cause to a judge in order to get a warrant; perhaps ‘rebate’ was the lowest hanging fruit.  But once the FBI is culling through your emails looking for malfeasance of rebate application.. everything is fair game.

But if you want some ideas/theories/WAGs on where the investigation may lead, the comments section of the Knoxville News Sentinel article as well as ABC station WATE’s story offer some:

  • A simple customer rebate issue or dispute would be a civil issue and not criminal, the FBI does not get involved in civil matters as they are a criminal investigative division. This quick cover our butt answer is for those who don’t know the difference between civil and criminal.
  • Price gouging, tax fraud and attempt to bribe a federal official will be added soon. I heard from several employees at Pilot/Flying J head quarters that Jimmy offered a payout to the FBI to get out. Guess we will see if it worked or not. The local businesses have been getting the shaft from the Haslems for years its about time someone pays them back.
  • I wouldn’t jump to cooking the books. It’s common knowledge that that pilot is used for prostitution. I’m thinking more like money laundering.
  • I’ve worked for Pilot and one of their business partners. I met Bill, Big Jim, Jimmy and they could care less about the people that actually work for them. All they care about is how the general public perceives them and the money they make. Sure they’ll smile and talk to you. But you can always see that little “I’m better than you” sneer lurking just beneath the facade they put on.
  • Does a wild Bear use a Port-a-Potty ? Nope. And the FBI and IRS does not close the HQ and serve 2 search warrants for a small number of unpaid rebates. If they did Best Buy and a lot of other companies would be raided daily. Jimmy has some real splainin’ to do and not this smoke and mirror show.

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Not the first brush with government oversight.

PFJ was forced to pay fines for price gouging in 2008.

Yeah, that’s pretty high.

Pilot Corporation, which Haslam co-owns with family members, was forced to pay fines and penalties for its actions against consumers when it violated the Tennessee Consumer Protection Act by overcharging for gasoline at prices up to $4.99 a gallon over a three-day period following Hurricane Ike in late 2008.

The Tennessee attorney general sued Pilot Corporation and its subsidiary, Pilot Travel Centers, to force the company to stop raising gas prices and restricting its supply during that crisis. The court later ordered the company to repay every customer who was overcharged at its gas stations and fined Pilot thousands of dollars for its illegal behavior against Tennessee motorists.

Pilot Oil was also caught price gouging its customers at travel centers in Georgia and Kentucky during the same period, and the company was again forced to reimburse consumers and pay court-ordered fines – $100,000 in Kentucky alone – for its actions.

Tough business and PFJ has played tough in the past.

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Maybe there is a reason ExxonMobil hasn’t gone after the truck stop market segment.

PFJ did $29 billion in revenue last year.  Why wouldn’t ExxonMobil or Shell be all over that?  Well you don’t have to dig too far to learn that this is a nasty business.

Start with the numbers:  Forbes reports income of $635M against revenue of $29.1B.  Are you kidding me??  That is a 2.2% margin.  Hell… that in and of itself might get you on the IRS’ radar.  That income appears to be vastly under-reported and we are dealing with a cash business here.

But then, there’s also — truck stops can be just seedy, crime-ridden places and those transacting the crimes may or may not be consenting or adult.  Quick look at the FBI.gov site and search on truck stops yields:

06/25/12  In the continuing effort to address the national problem of child sex trafficking, the FBI and our partners today announced the results of a three-day law enforcement action in which 79 child victims of prostitution were recovered and more than 100 pimps were arrested. … Operation Cross Country national sweeps usually grow out of local law enforcement actions—officers and other task force members target places of prostitution such as truck stops, casinos, street “tracks,” and Internet websites.

And this:

Locations, such as truck stops, strip clubs, massage parlors, and cheap motels, are havens for prostitutes forced into sex trafficking.

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Conceded: the Foursquare comment section is not ideal sourcing of info. But yet..

We’re talking about truck stops.  It’s right there in the same category with strip clubs and massage parlors as ‘haven for prostitutes forced into sex trafficking.’  That’s not me, that’s the FBI.

In the past year, the FBI has been actively sweeping truck stops as part of a child sex trafficking study.  Is PFJ aware of any such activity on their properties?  Have they taken steps to secure their properties?  Lest we think PFJ locations are all maintained at a higher standard, we can simply check the Birmingham Flying J foursquare page (see above right).  The probability that the worst sorts of exploitation have happened at a PFJ is around 100%.  Does PFJ have a pattern of accepting monies from known sex practitioners?  If yes, a money laundering case can be made.

Baby Standards, 1911.

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Not for nothing:  rebates are what broke up the Standard Oil trust.

Clevelander John Rockefeller started using rebate schemes with railroads to effect below-market costs as early as 1872.  By 1890, Standard controlled 88% of the refined oil flows in the United States.  After new legislation and lengthy lawsuits, in 1909, the US Department of Justice sued Standard under federal anti-trust law, the Sherman Antitrust Act of 1890, for sustaining a monopoly and restraining interstate commerce by:

Rebates, preferences, and other discriminatory practices in favor of the combination by railroad companies; restraint and monopolization by control of pipe lines, and unfair practices against competing pipe lines; contracts with competitors in restraint of trade; unfair methods of competition, such as local price cutting at the points where necessary to suppress competition; [and] espionage of the business of competitors, the operation of bogus independent companies, and payment of rebates on oil, with the like intent.”

In 1911 Standard Oil was broken up.  Of course the effect of this was to enrich Rockefeller even more through his ownership of the baby Standards.

Point is:  let’s not discount the rebate angle of this as insignificant.  If you’re offering price A to your consumers, but big customers are getting price-A-less-rebate, then how is a small firm supposed to compete?  Are there kickbacks paid from the large trucking firms which incent PFJ to screw the small trucking companies?

No… monopolistic rebate practices which screw small companies… this rebate deal is probably not as insignificant as Jimmy would have you believe.

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So what do you think Kanick?

I remain stunned by the incredibly surreal picture of dozens of armed federal agents descending onto the corporate headquarters of a $29B business and shutting it down for a day.

IT. JUST. DOESNT. HAPPEN.

I see that such things as rebates are being discussed and I find the operating income ratio ridiculous and indicative of under-reporting.  It’s likely ‘just white collar crime.’

But I can’t shake that the harsh nature of the raid displayed such a lack of respect for the company and employees and that this treatment is reserved for more serious crimes.  There are 650 PFJ properties and they’re dealing with graveyard shifts and they’ve got a rough target demographic.  It’s not a huge leap to think this could be more than shorting a couple trucking firms on their diesel rebates.

But let me throw it back at you:  what do you think?  Here’s a poll and I’ll also keep it up in the right sidebar.  I’m sorry in advance if you think any of the options look too outlandish.  But I repeat, raids as conducted on Monday just don’t happen.  Everything is on the table.

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19 Comments

  1. bueno says:

    maybe he knows William J Mcenery A.K.A. Mr Gas City that filed bankruptcy on 400 million plus and fired all his employees.

  2. bueno says:

    maybe the fuel haulers ought to shut it down for a day

  3. bueno says:

    why not pay the pilot/flying drivers what their worth,or perhaps let the teamster negotiate that.

  4. bupalos says:

    Great job kanick. I think the political bribery angle deserves a bit more run given the kinds of industries this guy is tied up in (you know the one I’m thinking of.) UT is in the process of opening up 8000 publicly owned acres for fracking, and the value of the deal they are suggesting right now sounds like they are ridiculously undervaluing it. I see maybe 40MM sloshing around there. So if someone bribed the gov either to get UT to go along or to be the company selected, a good way to do that would be to pass it through Pilot.

    • jimkanicki says:

      but wait. that doesn’t have anything to do with rebates. nor does it square with motto #1: At Pilot, motto No. 1 is to do the right thing all the time.

      i mean.. lookit the mission statement for the UT program:

      maybe it’d be easier just to send some grad students up to warren county ohio to study the ‘impacts of natural gas extraction?’ just a thought.


      All: Until this does (or in case this doesn’t) bake into a full post, here is a link to the story bupalos is referring to. Net net: University of Tennessee is seeking to let drilling take place on an 8000 acre tract it controls.

      The forest has been overseen by the university’s agriculture department since 1947 and, after decades of strip mining and clean-cutting trees by private companies, has been restored to a biologically diverse condition. The university has been considering leasing out the land since 2001.

      The financial value of the region’s gas is not known, Dr. Brown said. But the university has proposed leasing the land for an initial fee of $300,000, plus $300,000 per year and 15 percent royalties on any gas sold.

      The Haslam connection to this angle is as speculative as anything else in this post. The Haslams are prominent UT alumni, one brother is governor, other brother runs 650 truck stops. It’s as connect-the-dots as anything I put forward above, maybe less more so.

      FYI, here’s the location, just outside Knoxville.

      • bupalos says:

        Just to introduce some numbers in association with this, in Ohio’s Utica, bonus payments for leases are running around $4000 per acre but generally go UP from there for large bundled acreages where drilling units can be set up optimally. I happen to know my farmer neighbor with 140 acres got $5300 an acre and that was signed over a year ago. And royalties are typically 18-25%, and that’s of all products, not just gas.

        Not sure how this may translate to the Fayetteville because it depends what products are there, but it’s hard to see a way that this suggested deal of $350/acre plus $350 per year with a low 15% royalty (on gas only?!) wouldn’t be several tens of millions low. And that doesn’t take into account the incredible value of putting this whole unit together at once with one willing and eager owner that just wants to study (and help whitewash?) how bad you ?@#! up this public trust he is administering.

        • jimkanicki says:

          i think we might have to tend to this earlier versus later.

          the priceless-ness of this one page of UT-Forestry news is off the charts.

          it goes:
          1. local girl scout donates three cedar wood duck nesting boxes (awwww…);
          2. lecture on… it seems the subject is ‘forests gonna die anyway‘ (see slide outlining gypsy moth, pine blister, blight, dutch elm.);
          3. lecture on tennessee fracking vs pennsylvania fracking (err? minimal fluid disposal probs?);
          4. father-daughter hike (awww…).

          gotta love forestry departments.

        • Now that we have an idea what Haslam has been engaging in this makes me speculate even more. If the things the FBI is talking about now involve Haslam having direct knowledge of what about the things that go on in the dark? If you are OPENLY engaging in fraud in meetings for the love of God what are you doing when your Brother is the Governor involving issues with land.

          Maybe just maybe a Browns owner in an orange jumpsuit is the key to a good season this year.

          I’m still waiting for how the NFL deals with this. They have to be furious that their hand picked owner for this franchise is in this much hot water.

  5. Capitalgg says:

    Don’t know if it was intentional or not, but i can’t so laughing at the Haslem picture caption because:
    Type A-ness sounds like Type Anus which sounds like Tight Anus.

    Otherwise, nothing to add, thought provoking article.

    I want to like JH3 because he is the key to my favorite team being good, but can and do understand the trepidation about him personally.

    • jimkanicki says:

      hah, now i can’t stop thinking of it that way.

      i may back off the ‘don’t like him’ bit. it’s just not my nature to ‘not like someone’ especially someone i’ve never met.

      there are things that bug me about him and idiosyncrasies that indicate personality problems. but it’s possible to like people with personality problems and good thing too since 100% of us have them.

  6. tmoore94 says:

    This post, right here, is the perfect example of why the media in this town, particularly The Plain Dealer, is dying away.

    The PD can find the money to send reporters to the Super Bowl and World Series, even though there are no Cleveland teams involved, to ice skating competitions, to the Olympics of all things (when not a single person in their coverage area would know or care if they were reading wire copy about the event) and plenty of other things that make the editors feel good about themselves but do absolutely nothing for the readership of Cleveland

    BUT

    They can’t find the cash to get someone – anyone- down to Knoxville to figure out just what the hell is going on with the owner of the only team in town that truly matters? Seriously?

    SERIOUSLY?

    Now, the PD certainly could not write the story the same way it is written here because (and this is not a criticism Jim) this post is filled with plenty of libelous statements that would land the PD (or any news organization) in hot water. Guys like you and me can get away with that, but not a large media organization.

    But we’re confident that the PD could figure out a way to report the situation without getting into trouble, can talk to people who know what these types of raids generally are about, etc. But they don’t because it’s easier to just write mock drafts and retweet other people’s information, apparently.

    Good job.

    • jimkanicki says:

      i drafted this exact sentiment in a reply to jptribe (that i didnt post). wholeheartedly agree that, i would like to think there’s at least one group of editors around a conference table talking about whether to send someone to knoxville to sniff around.

      this story is SCREAMING for old school investigative journalism.

      it’d be a great story for someone to dig in to. imagine a roldo martimole on this. someone could make their name on this story… and do a public service at the same time.

      i can see my page hits and eventually you can know who’s dropping in. i know at least one publisher-type stopped by several times to peruse the story. i’m certain he would love to run a story like this. i do wonder what the calculus is behind deciding to go after a story versus sit on it.

      as you correctly point out, it’s nice that you and i aren’t burdened by those issues and can write what we want.

      ps, no offense taken and i know well there are problems with the content delivered and this would never see newsprint. but yet, i think i can defend all the points. (i grant that citing foursquare comment section as a source is dubious, you got me there.) even the points that deal with some of the ugly facts of life about truck stops are defensible because they are, after all, facts of life about truck stops.

  7. Holdenbeach1 says:

    Another excellent effort in a long line of great articles.

    Your pieces are consistent in their references to facts and illustrations. Kind of like reading in depth investigative long form pieces. It also helps that you make them interesting.

    I salute your takeover of the main stream sports media.

  8. willy loman says:

    One thing that piqued my interest during the presser was a question about another Knoxville-based company that has apparently been involved in some impropriety (I’m too lazy to go back and look it up). The reporter asked Haslam if he had done business with them, to which he non-answered (paraphrasing here), “I don’t know who that is.” Unless this company is really small or off-the-radar or something, I can’t believe Haslam’s NEVER heard of them, especially if they went through a scandal of sorts (which is what the question led me to believe). Anyway, the reporter asked Haslam the question again – “Have you ever done business with them?” – and he just repeated the line about not knowing who/what they were. Seemed fishy that he wouldn’t just issue a denial, but maybe I’m reading too much into it.

    • jimkanicki says:

      i screen capped the presser then got rid of it. wish i hadn’t now, i could double check this.
      also he did an egregious lip-smack during an answer which would’ve made a great gif. ah well. a rare miss.

  9. pdxscott says:

    excellent. excellent, excellent.

    jpftribe is right – this is a must read blog. keep writing about what you know.

  10. BilliardsBum says:

    I thoroughly enjoyed this read. Thanks for digging into some of the angles of the truck stop industry and Pilot/Flying J that I think most of us never really considered. Price gouging following a national disaster shows real moral bankruptcy, and makes me look at the company in an entirely new light. As far as the real reason for the raid, it is tough to say. I voted predatory pricing practices in the poll since the company has showed a propensity for it in the past, and the entire “a few companies did not get their rebates” explanation does not hold water. One would think that (a) there would have been dialogue between these companies and Pilot Flying J about such an issue and that Haslam and company would resolve said issue before it reached a point where multiple federal law enforcement agencies storm their offices, and- as mentioned in your article- (b) the fact that the charges being filed are criminal and not civil seems odd if the dispute is among companies. I am by no means a legal expert, but this distinction appears to be a red flag.

  11. jpftribe says:

    Doing my best Terry Pluto:

    1. Fantastic read. This is a go to blog and I don’t miss a word written.
    2. Most interesting is the NFL’s response to all of this: No Comment.
    3. National media is completely dead on this. I’m not equating this to the Boston story in any way, shape or form, but there is zero coverage of this.
    4. Likewise on Twitter. No one is touching this right now.
    5. Kudos to Frowns. This is not a political thing, it’s starting to smell really bad and he called him out a while ago.
    6. I’m feeling really ashamed about a previous comment on Frowns admiring a little “rat bastard” in my NFL owner.
    7. Fuck. What does it take to buy a break for the Browns?
    8. Follow the money, the numbers speak. Lot of wisdom above.
    9. Fuck. I want to talk about safeties, DL, OG and LB’s, not hookers and taxes.
    10. This will not end well. $1B contract on the line, reputation of the league, FBI and IRS means zero luv for Browns fans. On the list of top 100 concerns, we”ll be about 952.

    Great work here, wish I could take you to the woodshed on even a portion of it.

  12. Anonymous says:

    And the Hits Just Keep Coming! Great read, my man.

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