CHATTANOOGA, Tenn. (CN) – A federal prosecutor said he wants jurors in the trial of former Pilot Flying J executives to understand the power of pennies, claiming they saved the truck stop giant millions by fraudulently charging trucking companies a couple extra cents per gallon of diesel.
Arnie Ralenkotter, a former regional sales director for Pilot, sat on the witness stand Thursday in day four of trial in the federal courthouse in Chattanooga, Tennessee. Along with a carafe of water and a box of tissues, a calculator laid next to him.
The federal government has accused four former Pilot employees with conspiracy and wire fraud. They include former Pilot President Mark Hazelwood and Scott Wombold, the company’s former vice president of direct sales, as well as former regional account representatives Heather Jones and Karen Mann.
Pilot Flying J is one of the major players in the fuel industry because it is one of the big three companies that cater to the trucking industry, along with Love’s Travel Stops and Travel Centers of America.
In 2014, Pilot admitted corporate responsibility for the scheme that its direct sales division allegedly ran from 2008 to 2013 promising trucking companies rebates on fuel and then reducing those rebates for companies that were not closely tracking ever-changing fuel prices around the nation.
The federal government charged 18 people in the scheme and 14 pleaded guilty.
Not only is Pilot Flying J a big player in the trucking industry, but it is owned by Jimmy Haslam, who also owns the National Football League’s Cleveland Browns. His brother, Bill Haslam, is the current Republican governor of Tennessee who served as Pilot’s president in the late 1990s.
Starting the day off on Thursday, Assistant U.S. Attorney Trey Hamilton asked Ralenkotter to do some multiplication. A large trucking company may have around 10,000 trucks in its fleet. A smaller one, 200.
According to his May 2013 plea agreement, Ralenkotter was the first sales director at Pilot to admit to conspiring to defraud trucking companies. He faces up to 20 years in prison and a fine of up to $250,000.
Hamilton asked Ralenkotter to calculate how much fuel a trucking company with 200 trucks might buy, given that the average truck burns through 1,600 gallons a month.
Ralenkotter’s answer: 320,000 gallons a month.
Trucking companies do not pay retail price for fuel, like so many commuters do at the local pumps.
Pilot would often sell gas to these customers at the index wholesale price, plus a few cents. Pilot and trucking companies would negotiate this “cost-plus” rate. The lower the number, the better the deal for the trucking company.
If this cost-plus rate stood at two pennies, Hamilton asked Ralenkotter, how much would that be a month, assuming that Pilot could convince the company to pull up to its pumps half the time and buy 160,000 gallons?
“$3,200” Ralenkotter said.
And for a year?
“$38,400,” he answered.
A few minutes later, Hamilton began showing the jury emails that he said prove Pilot employees conspired to commit fraud, including an email Ralenkotter sent in October 2008 in which he copied defendant Mann. For three months, Pilot charged Smith Transport four cents more than what it promised and the company discovered the discrepancy, Hamilton said.
“Karen,” Ralenkotter wrote, “Do what is necessary to rebate the difference between what they thought they got and what we ‘mistakenly’ were charging for the 3 month period.”
Ralenkotter also explained a July 2008 email chain in which he emailed a trucking company with one fuel rate but then emailed a regional account representative 20 minutes later with a revised rate, leaving the trucking company out of the loop.
“I was cheating them out of the agreed-upon deal,” he testified Thursday.
Hamilton asked why.
“So we could make more profit at Pilot and I could make more commission,” Ralenkotter said.
Federal prosecutors claim Pilot skimmed a total of $56 million through the rebate scheme.
In his cross-examination of Ralenkotter later that day, defendant Hazelwood’s attorney, Rusty Hardin, teased out more details about the former sales director and the timeline of events.
After working for another diesel company, Ralenkotter joined Pilot in the mid-to-late 1990s – around the time Tennessee’s current governor led Pilot as its president. But Ralenkotter said it was not until about 2008 that he and other salespeople started issuing rebates that did not reflect what trucking companies were owed.
Two factors started the practice, Ralenkotter testified. In 2008, fuel experienced a big run up in the first half of the year, followed by a large decrease. This lead to a large spread between what Pilot paid for the fuel and the retail price for it.
“We thought there was an opportunity there to keep some of that spread,” Ralenkotter said.
A few years before Pilot merged with truck stop competitor Flying J on July 1, 2010, Ralenkotter and his co-workers learned about how Flying J worked out an arrangement similar to the way Pilot offered manual rebates, or rebates that the fuel company calculated.
Some trucking companies preferred to buy fuel at retail price and have Pilot send them checks, Ralenkotter said. Some did not qualify to buy fuel on credit. Others wanted the rebate check because they would get the money, and not their drivers, he testified.
In 2008, Ralenkotter and the sales people he supervised in his region managed 250 trucking company accounts. Five years later, around the time federal agents raided Pilot’s Knoxville, Tennessee, headquarters in April 2013, Ralenkotter’s team was managing 900 accounts. He estimated 10 percent of them received manual rebates. Of those accounts, he says about 50 were defrauded over the years.
Earlier in cross-examination, Hardin asked Ralenkotter if he remembered the name of the first trucking company that Pilot issued manual rebates to, or perhaps the first company it started to defraud.
Like a penny, it seemed inconsequential at the time. Ralenkotter did not remember.
“I kind of slid into it,” he said.
Testimony will continue Monday in the trial that is expected to last at least six weeks.