FORTUNE — A mighty Southern family has fallen. The Haslams, who have owned the Pilot Flying J gas station empire since Jim Haslam II opened the first Pilot shop in 1958, are under investigation by the FBI for fraud.
Jimmy Haslam III, the current CEO of the company and an owner of the Cleveland Browns (His brother Bill is the Republican governor of Tennessee.) has said he would cooperate with the investigation after an affidavit filed by FBI agent Robert H. Root was unsealed on Thursday, April 18 and the FBI and IRS raided Pilot Flying J’s Knoxville, Tenn. headquarters on April 15 and 16. The Haslam family was not available to comment before the story went to press.
Jimmy Haslam III delivered a formal statement on the raid on April 22, wearing a white button-up Pilot shirt and holding a Diet Coke. “I will tell you this, I’ve worked here, it’ll be 36 years in August — the company’s 54 years old — and that was the most painful, and still is, 48 hours that I’ve ever experienced in business.”
That’s believable. The 120-page affidavit is a salty read, full of language that portrays Pilot Flying J’s business practices in gritty light.
Fortune ran a Q&A with the elder Haslam in the October 29, 2012 issue of the magazine, in which he gives a folksy account of his ascent and offers sage business advice. One of his pearls of wisdom is to hold people accountable. “We have monthly goals,” he told Fortune. “If our people don’t make them, they have to explain why. When they make their goals, we reward them.”
To be clear, no one has been arrested in the case so far, and investigators haven’t disclosed how high up the chain the wrongdoing went. But Jim II’s accountability advice is cringe-inducing in retrospect, especially since the accusations involve Flying J sales associates boosting their commissions as well as company profits. In other words, some employees were allegedly rewarded for fraud.
Here’s how it worked: Pilot Flying J secured business from certain trucking clients by offering discount rates if those companies bought fuel from Pilot Flying J stations exclusively. Certain discount rates, called “Cost Plus” discounts, were based on an index that tracked the average price that gas stations pay for fuel nationwide. Pilot Flying J would sell customers a discount based on that index, calculated by the Oil Price Information Service (OPIS), plus a set number of cents per-gallon. Clients paid full price for the gas at the pump, then Pilot Flying J would cut them a rebate check each month.
But not everybody can monitor the index. According to a white paper by fuel card company Wex, “The expense of accessing OPIS data services — upwards of tens of thousands of dollars per year — creates a firewall between the fleet company and its pricing provider.”
Pilot Flying J, the affidavit suggests, abused that firewall, especially for smaller “less sophisticated” customers. Certain associates would gauge whether or not clients monitored the index. If it seemed like they didn’t, sales associates at Pilot Flying J allegedly cut those clients a rebate check for much less than they had earned. The deception benefited individual employees’ sales-commission numbers as well as the company’s bottom line.
But here, Pilot employees explain it best. An undercover FBI informant recorded Brian Mosher, director of sales for national accounts at Pilot, explaining the type of customer to screw over. “I’m sending cost-plus pricing to a guy that has absolutely no idea what cost-plus pricing is. [That] guy does not deserve premium pricing from us, in my opinion, because he’s not willing to go back and do all the work on it.”
Or, perhaps more graphically by Pilot VP of sales John Freeman, during a meeting on October 25, 2012: “Hey, this is a game. We’re playin’ fuckin’ poker with funny money, and its liar’s poker with funny money because of all this cost-plus stuff.
“So, you know, I’m not, I don’t want to get into a moral or ethical conversation, because I believe that if a guy’s gonna butt-fuck you then we got to go to butt-fuckin’ him harder … “
This kind of justification for the alleged fraud appears over and over again in the affidavit. “You gotta get your arms around the thought process here, and the thought process to me is extremely simple. I’ve clearly made peace with it,” Mosher said. The customer could check the index if he wanted, the logic goes, and they’re out there to screw you so screw them first.
This is an example of a management mutation — the elder Haslam’s reward strategy gone haywire. When employees earn profits for themselves and their company by behaving a certain way, they will bend over backwards to rationalize that they are doing the right thing as long as they go unchecked. CEO Jimmy Haslam III said on April 22 that he plans to curb such behavior by mandating an internal audit, complying with the external investigation and hiring a chief compliance officer.
“I don’t think I’ve ever been as embarrassed as I have been since I read the affidavit,” Jimmy III said this week, “We have respect for people, we have the utmost respect for out customers, and we don’t talk in that kind of language.”