The new attorney for former Pilot Travel Centers president Mark Hazelwood is asking a delay of 120 days for his sentencing.
Hazelwood was found guilty by a Chattanooga jury of three counts related to cheating trucking companies out of millions of dollars of promised rebates.
He is set to be sentenced on Aug. 22 by Judge Curtis Collier in Chattanooga.
Hazelwood remains under house arrest in Knoxville.
Attorney Bradley Henry of Knoxville and New York City say additional time is needed for an accountant to review the loss figures, which will be a main factor in the length of the sentence.
Attorney Henry said, "On March 28, 2018, the Court set a date of August 22, 2018, at 2:00 p.m., for sentencing. (Doc. 526). A draft Presentence Investigation Report (“PSR”) was issued on July 18, 2018. A revised PSR was issued on July 20, 2018. Objections to the PSR are currently due on August 1, 2018. Fed. R. Crim. P. 32(f)(1); Local Rule 83.9(c). Defendant’s sentencing memorandum is due on August 8, 2018. One of the most significant factors at sentencing will be the determination of the attributable loss amount under the advisory sentencing guidelines. But the loss calculation listed in the defendant’s PSR is based on approximately two years’ worth of painstaking underlying work much of which has only recently been provided—and still only in part—to Mr. Hazelwood, robbing him of any meaningful opportunity to challenge the loss amount. In approximately April 2013 through April 2014, Pilot Travel Centers LLC (d/b/a Pilot Flying J, “PFJ”) used a team of internal auditors to conduct an analysis of potential underpayments made to customers. Because PFJ had gaps in its business records, and because customers sometimes claimed they were promised discounts higher than those reflected in PFJ’s records and systems, or did not have comprehensive documents, the Pilot Audit adopted a “customer friendly” approach, and resolved any doubt in favor of the customers. This approach resulted in an overpayment to customers. In addition to the overpayments made because of the “customer friendly” approach, PFJ issued further overpayments when it could not confirm that a customer had been notified of a prior reduction in its discount arrangement, even if it also could not confirm that the customer had not been notified (or that notification was required). Finally, the company also made restitution and make-good payments to customers when the underpayment was the product of an innocent mistake. See PFJ Criminal Enforcement Agreement, dated July 10, 2014, at 6. Despite these inherent biases, the PFJ internal audit served as the bedrock of all work later done to determine the loss amount attributed to defendants, which is described below. In approximately 2014, Neal & Harwell PLC (“Neal & Harwell”), counsel to PFJ, engaged KraftCPAs PLLC (“Kraft”) to analyze, pursuant to PFJ’s cooperation obligations under its Criminal Enforcement Agreement with the U.S. Attorney’s Office, the attribution loss amounts associated with PFJ’s diesel fuel discount program. Kraft completed its Loss/Gain Attribution Project in March 2015 (the “2015 Kraft Report”). The 2015 Kraft Report was based on PFJ’s internal audit, which was conducted in 2013 to determine the amount of loss across its entire customer base, including losses unrelated to rebate fraud. The 2015 Kraft Report did not state its conclusions in the body of the report, but apparently included them in an Excel file accompanying the report. That Excel file asserted $133,888,895 of customer losses attributed to 42 different PFJ employees. No losses were attributed to Mr. Hazelwood in this file. The supporting documents attached to the 2015 Kraft Report did not provide an audit trail that would allow one to recalculate how the loss amounts were derived nor how Kraft reached its conclusions concerning attribution to the various PFJ employees. See Declaration of Philip E. Kruse (“Kruse Decl.”) ¶ 9(a); id., Ex. 4.
On June 21, 2018, Kraft issued a set of interim findings that included, for the first time, a summary purporting to show losses attributed to Mr. Hazelwood (“Kraft Interim Findings”). Although the Kraft Interim Findings were not provided together with a summary report, Neal & Harwell’s cover letter indicated that the U.S. Attorney’s Office requested, through Neal & Harwell, that Kraft “refine and narrow” the 2015 report to only include defendants who were either convicted or pled guilty. The Kraft Interim Findings indicated that Mr. Hazelwood was attributed $23,789,936 of customer losses. There was no report or summary of Kraft’s methodology includ 4 Kraft’s methodology for the supplemental project. The summaries and descriptions in this report encompassed the work performed by Kraft for the Kraft Interim Findings and for the Supplemental Kraft Report, but was provided for the first time with the Supplemental Kraft Report. See Kruse Decl. ¶ 9(c); id., Ex. 2. The digital file of supporting documentation contains over one gigabyte of data in compressed form, including attribution support documents for all customers with attributed losses and files supporting Kraft’s sampling analysis on 133 customer-months of losses. See Kruse Decl. ¶ 11. Much of this data had never been provided to the defendants before. Once again, these supporting documents did not provide any information as to how the loss amounts were derived nor did they provide an easily traceable trail of how Kraft reached its conclusions concerning attribution to the Defendants. This poses significant obstacles to challenging both the loss calculation amounts, as computed by the PFJ internal audit, and the loss attributions, as determined by Kraft. Notably, Kraft spent four and a half months working on the Kraft Supplemental Report, after having spent significantly more time on the 2015 Kraft Report, which “was the foundation for Kraft’s analysis” in the Supplemental Kraft Report. See Kruse Decl. ¶ 10; id. Ex. 2 at 1. Moreover, Kraft noted that even this much time was not sufficient for it to conduct all of the work that went into the Supplemental Kraft Report in the proper sequence, noting in a footnote that it had to conduct some of its operations out of order “due to time constraints.” See Kruse Decl. ¶ 10; id. Ex. 2 at note 10. In total, Kraft’s reports provided, or appear to incorporate by reference from PFJ’s internal audit, at least five gigabytes of data stored in more than 15,000 files. But these supporting documents were provided in a manner that limits their usefulness. For example, copies of documents upon which Kraft relied for its analysis of knowledge and intent by the defendants are spread across three different groups of documents, including certain PFJ internal audit files that contain documents gathered in connection with the PFJ internal audit. Another example is that many documents appear to have been provided in formats that are difficult to work with, such as hard coded Excel files (rather than Kraft providing formulas) and other sets of data converted to PDF rather than being provided in native form. These issues make the process of attempting to review and verify Kraft’s conclusions significantly more time consuming than if the relevant files relied upon by Kraft were collected in one place and provided in native form, with Excel formulas included. See Kruse Decl. ¶ 12. The PSR for Mr. Hazelwood was filed on July 18, 2018. (Doc. 649) It adopts, wholesale and without analysis, Kraft’s loss attribution findings, stating in conclusory fashion that Kraft “provided the losses incurred by the trucking companies as a result of the fraud, and it determined to which defendant or defendants the loss should be attributed.” PSR ¶ 32. Of course, although this is what Kraft purports to provide, there are a number of inherent biases and flaws in methodology that underpin its results, which the defendant needs—and has a right—to test independently. Indeed, Kraft appears to have employed certain methodologies that are unorthodox and has undertaken certain analyses not typically performed by auditors or CPAs, and Mr. Hazelwood needs sufficient time to challenge the PSR’s findings. See Kruse Decl. ¶ 13; id. at note 1.
Accordingly, given the volume and complexity of the data and information we have (and we are still seeking additional information needed to conduct adequate testing), and because the defendant has only recently received the Supplemental Kraft Report—which contains significant new information, including Kraft’s methodology and substantial new data—the Court should reset Case 3:16-cr-00020-CLC-HBG Document 613 Filed 07/27/18 Page 5 of 13 PageID #: 16005 6 the sentencing and corresponding deadlines for objections to the PSR and filing sentencing submissions. II. ARGUMENT “Whether a continuance is appropriate in a particular case depends on the facts and circumstances of that case . . . with the trial judge considering the length of delay, previous continuances, . . . whether the delay is purposeful or is caused by the accused, . . . the complexity of the case, and whether denying the continuance will lead to identifiable prejudice.” Wilson v. Mintzes, 761 F.2d 275, 281 (6th Cir.1985) (citations omitted). A continuance is warranted here. This is our first request for a continuance and we make it with ample justification. The length of the continuance requested, 120 days, is less than the amount of time Kraft needed to complete the Supplemental Kraft Report on which the government and the PSR will rely. The issues involved are highly complex and they rely on a massive amount of data, and we received the Supplemental Kraft Report less than two weeks before objections to the PSR are due and two and a half weeks before our sentencing memorandum is due. This does not give the defense an opportunity to meaningfully challenge the findings of the loss calculation— the most significant factor related to the calculation of the advisory sentencing guidelines.
For the reasons described below, this would constitute a violation of the defendant’s Due Process rights unless a continuance is granted. Federal Rule of Criminal Procedure 32 “contemplates full adversary testing of the issues relevant to a Guidelines sentence.” United States v. Christman, 509 F.3d 299, 304 (6th Cir. 2007) (quoting Burns v. United States, 501 U.S. 129, 135 (1991)). Rule 32 protects a defendant’s constitutional right to due process by requiring disclosure of information relied upon at sentencing. 7 probation officer’s determination and on other matters relating to the appropriate sentence.” Id. (quoting Fed. R. Crim. P. 32(i)(1)(C)). For any issue in dispute, including any parts of the presentence investigation report, a court must either rule on the disputed matter or determine that a ruling is unnecessary because the issue would not affect sentencing. Id. As the Sixth Circuit has noted, although Rule 32 only expressly gives the parties the right to review the presentence investigation report, the right to review other information that a court relies on at sentencing (such as information relied upon by the presentence investigation report) is implied. See United States v. Hayes, 171 F.3d 389, 392-93 (6th Cir. 1999) (finding such a right “implicit in the adversarial scheme created by Rule 32”). A defendant must have “a meaningful opportunity to contest” information on which a court would rely upon on sentencing. United States v. Hamad, 495 F.3d 241, 246 (6th Cir. 2007) (remanding for resentencing because court relied on confidential documents pursuant to Rule 32(i)(1)(B) and the summary of the confidential information did not reveal the relevant sources, and therefore defendant did not have a “meaningful opportunity to contest the allegations”). The government has the initial burden to prove the amount of loss by a preponderance of the evidence. United States v. Jones, 641 F.3d 706, 712 (6th Cir. 2011). If the government proves a certain loss, then the burden shifts to the defendant to offset the loss amount by a preponderance of the evidence. Id. While sentencing courts are not required to establish the value of loss with absolute precision, “bald conclusory statements do not acquire the patina of reliability by mere inclusion in the PSR.” United States v. Jones, 475 F.3d 701, 705-06 (5th Cir. 2007) (citation and internal alteration omitted) (court remanded for resentencing because the government failed to prove victims suffered any loss).
Indeed, a defendant’s “due process right to a fair sentencing includes the right ‘not to be sentenced on the basis of invalid information and, therefore, a defendant must be given an opportunity to rebut any challenged information.’” United States v. Forlani, 1:11-CR-491, 2013 WL 66081, at *3 (N.D. Ohio Jan. 3, 2013). A meaningful opportunity means that Mr. Hazelwood must have sufficient time to analyze the government’s loss calculations and the information supporting those figures. See id. In Forlani, the government’s sentencing memorandum identified numerous bribe amounts that formed the basis of its loss calculations but did not include any detail that would allow defendant to “test the validity of these figures, or rebut the challenged information.” Id., slip op. at 2–3 (N.D. Ohio Nov. 19, 2012) (Dkt. 122). The court ordered the government to produce “specific and meaningful details relating to its loss calculations,” including dates and descriptions of the alleged bribes so defendant can understand the claimed amount, setting a deadline to produce that was more than a month before sentencing. See id., at 2–4. The government complied with the court’s order, but in doing so also revised its loss calculations. See id., 2013 WL 66081, at *1. The court found that “the government’s position on loss has been a moving target” and that due process required providing defendant additional time to analyze and challenge the government’s loss calculations. See id.
Mr. Hazelwood is being afforded less time to understand and test the validity of loss calculations that are much more complex. Years of work went into producing the Supplemental Kraft Report, and asking the defendant to meaningfully challenge it in two and a half weeks is to give him no meaningful opportunity to contest it at all. 1 First, the PFJ internal audit (the findings
1 As noted below, we worked diligently to test the Kraft Interim Findings. However, we could make only limited progress for two reasons. First, we did not yet have the crucial new information that was provided with the Supplemental Kraft Report, including its six-page summary report. Second, there was an enormous amount of data to work with, which was in disparate locations, in difficult-to-use formats, and without any straightforward way to recreate Kraft or PFJ’s work.
of which were later incorporated by Kraft) was performed over a one-year period between April 21, 2013 and April 30, 2014. During its peak, up to 55 people were working on the project, including many who worked significant overtime. See Kruse Decl. ¶ 7; id. Ex. 3 at 3. That audit relied upon at least eight years of data including: 1) daily retail diesel fuel prices for over 600 locations; 2) daily diesel cost from all loading locations; 3) transaction information, including customer, gallons purchased, date purchased, and location; 4) discount program information by customer, with the more complex having frequent changes, and with the discount program arrangement varying by store location and/or region; and 5) millions of emails, salesforce entries, pricing documents, and other sources of information that could be used to establish the discount program arrangement. See Kruse Decl. ¶ 8; id. Ex. 3 at 4. Second, Kraft spent a significant amount of time, likely at least several months, reviewing the PFJ internal audit and preparing its 2015 Kraft Report, although it did not assign losses to Mr. Hazelwood. See Kruse Decl. ¶ 10; id. ¶ 9(a). Third, Kraft spent an additional four and a half months reviewing both the PFJ internal audit and its own work from 2015. Despite the fact that it had the advantage of already being familiar with the data and its prior work, even that amount of time was too little for Kraft, which stated in the Supplemental Kraft Report that it was forced to conduct its work out of the proper sequence “due to time constraints.” See Kruse Decl. ¶ 10; id. Ex. 2 at note 10. It is impossible for Mr. Hazelwood to adequately analyze and test the data in the significantly shorter period that has been afforded him. Here, as in Forlani, due process requires providing Mr. Hazelwood with additional time to analyze and challenge the government’s loss calculations. 2013 WL 66081, at *1. Given the amount of time it took Kraft to produce its result, there can be no serious dispute that it would likewise take Mr. Hazelwood a significant amount of time to reasonably challenge it. Furthermore, after not attributing losses to Mr. Hazelwood in 2015, Kraft attributed $23,789,936 Case 3:16-cr-00020-CLC-HBG Document 613 Filed 07/27/18 Page 9 of 13 PageID #: 16009 10 of customer losses to Mr. Hazelwood in the Kraft Interim Findings, and attributed $21,562,648 to Mr. Hazelwood in the Supplemental Kraft Report. See Kruse Decl. ¶ 9(b), (c). Thus, here, as in Forlani, Mr. Hazelwood has been forced to grapple with “a moving target” with respect to the loss amount. See Forlani, 2013 WL 66081, at *1. In addition, important data from both the PFJ internal audit and the Kraft work has still not been provided to the defendant—including, as noted above, readily traceable trails showing how the PFJ internal audit team reached its conclusions concerning the loss amounts, or how Kraft reached its conclusions concerning attribution to the Defendants—despite our request to the government for such information. The lack of this information limits our ability to meaningfully challenge the Kraft findings and, by extension, the PSR.2 This will be the subject of a forthcoming motion requesting Rule 17 (c) subpoenas. Moreover, the data we do possess—including what was provided only recently in the Supplemental Kraft Report—though of limited utility, is very significant in volume and complexity. It will require a substantial time and effort to properly evaluate Kraft’s work and fully evaluate whether its conclusions are reasonable and appropriate. See Kruse Decl. ¶ 13. The 11th hour disclosure of this very significant report has placed Mr. Hazelwood in a precarious situation. As the Court is well aware, the United States Sentencing Guidelines used in this case are driven significantly by loss amount. More than any other factor, loss determines the advisory guideline range. The receipt of the Supplemental Kraft Report two and a half weeks
2 The PSR states, simply: “The loss amount attributed to Mark Hazelwood in the Kraft Report [at the time, the Kraft Interim Findings] is $23,789,936, and the number of victim trucking companies is 215.” Therefore, in order to meaningfully challenge the PSR, we must challenge the Kraft findings.
before sentencing submission is due makes it impossible to adequately review, test, and meaningfully challenge their findings. Indeed, even the first indication of a specific loss amount was not provided until June 21, 2018, in the Interim Kraft Findings. The earlier 2015 Kraft Report did not assign losses to Mr. Hazelwood. The Interim Kraft Findings provided a significant amount of new data, but were incomplete because they did not include a report or summary, and did not include the large amount of new data that was included in the Supplemental Kraft Report. Additionally, the Supplemental Kraft Report revised the loss attribution amounts. Although we worked diligently to test the Kraft Interim Findings, we could make only limited progress without the crucial new information that was provided with the Supplemental Kraft Report, including itssix-page summary report. Without additional time to contest the Supplemental Kraft Report, Mr. Hazelwood will be wholly unable to meaningfully challenge the loss calculation attributed to him – the single biggest factor in the PSR’s advisory guideline calculation. Compounding the issue, the Supplemental Kraft Report contains a number of conclusions without citing or providing the information relied upon in the PFJ internal audit. Without sufficient time, the defendants are deprived of the ability to effectively test and challenge Kraft’s—and by extension the government’s—loss amount calculations. Failing to grant a continuance in this instance would violate Mr. Hazelwood’s Due Process right to a fair sentencing where he is given a full opportunity to meaningfully challenge the PSR. See Forlani, 2013 WL 66081, at *3 (granting defendant additional time to analyze new information regarding loss calculations because “the due process right to a fair sentencing procedure includes the right ‘not to be sentenced on the basis of invalid information and, therefore, [a defendant] must be given an opportunity to rebut any challenged information’” (citing United States v. Barrett, 890 F.2d 855, 865 (6th Cir. 1989), superseded on other grounds, United States v. Williams, 940 F.2d Case 3:16-cr-00020-CLC-HBG Document 613 Filed 07/27/18 Page 11 of 13 PageID #: 16011 12 176, 181 n.3 (6th Cir. 1991))). Needless to say, the calculation of loss amount is no simple matter and requires substantial analysis. It is in the interests of justice and judicial efficiency for the parties to be able to address as many of the disputed factual issues as possible well in advance of sentencing. The delay in providing the information by Kraft, and by extension the government, simply necessitates an extension of the time needed to analyze the significant financial information reviewed during the PFJ internal audit and the three Kraft reports that is crucial to determining whether the methodology was appropriate throughout. For all of these reasons, we respectfully request that the Court continue sentencing for at least 120 days to permit a meaningful review of the Kraft reports, appropriately address issues in those reports as they arise, and to submit sentencing materials.
CONCLUSION
For the foregoing reasons, Mr. Hazelwood requests the Court continue the sentencing and corresponding deadlines for 120 days.