April 2010

The Tangled Demise of Arrow Trucking

As forensic accountants work to piece together what’s left of the company, and fleet lessors comb the country for missing trucks, the three executives blamed for orchestrating the multimillion factoring fraud that brought Tulsa-based transportation firm Arrow Trucking Co. to its knees are busy pointing fingers at each other. Using court records, press reports and the statements of those involved, ABF Journal attempts to untangle the convoluted mess that was Arrow Trucking.

Sometimes trucks talk

At least the hundreds that sat at the Fair Meadows Racetrack in Tulsa, OK on the morning of March 18 awaiting auction had quite a story to tell: a tale of fraud and greed that ended with hundreds of drivers stranded across the country over the Christmas holiday and a 61-year-old transportation firm — Arrow Trucking Co. — in disarray.

It’s the story of more than 1,200 jobs lost due to what investigators, lenders and even Arrow executives now say was a multimillion-dollar accounts receivable fraud.

In its heyday Arrow Trucking was a regional transportation powerhouse, operating some 1,300 trucks and 2,500 trailers; when it was acquired in 1968 by Jim Pielsticker — the father of former CEO Doug Pielsticker, who lenders say helped orchestrate the fraud — it had less than a dozen. The younger Pielsticker took over the company in 2001 after his father was killed in a plane crash. Less than a decade later, the company is in shambles, pursued by lenders, former employees and, potentially federal prosecutors.

A bidder wandering around Fair Meadow would see what’s left of the Arrow’s once mighty fleet. Seven hundred people turned up for the first Arrow liquidation sale. The 300-plus Freightliner and Kenworth trucks and trailers — most all of them owned by leasing firm Daimler Truck Financial — are a fraction of the total inventory, much of which remains missing. Where they are is just one question out of many that remain unanswered in the tangled story of Arrow Trucking Co.

The Year of Living Dangerously
Tulsa-based Arrow Trucking Co. initiated a voluntary Chapter 7 bankruptcy petition on January 8, seeking to liquidate itself, just hours after being sued by its bank for allegedly engaging in a multimillion-dollar accounts receivable (A/R) fraud.

In its suit, Transportation Alliance Bank (TAB), based in Utah, said it was duped out of millions of dollars by Arrow and its executives as the trucking firm struggled to remain solvent in the months leading up to December 2009.

According to the lawsuit, filed in U.S. District Court in Oklahoma, Arrow executives and affiliates submitted fraudulent invoices to the bank under a factoring facility the two entities maintained.

The bank and Arrow Trucking inked the $28 million A/R purchase agreement in November 2008. Under the agreement, which was guaranteed by a company owned Pielsticker, TAB was given a “continuing first priority interest” in all Arrow Trucking accounts.

By July 2009, the bank said it began noticing “irregularities” in the documents Arrow was submitting, including instances of customers remitting less than what was invoiced. The red flag turned out to be prophetic; it would eventually be revealed that Arrow was preparing two invoices for each account: one for their customers, and a separate, inflated invoice, which it submitted to TAB.

Throughout the summer of 2009, the bank says, every move it made to get to the bottom of the irregularities was met with diversion or outright resistance from Arrow. When TAB asked to speak to the customers in question to verify the accounts, for instance, the company allegedly balked, claiming it would “…risk losing future business with any customers contacted by TAB because they would not want to transact business with a carrier that was ‘factoring’ accounts,” according to the suit.

When, on September 1, the bank sent an inspector to Arrow headquarters, the TAB suit alleges, Arrow Chief Financial Officer Jonathon Moore and General Counsel Joseph Mowry minimized the problems, blaming the errors on a billing clerk that they said had been fired as a result.

Two days after that visit, the bank sent its first and only official notice of default to Arrow, saying that the company was in breach of its agreement with TAB for submitting inaccurate invoices and warning that if the problems were not cured within seven days it would notify Arrow’s customers that it was taking over the company’s accounts. A cure was subsequently negotiated with TAB’s director of A/R financing operations, Curtis Sutherland, which the bank says it now knows to be fraudulent.

Just days after inking the cure agreement TAB once again sent an onsite inspector to Arrow headquarters with the intention of calling customers to verify the accounts.

The bank’s complaint reads: “Prior to the visit [General Counsel] Mowry had arranged with TAB’s president to only call certain accounts and to place all calls through [CFO] Moore. Throughout the day TAB’s A/R manager and Moore placed calls to approximately 30 persons represented to be Arrow Trucking customers. The customer phone numbers were pulled directly from Arrow Trucking’s computer system and all of the phone numbers were unique. During the phone calls, the alleged ‘customers’ fielding the calls confirmed the Arrow Trucking A/R balances…”

But the story didn’t end there. For the next two months TAB says it continued to identify problems with Arrow accounts, including poor invoice aging, a high dilution percentage, significant differences between purchases and collections, and many “short-paid” receivables.

Finally, on December 11, TAB made another series of verification calls to purported Arrow account holders. But this time, the bank says it was able to ascertain through its discussions with the third parties that the “customers” it had been calling were not customers at all, but were imposters arranged by Arrow to cover the fraud. It now says it suspects the 30 “customers” it spoke to on its previous visit were also accomplices in the fraud.

Later that day, after being pressed by TAB, Mowry finally admitted that the bank had indeed been defrauded by Arrow, but pointed the finger at CFO Moore as the culprit. “[General Counsel] Mowry admitted that Arrow Trucking had been providing TAB with fraudulent invoices, but that the sole person responsible for this activity was [CFO] Moore,” TAB said. “Mowry told TAB that Arrow Trucking had terminated Moore’s employment.”

In time, Pielsticker would subsequently back up that claim.

Following Moore’s admission the bank finally pulled Arrow’s line on December 21 and along with it the Arrow fuel cards it backed; a day later the company ceased operations and terminated its employees. Those drivers unlucky enough to be on the roads without fuel were told to abandon their rigs and find their own way home.

Today, TAB contends that some or all of the representations made by Arrow in the original agreement of 2008 were false, and that in total, the fraud cost it $12.5 million. The suit alleges that in the weeks leading up to Christmas 2009 alone, executives of Arrow submitted $1.9 million in receivables against which TAB advanced $1.18 million in emergency cash to sustain the business.

Oh, What a Tangled Web
Four months after the company’s demise, as investigators work to get to the bottom of the Arrow Trucking debacle, the case has devolved into an exercise in finger pointing, replete with claims, cross claims and counterclaims pitting top executives against each other.

Much to the surprise of everyone involved, on February 1, 2010, former CFO Moore came forward with an affidavit admitting his role in the fraud, but adding no less than 30 times in his filing that he was only following the orders of Pielsticker and Mowry.

“At all times relevant herein, Moore was acting upon instructions from his employer, or upon advice of counsel,” Moore says in his brief.

For his testimony in the matter, Moore is asking the court for indemnification from any judgment meted against him in the TAB case. Citing an ongoing criminal investigation, he declined to make any additional response to the allegations of covering up the fraud. He is, however, suing both Mowry and Pielsticker for slander, claiming the two “made false and malicious statements concerning [him]” by placing blame for the fraud on him and that “…such statements attribute criminal acts about Moore, which cause him to suffer irreparable damages.”

Additionally, Moore says he wasn’t fired at all but resigned his position as the company crumbled.

At the end of the month Pielsticker too broke his silence, filing his own affidavit with the court insisting he was at all times kept in the dark about the financing irregularities and didn’t learn about them until December 2009, days before the company collapsed. In a twist of irony that could only be entertained by a court of law, Pielsticker actually blames TAB for keeping him in the dark and continuing to do business with Arrow at least a week after learning of the fraud.

But not everyone is buying the ignorance defense. “It is my view that [for] an owner/CEO to claim that he/she did not know what was going on is pure fiction as owners normally stay close to their business and know it inside and out and the CFO will never be able to do it alone, not with this magnitude,” George Dorkhom, president and managing partner of restructuring firm AD&A Worldwide, wrote in an analysis of the Arrow case, published in March.

Meanwhile bankruptcy trustee Patrick J. Malloy III has assembled a team of two dozen lawyers, accountants, appraisers and investigators to sift through mounds of papers and try to piece together how things got so bad. Besides Transportation Alliance Bank, a preliminary list of creditors included California First Leasing, Dell Financial, GE Capital and Center Capital.

The trustee hired accounting firm Barnes & Barnes, Inc. to inventory Arrow’s assets; early in the investigation Gary Barnes, president of the firm, described Arrow’s offices as “dysfunctional” and said office files are “in disarray.”

Over in District Court, the TAB case against Arrow is, for the time being, bogged down in claims, cross-claims, counterclaims and motions. The TAB complaint contains a laundry list of violations against the defendants including fraud, civil conspiracy, unjust enrichment and violations of the Federal Racketeer Influenced and Corrupt Organization Act (RICO).

Defendants include Arrow Trucking Co., Pielsticker, Moore and Mowry, as well as Pielsticker’s mother, Carol (Arrow’s chairman) and several subsidiaries of the company.

In addition to the suit by Transportation Alliance Bank, Arrow faces two class action lawsuits filed by employees seeking damages, and Pielsticker faces a number of other suits, not least of which is a foreclosure proceeding on his $2.5 million home.

And, while no official announcement has been made concerning possible criminal charges in the case, Moore’s allusion to an “ongoing criminal investigation” in his court filing of February 1 leads one to infer that prosecutors are closely watching the case.

There’s also the little matter of $9 million in unpaid federal employee taxes, which, like the factoring fraud, Pielsticker blames on former CFO Moore.

Separately, Pielsticker and several entities he owns named in the TAB suit have counter-sued the bank, claiming breach of contract for terminating the company’s fuel cards.

If Trucks Could Talk
It seems everyone has their own idea about what happened and who’s responsible; but what no one seems to know is the exact location of Arrow’s missing trucks. And that’s something that the bankruptcy trustee and the lenders that financed the rigs would very much like to know. They’re now scouring the country for missing trucks, which investigators suspect will be “trickling in for months.”

One of the leasing firms, Navistar Financial, hired American Lender Service Co. to help track down the 250 trucks and trailers that never made it back to Arrow headquarters.

As of press time, American Lender’s Elaine Tunnell said the company had managed to track down about half of the inventory and speculated that by now at least some of the trucks are likely north or south of the U.S. border.

“The drivers haven’t been paid in months,” she told the Associated Press. “They’ll sell everything they can off those trucks and trailers. What can you do? Hope they come back across the border.”

Shortly after the collapse of Arrow, a Facebook page popped up to help coordinate efforts for stranded drivers. Today there are more than 7,000 members trading information on the legal cases, the rights of former Arrow employees and new jobs for former Arrow drivers.

At the end of March, the full extent of the company’s predicament came to light when bankruptcy trustee Malloy, when overseeing the liquidation, filed papers in U.S. Bankruptcy Court in Tulsa that shows the company has nearly $100 million in liabilities on just $8.5 million in assets. The company total assets are a fraction of the $100 million to $500 million that Arrow listed on its Jan. 8 bankruptcy filing and less than a tenth of its total liabilities.

Christopher Moraff is the associate editor of ABF Journal.