Employee converting clients to private pay

My salaried lead employee has been accidentally caught logging into our server through our laptop to service a client we have not had revenue from since last June. When confronted, he said it was a client he brought to some business several businesses ago. He has been their tech rep from my business, but he and I have no agreement about ANY client being HIS as opposed to being mine.

I immediately wrote up an employee manual extending my thoughts on how nobody I was paying should be in the same business as we are on the QT at night... but that especially, nobody I employ should be thinking he can use my facilities to accomplish work for what he claims is a private client during MY WORK HOURS.

Now I have problems with another tech who works WITH this guy this most. He seems to think that I should pay for his car and mileage... he claims to have put 6k miles out of 22K miles on his newer car due to work. I'd love to be able to pay his expenses, but currently not one of my employees is billing enough hours or selling enough product to pay their own salaries... much less to pay $.55 per mile plus a car allowance. I have REMOTE Maintenance facilities in my office. The only reason we go out is to service terminals or to deploy networks. They have not deployed more than three new networks this year. A pitiful record. I don't think he is actually counting his mileage, but he seems to be estimating it. I asked them to record their mileage last year, but they tell me they have stopped because they aren't getting paid mileage. Too bad they don't understand that if they get audited on their business expenses, they will have to find documentation... probably from my Quickbooks listings of work done. But I understand two of them are not recording their time regularly.

I need all the employees to handle the workload and the tech informational requirements of our clients. How can I put something into writing that gives this client thief on notice that he will be prosecuted if we see any further evidence of his under the table billing? Should I just fire him and hope to find another lead tech? What about the negative leadership he is giving to the younger tech who is complaining about his car expenses? He actually told this young guy that it was HIS client, not ours and that he had only made a couple thousand off their new server and a couple hundred a month during this last year since he began billing them from home. Can I have him arrested for theft of service for using MY equipment and salary time to service his HOME BREW client?

I want to fire him, but I'm holding off to see what else we find. I need to do something very soon. What do you recommend?