Kail did his criming through a shell LLC he set up called "Unix Mercenary".
He took between 10-15% of the total billings for each of the companies he hooked up with this scheme. None of those companies were charged (more's the pity).
They got him on mail fraud, wire fraud, honest services fraud, and money laundering. The victim of the fraud was, of course, Netflix itself.
Additional fun facts from PACER:
He's seeking to exclude his shares in Sumo Logic and Netskope from forfeiture, arguing that they were largely the result of his own hard work, which takes some serious chutzpah.
All of this apparently happened back in 2014 (the conviction is recent). If you're wondering what Netflix thought of all this, Kail apparently left Netflix for a job at Yahoo, from which he was fired after Netflix found out about his scheme and told Yahoo.
Kail's sentencing memorandum is a fun read (again: chutzpah). For instance, this gem:
Further, though Mr. Kail complained of problems with Sumologic (as one would see with any new startup), the product itself was “useful,” according to Ashi Sheth. (R.T. Vol. 8, p. 1670-71). As described below, at the time, Sumologic saved Netflix from paying for a far more expensive and inferior product called Splunk.
A lot of people here are saying this is incredibly common which is frankly pretty surprising to me. Does it really happen through shell LLCs?
I am definitely aware of execs prioritizing startups they've invested in, which is... not a great look.
But this seems to be a different thing. Kail wasn't an investor. He explicitly drafted agreements that paid him a fraction of the money flowing from Netflix. This seems almost like embezzlement to me (not a lawyer! just a guy using words he has heard!):
> Two days before Unix Mercenary was registered, Kail signed a Sales Representative Agreement to receive payments from Netenrich, Inc. amounting to 12% of the billings from Netenrich, Inc. to Netflix for its contract providing staffing and IT services to Netflix. Later in 2012, Kail began to receive 15% of all billing payments that VistaraIT, LLC, a wholly owned company of Netenrich, received from Netflix. From 2012 to 2014, Netenrich, Inc. paid Unix Mercenary approximately $269,986, and VistaraIT, LLC paid Unix Mercenary approximately $177,863. The payments stopped in mid-2014, after Kail left Netflix.
We always check the corporate registries to see if any of the legal entities the execs of a company are related to are making substantial turnover from either the company we are looking at, or a subsidiary. In 200+ DDs this has happened a handful of times. So I would not say it is a common thing but it definitely does happen, and often enough that we feel the need to at least try to establish if it is the case during a routine checkup in case of investment or acquisition.
Of course that would not help a company while it is happening, we only check a very small fraction of all offerings. In a perfect world an accountant would catch this.
One case I ran into was very much like this one: a whole bunch of hardware was sold at above sticker price, on top of that much more hardware was sold than what the business could reasonably expect to be using. The a-technical management never caught on to this until we showed up, the fall out from that case was fairly spectacular.
> We always check the corporate registries to see if any of the legal entities the execs of a company are related to are making substantial turnover from either the company we are looking at, or a subsidiary. In 200+ DDs this has happened a handful of times.
Just to add a few points:
- This is much easier to do in Europe where entities are more public.
- I regularly see (probably 1 out of 20 deals) companies where there is some level of a conflict of interest between the owners/management and a 3rd party. The most typical one is where the CTO of a small ($3M revenue) software company also owns the outsourced dev group in India. The implications are numerous here.
A conflict of interest is one thing, but as long as it is disclosed to all parties who might be on the downside of that conflict it need not be a problem in and of itself (but it still could be, and may very easily become one).
An undisclosed conflict of interest is always a problem.
> An undisclosed conflict of interest is always a problem.
Can you help me understand why this is? If a known conflict of interest may or may not be a problem for the downside party why does that change if the conflict is unknown?
I can see how it can become a problem, and how the downside party is at a disadvantage but I’m not understanding why this is always a problem.
Also, this is the classic "it depends" in consulting.
Example where this went bad:
- "Acme Co." has an offshore/outsourced dev group in India called "Offshore Co.". Offshore does all of their software development, maintenance, infrastructure, etc.
- CTO who is employed by Acme wholly owns Offshore Co.
- PE Group ("PEG") buys Acme Co. and takes a controlling interest
- PEG decides Acme should do something strategic.
- CTO disagrees with strategic direction
- CTO operates Offshore Co and decides to hold the company hostage and directs his resources to stop maintaining the code, infrastructure, etc. anymore unless they do what the CTO says
PEG/Acme could simply stop paying Offshore/CTO but since they don't know how the code works, etc. they basically don't have a choice.
I'm the other DD guy (besides jacquesm, who btw is very knowledgable) that regularly posts here. Happy to answer any questions.
There really isn't any "public" info about tech DDs that I could share. The tech DD world is growing likely crazy so if you have a business and tech mind, you'll likely find companies hiring for roles, even if you don't have specific experience.
These are two books that might help you provide perspective on M&A/PE that you would learn if you got into DD:
Assuming the receiver uses a proper offshore construct to accept the payment, this would go by unnoticed by your DD?
But most interesting: What is your best guess - Your partner says you find “a hand full” from a few hundred - how many of these cases do you miss because the recipients use a not easy traceable proxy entity to collect the payment?
Do you try to uncover such hidden actions, if yes, how?
Also, is there a good reason why someone would not use a offshore proxy/holding?
> how many of these cases do you miss because the recipients use a not easy traceable proxy entity to collect the payment?
That's the 'million dollar question', and in some cases substantially more than one million. I think the reason a good number of these people get caught is (1) things like the Panama papers and other leaks like that have made it harder to do this, and have also brought the not insubstantial resources of the authorities to review these constructs and (2) most people never expect that during DD such a thing would be checked.
It's typically quite a surprise when we start asking about the activities of companies that the other party believes are well hidden.
I don’t see offshore leeks as a big deterrent, unfortunately.
The three big ICIJ leaks were not published as in dumped to the public. Only politicians, PEPs, obvious money launderers and some obvious other criminals were selected and exposed. (It’s only money laundering if you can proof the money comes from the proceedings of crime)
There are some criminal service industry leaks that are public, or have been public, yet it doesn’t appear more than a few individual have the motivation to follow trough in combing them. At least this is true for groups who would publish on their findings.
Fair enough. I go on the assumption that there will always be stuff we miss, and my customers do as well - especially given the time pressure that we are under to deliver. Even so, it's a given that some people will get away with these things. Interesting detail: over the years you'd expect something like this to pop up after the fact or in a subsequent DD if it goes on for long enough, but that has never happened. So maybe the number of missed cases is lower than what I would personally expect it to be (a factor of two would not surprise me).
> It's typically quite a surprise when we start asking about the activities of companies that the other party believes are well hidden.
Also, if you do tech DD - most techies are happy to share details that unknowingly might expose because they tend to be less business savvy. CEO/CFO's on the other hand...
Haha, true. Was most probably me who let that deal fall through back then when I admitted the algorithm was basically a bunch of haphazard excel sheets.
Managed to BS the second team way better after that — and they were eager enough to have a share of the rocket ship at all cost.
Guess they weren‘t too happy losing most if their series B invest.
Note that these articles are now about a decade old, I probably should update them to reflect the experience gained since then and changes to the state of the art in tech.
That's not how this works. How it works is like this: we have some expectations about what things should cost, if something is wildly deviant from the regular market rate then that's worth looking into.
I'm sure plenty of shady vendors out there would be more than willing to offer a market rate plus bribes. Especially in software since they have the margins to afford it.
I don’t want to come off as holier than average, but I always assumed the standard was to disclose the relationship I had with any company we were considering and to explicitly exclude myself from the evaluation process. Seems like common sense and is drilled into all our leaders as part of code of conduct behavior.
Companies that I’ve worked for and companies that I’ve advised or invested in have never had a problem with me making an intro under such terms (and sometimes we bought, sometimes we didn’t, but in either case, I was out of it after the intro; the very most an advised company would get is a better/more truthful explanation of why we decided not to buy.).
I can’t find the OpenDNS citation — could you post a link? I would be super disappointed to find out that the founder of OpenDNS was involved in this sort of behavior.
IANAL, but: One can be both an advisor to a company and their company can be a customer of it. That is not, in itself, illegal.
It is illegal when they are tied together as a quid pro quo, and further, when it is undisclosed. In every case any company I ran has ever done this, we fully expected the other party to disclose the conflict of interest to their company before becoming an advisor. Of course we have no way of confirming this, but this is also why none of the startups themselves were charged here.
I worked on the services side for many years and eventually worked my way into the sales and contract writing level of the operation. I was definitely too much of a square for anyone corrupt to want to pull me into their schemes, but I also never caught any kind of whiff of impropriety. We worked for a pretty wide array of clients including Fortune 50s and startups, contracts in the $500K-$20MM range. Never heard a whisper of kickbacks and we were typically squeezed to utilize every penny so it would be really, really hard to make more than 1% of our contract price disappear. The worst I ever saw was small-time expense abuse like buying steak dinners and wine on trips.
Second hand, an acquaintance worked on a tobacco account where they were spending government-mandated anti-smoking funds on a digital marketing campaign and they were asked to deliberate overbill and churn on work without delivering. People went to jail.
Third handed story because I knew some folks who used this software, a vendor once extracted about 1000% of their contract price in kickbacks building HR software for the city of new york: https://www.nytimes.com/2014/04/29/nyregion/three-men-senten...
Subchapter S corporations or LLCs facilitate paying yourself distributions, which are exempt from Medicare and Social Security taxes, saving you an initial 15%. Although, there are details and caveats to be aware of. I don't know of any way to get that benefit without a corporation.
Social Security stops at something under $150K per year.
If you’re going to try to avoid it by paying no salary and all distributions for work that you personally did, you’ll likely fall afoul of the “reasonable salary” test, designed to prevent exactly this.
Everyone needs to understand this. I’ve had two friends get audited and fined for massively underpaying themselves for contract work via their LLCs. Many of the people I run into who claim all kinds of benefits from this route are actually commiting low level tax fraud, knowingly or otherwise.
Many accountants make a living doing this. Many are also setup as s-corps taking low salary. You need to educate yourself and Understand the risks/rewards
You don't avoid it all via the S-Corp. You just avoid the half the employer (in this case, also you) normally pays.
I'm not a tax accountant or a lawyer, just happen to run my own consulting through an S-Corp. I still pay myself around half of the net revenue the S-Corp brings in as a regular employee, and that portion is taxed under FICA.
You are right about that, and I probably should've mentioned it in my comment. But I feel it's a niche case for these reasons:
1) The benefit only applies to profits above "a reasonable salary". You need to determine and potentially later defend what you chose as a "reasonable salary".
2) Once you have over ~150K income (including your day job's salary and LLC profit), social security taxes phase out so most of the benefit is gone (just the medicare portion remains), unless you have a HUGE LLC profit.
3) There's overhead in filing taxes on an s-corp.
All this probably makes sense if you have >$100K LLC profits and no other big income source, or maybe if you have >$500K LLC profits regardless. You'll def want an accountant. Companies like Collective.com exist to make it easier to go the s-corp route if you choose to go that way. But it is complicated for some minor savings.
It can depend and IANAL buuuut I do have an LLC taxed as an S Corp, because you can dramatically reduce your tax burden. Essentially you buffer your money in your LLC and pay yourself a "reasonable salary". For example: maybe you earn $200k this year as a software contractor. You go to glassdoor and find that mean salary for software engineers is $96k/yr. You pay yourself $8k/mo (pre-tax), deducting payroll taxes and putting $1,650 (the max contribution) into a 401k. You also max out your 25% 401k business contribution at another $2k. Depending on state taxes, your total tax burden is something like 19%, after you've put $43,500 into retirement. If you didn't have an LLC, it'd be closer to 30% (or higher, ugh) with only $19,500 in retirement. In raw dollars, in this hypothetical you're down ~$24k.
Your business also gets tax breaks you don't, namely on (paying for your) health care, (paying for your) retirement savings, depreciating assets, (paying for your) salaries, food, travel, lodging, equipment, and services. Further, the cap on business 401k accounts is way, way higher [1]. The ability to sock away even more pre-tax money in a retirement account, and deduct your health insurance from your taxes is insane.
The biggest downsides, at least for me, have been the infra to get it all going. I have an accountant, a lawyer, a financial planner, and an army of online services that help me stay legal and paid up. That said, I'm still coming out ahead (e.g. they don't cost $24k/yr and you guessed it, startup costs are tax deductible), so the gains are there.
(I think paying taxes is patriotic, but I don't think it's reasonable to pay taxes on $200k of income for one year, and then only make $60k of income the next year. I also don't think it's reasonable for me to pay ~40% of my income in taxes while big corporations and the rich pay very little so....)
See below; this S-corp "reasonable salary" thing was called out to me as an audit flag by my accountant, and other people have stories of friends being audited. It's not worth it (and the ethics of it aren't great; most people can't work for S-corps they own, and can't avail themselves of this "favorable treatment".)
The 401k part is available to sole proprietors too. "Solo 401k" or SEP-IRA are the tools for the job. They're easy to set up and you can put up to that same limit ($45Kish?) away if you have enough income. And if you have a LOT of income ($200K+?) you can really turbocharge it with a defined-benefit plan, which lets you put away close to 50% of the consulting income for retirement.
Most of the other things you list are available to sole proprietors too: "(paying for your) retirement savings, depreciating assets, (paying for your) salaries, food, travel, lodging, equipment, and services"
I'm not sure about health care, are you sure there's no way to deduct it as a sole proprietor?
Yeah, that's fair (yeah you can also deduct health care premiums on Schedule C). I think the liability shield is really important though, and if you're not wild about the S corp administrative overhead you can choose to be taxed as a sole proprietor.
An LLC doesn't help you against your own actions though:
"forming an LLC will not protect you against personal liability for your own negligence, malpractice, or other personal wrongdoing that you commit related to your business"
Yeah I mean, if you commit negligence or malpractice (which are serious, not like the client didn't like your work) you're liable, so you need insurance. And you can still go to jail for actual crimes. But the creditor/bankruptcy liability is nice and basically free.
From my understanding, an LLC does help with _financial_ liability - if the company fails and goes bankrupt, your personal assets generally won't be on the line.
Obviously, an LLC cannot shield you from criminal liability.
Small time LLCs are not going to get so much as a credit card without a personal guarantee. Sometimes you can get loans from the company doing your payment processing but only because they're directly involved and can see your cash flow.
(disclaimer: I work for Stripe which had a product that works like that, but not anywhere near that team)
What this person said. You'll almost always have a personal guarantee on a loan. And if it's just you consulting, you don't typically have assets in the LLC to borrow against anyway.
Sure, but this is the exception that proves the rule:
> generally courts have a strong presumption against piercing the corporate veil, and will only do so if there has been serious misconduct. Courts understand the benefits of limited liability... As such, courts typically require corporations to engage in fairly egregious actions in order to justify piercing the corporate veil
LLCs still protect personal assets in the general case.
"forming an LLC will not protect you against personal liability for your own negligence, malpractice, or other personal wrongdoing that you commit related to your business"
That's fair in the general case. But in those cases where execs are using them to commit otherwise illegal activities it should be no surprise that it occurs far more frequently than that.
It would be embezzlement (and not fraud) if the money had first gone to Netflix and then been redirected to Kail (without their knowledge).It's only fraud because the funds never went to Netflix in the first place
Embezzlement: Misappropriation of funds
Fraud (in the inducement): (Specifically wire/mail fraud when talking about contracts): Misrepresentation of contractual terms to induce entering into a contract. (Here the misrepresentation is the amount of money that the vendor was going to charge netflix since technically his kickback would've reduced the expenses to Netflix)
> A lot of people here are saying this is incredibly common which is frankly pretty surprising to me.
As an intern at one place I had to spend hours studying and then taking a test to ensure I complied with anti-bribery rules. I’m sure this didn’t just come up because one person did something bad.
We've already had a thread on the original conviction when this first came out. This business insider article at least added some new angles about how there are degrees of this happening throughout the industry.
I wholeheartedly disagreed until I saw your point (I think). The post still has your name beside it and you disagree with someone changing your words. While I don't find it a big deal with this, I kinda agree in spirit. Maybe the poster name should be changed too. However, folks would then be upset about not getting their sweet, sweet karma.
That you expect HN to work the way you want it to, instead of the way it already worked when you joined. You've been here 8 years, enough time to familiarize yourself with what's in the package. Besides that, a moderator going out of their way to mention that they have made an edit to your post, as well as specifically what edit they made is more than you could reasonably expect, and you already have that. Anything over and beyond that is pure entitlement.
Moderator time is more precious than your time, if you feel that you've been wronged then you could have just said what you thought was wrong rather than to demand a fix to your liking. This is further amplified by the fact that you have a major stake in the property whose link you posted here. Your website, your rules, HN -> HN's rules.
- "you expect"- wrong! - at no point did i express my "expectation". I was voicing my opinion on how I think the UX should work for this use case
- "instead of the way it already worked when you joined." Just because it worked this way does not mean it is right.
- "HN -> HN's rules." Yes, Captain Obvious. this does not mean their rules make sense and certainly does not mean a user voicing an opinion on how the rules should be changed is entitled.
This "captain obvious" stuff isn't helping you; it's just going to get everything you have to say flagged. You sound upset. I don't think I understand why --- having links replaced is totally standard HN practice, happens all the time, and works to the overall benefit of the community. But I don't have to understand why you're upset for you to feel that way. Rather, I'd just say, step away from HN for a bit until you can write with a clearer head.
i do get where they're coming from. right now we rely on dang and other mods (do they even exist?) doing the right thing in terms of making benign and beneficial changes to the linked story and being visible about making those changes. i've certainly seen communities where this trust ended up being abused due to scale or change in moderatorship.
it would be nicer from a transparency perspective to make these kinds of changes easily auditable by adding an "edited by" in the full page or a dedicated audit log. it would strike a balance between letting moderators improve the community while improving transparency at the system level.
HN's UX here is good. Stories are community property; they do not belong to the person who submits them. It's a basic rule of the site, and a very good one.
> Further, though Mr. Kail complained of problems with Sumologic (as one would see with any new startup), the product itself was “useful,” according to Ashi Sheth. (R.T. Vol. 8, p. 1670-71). As described below, at the time, Sumologic saved Netflix from paying for a far more expensive and inferior product called Splunk.
Wow! I was evaluating SumoLogic and Splunk in Netflix back then. Neither of them was suitable for our use cases. We ended up rolling out our own solutions. As far as I recall, the eng org didn't use Splunk or SumoLogic. Kail headed the IT department, though. Maybe they used SumoLogic.
Half a mill here, half a mill there, soon you're talking serious money...?
It is possible that your perceptions of how easy it is to extract millions-scale dollars from the business world is skewed. Google suggests 1.7M is the median lifetime earnings in the US, 2.7 is the average. Getting that in a handful of deals could tempt all sorts of people.
I think your parent's point is that this guy wasn't earning an average salary, but a Netflix executive one. In that case, 500k definitely doesn't seem worth risking so much for.
There’s a lot of ways to tie yourself up in various obligations and burn money. It’s easy to waste seven figures with houses, cars, boats, philanthropy, bottle service, gambling, divorce, etc…
Those stock options could be worth millions, one of the companies he received xx,xxx options for was acquired by mega corp I think was mentioned for example. This is on top of the money he brazenly funneled into his sham LLCs
If there are no repercussions for paying a bribe, then the optimal play is to indiscriminately offer bribes to get what you want while taking on none of the criminal liability.
> All of this apparently happened back in 2014 (the conviction is recent). If you're wondering what Netflix thought of all this, Kail apparently left Netflix for a job at Yahoo, from which he was fired after Netflix found out about his scheme and told Yahoo.
I was at Yahoo around the time this was revealed, and I don't think he was fired immediately after Netflix making the claims public. He was still CISO/CIO/some shit and used to participate in mailing lists, iirc.
I wonder how much he got in severance from yahoo, to round out the list of chutzpah-s
That's amazing. Kail was a star in Netflix. He got promoted to VP only a few months after he joined Netflix as a director. I don't get what the point is of committing such crimes.
How do you prove your value to get promoted like this after a measly few months on the job? Play golf with the CEO? I’m seriously wage slaving to make senior leadership at my org Rich, just for the promise of not being fired and not being promoted.
And an indirect victim is all of the competitors to the companies that were complicit in this scheme; presumably their services were displaced by those who paid-to-play.
It’s incredible to me that the one being bribed gets a conviction but the corporation doing the bribing gets absolutely no punishment, other than people reading on here knowing Sumo and Netskope have questionable business practices and we’re willing to wire a percentage of netflix’s fees to a shell Corp.
Or maybe he was just that good about hiding it, IE only soliciting via the business entity which then took a “commission”?
It is entirely possible the 'briber' did not know. Companies, particularly startups, tend to assume that the other party will 'do the right thing' and quite literally may not know any better. Ignorance isn't a defense, but assuming that the other party will properly disclose the conflict of interest is not an unfair assumption; that Kail didn't is, frankly, the main problem here, at least with regard to shares.
With regard to kickbacks, I have no idea how it was 'sold' to the startup; for all I know it was sold as a separate entity that Netflix buys from which they have premade contracts for, etc. I wasn't there, but I wouldn't assume Sumo or Netskope are running around offering people bribes. My guess is it went the other way.
They arranged to pay him a percentage of their billings. It strains credulity to think they might have believed it was innocent, or sanctioned by Netflix. We should all be looking at these companies differently now.
My understanding from reading it (perhaps incorrect) was that they arranged to use a third-party reseller that was actually owned by him; the startups may not have known that fact. Basically, that the percentage of revenue was going directly to Kail may have been known only to Kail; that's how I read it.
Is there any gray here? Example: you continue a contract with NewRelic and they buy you a fancy dinner at a michelin restaurant. You go with Splunk and they buy you a vacation in Hawaii to talk things 'over'. Seems like if you aren't taking cash - things can get gray real fast.
Every company I've worked for (all US based) has had corporate policies on just this subject, because they are aware that this is a major danger for them, either giving or receiving. When I worked for a government contractor we weren't even allowed to give rides to government employees in our rental cars when we were all together on a business trip, to make sure that even a line that trivial was not crossed.
Generally, the company will have a limit (somewhere in the $25-$50 range) on gifts you could give or receive without prior authorization. So maybe I can take you to a bar or coffee shop and get you a drink or two while we talk. But not a dinner at a high end restaurant, or a sporting event or a vacation in Hawaii, because the risk of being corrupted (on the receiving end) or reputational risk from being seen as corrupt, was too great.
This is particularly potent issue for American companies because of the Foreign Corrupt Practices Act. The FCPA means that US companies (and their subsidiaries, contractors, etc.) have to draw these sorts of lines over the entire world, or be subject to heavy penalties, even in countries where it might be more common and legal.
I work for a finance company in the UK and the training we get is exactly the same as you described (Even the price of gifts we're supposed to report is in the same range).
It depends on you and your company's ethical take. Personally, if a vendor is providing anything of value to me, I might as well be taking cash from them. This includes sporting events or concerts, meals, golf, xmas gifts, whatever. If you work for a company that the vendor wants badly for the money or the credential, vendors are going to throw all of these things your way. I keep it simple: if we need to do business, I have a perfectly good conference room and we can do it there.
One area that's more fuzzy is free passes to user events, i.e., a DreamForce or Oracle World. We clear these per our process and are fine to accept them because we were going to spend money on sending someone anyway. We saved the company money. Also: it was never indirect between individuals, it was company to company.
You mean the fraud that's been uncovered and successfully prosecuted? Unfortunately the article and press release don't disclose how this came to light, unless you know something more?
Netflix identified the issue and filed a civil suit against him alleging fraud before criminal charges were brought by the DOJ. It’s very likely Netflix tipped them off.
Very little in SOX scope is going to detect transactions outside of the company such as these. SOX is primarily about having effective mechanisms to assure that the financial information you report is accurate and complete, and then those mechanisms are inspected internally and audited externally. SOX is about what happens inside a company and with a companies resources -- you might have different means of preventing an employee from exfiltrating the company's money, and those are SOX-scoped.
Being able to detect whether a given employee has taken a bribe from a vendor might trip over SOX-relevant things incidentally but not directly. For example, you might need to certify that every employee has taken anti-bribery training every year, and that's your preventative mechanism so at least employees know what is permissible and what the consequences are.
The prosecution serves as a warning to those thinking they can do the same thing. Had these compliance laws not existed, there would be no incentive to _not_ commit fraud.
Unless you think nobody is going to look at this and go “these are consequences that could apply to me”?
SOX compliance builds a paper trail so crimes like this are recorded and uncovered.
Hey, I'm the author of the article -- just wanted to point out that what made this story interesting to me is the implication that this kind of conduct could be very widespread. Prosecutors definitely hinted at that. If anyone knows of any similar stories, I'd be very interested in hearing them. christie.smythe@businessofbusiness.com
The amount of "I don't get why this is wrong?" going on in this thread would seem to support the prosecutors' view that this is a widespread practice.
Long ago, before Dotcom went Dotbomb, I worked for a firm where the CIO was being paid kickbacks by our hardware reseller. He was terminated for other reasons and, shortly after he left, our head of network ops got a call from the distributor asking where they should send the bonus check that was due to him. They clearly thought that with the CIO gone, the head of network ops would be down the with the deal.
Unfortunately for them, and fortunately for him, he was absolutely not down with the deal and reported the whole thing up the chain.
We were overpaying for hardware and the previous CIO had been splitting the difference with the distributor.
If it's unclear to anyone on this thread why that is both illegal and immoral... perhaps you are in the wrong business?
> The amount of "I don't get why this is wrong?" going on in this thread would seem to support the prosecutors' view that this is a widespread practice.
I think it's because a lot of "hustle" culture and stories of the early business careers of very successful founders involve a bunch of stuff that sure looks like fraud or otherwise like something that ought to be illegal (it may not be, but I mean that it feels like the kind of thing that ought to be illegal, to a normal person) that works out great for them and sure looks like it was a necessary step on their journey to hundreds of millions of dollars and being on the cover of TIME or whatever.
Add in normal corporate business practices just feeling gross as hell on a pretty regular basis, and I can kinda see why people might see this as not really that different from how you're "supposed to" do things—if you aren't a chump, anyway.
Kinda like the college admissions bribery scandal. There was a lot of "oh, so their crime was not being rich enough to bribe the correct way?" in people's reactions, because... well, the system's officially corrupt, in a lot of people's opinions, so prosecuting unofficial corruption feels more like a very fancy organized crime racket putting the screws to the (relatively) little guy to protect their own corruption, than good old feel-good justice.
The worst example of this is the recent NCAA shoe company bribery scandal, where shoe companies paid student athletes and their families to attend particular schools sponsored by the companies. In any other industry, delivering money to people who become a part of your organization and generate revenue for it is just employment, and having your sponsors pay them directly is just cutting out the middleman. Only in amateur sports is that considered bribery and an offense that can get a person sent to prison.
Kickbacks, of course, are quite different, where a company official has a legal duty to negotiate in good faith in the best interests of their company and not make purchasing decisions based on which vendor gives them the biggest personal cut of the deal. It's hard for me to see the other side of that, how anyone can possibly not understand that that is illegal.
This reminds me of the ridesharing debacle. Uber was operating an illegal taxi service which upset a lot of local governments. It was taken to the courts multiple times. Uber won but one of the lessons to young founders was to go for it even if it's not strictly legal - laws can change.
Now I'm not saying what Uber did was necessarily a bad thing. But if I had the idea to disrupt taxi services and learned about the legality of it all, I'd have moved on to the next idea.
YouTube got huge largely due to rampant piracy, in the early days. Straight-up posting copyrighted material unmodified, and all kinds of use of media (songs, especially) in ways that aren't protected by fair use. All while copyright cartels were going after torrent users—YouTube? Made a bunch of people rich, none of them paid for what they knowingly did, and no-one thinks 1/10 as ill of any of them as they do of this guy, now.
What the hell is the lesson of any of this? It sure seems to be "doing unethical and/or illegal things is downright necessary to succeed big-time in business, and doing them successfully will make you rich and, most bizarrely, respected—unless you screw the wrong people (i.e. the bigger scammers/criminals/morally-questionable people) then you're just a criminal and we'll all sneer and spit on you and fine you and send you to prison"
Copyright and taxi-medallion laws are grossly immoral examples of regulatory capture that impoverish and endanger the public in order to provide a much smaller benefit to a small number of "exploiters." YouTube, BitTorrent, and Uber Cab were able to improve this situation, making them very popular despite greatly angering the exploiters. Similarly for, say, marijuana sellers. Doing illegal things that are nevertheless ethically upright and very popular may pay off for a business, as it did in those cases. Or it may not.
It's less likely to pay off when the illegal things are instead unethical, unpopular, and harmful to the public, at least if you get caught—and when they involve betraying the people closest to you, you're probably going to get caught.
When I was in law school, I felt patronized by the amount of time we spent talking about conflicts of interest because it seemed so obvious to me. In retrospect, having read so many of the disbarment announcements in the bar association newsletter, it's clear that a great many people do not understand what a conflict of interest is.
I feel patronised by yearly mandatory training. All of it seems obvious and not relevant to me because I’ve never negotiated a contract on behalf of my employer. Still, good to know there’s plenty of people who might find training useful.
Perhaps I'm naive, but I think the number of people who know and don't care is a small fraction of the people who honestly don't understand that they're doing something wrong. I mean, obviously this guy knew he was doing something wrong, but a lot of people just can't imagine that their own unethical behavior wouldn't be obvious to them.
Haha I do taxes for a living, and the number of times people have said, "My buddy does this and he says it's fine." As if the fact that the person hasn't been caught is evidence that what they're doing is legal. It's what you mentioned, they feel clever and don't think they're doing anything illegal.
Yes, your description is clear and I can see why it's illegal and immoral, but the article is very vague on what's illegal or wrong about it.
The key distinction that you outline is that the CIO did something behind the company's back that the company would almost certainly not have approved of. The CIO defrauded their own company by taking kickbacks in exchange for purchasing agreements; most people can see that as being wrong.
As I'm reading this article with no familiarity or background knowledge, I did not presume that this exec, Kail, was doing something that Netflix would not have approved of and using his position for his own benefit and to defraud Netflix.
If Netflix had been okay with Kail becoming a consultant or partner of the startups that Netflix entered into an arrangement with, then there would be no issue.
Anyways, this article is written as if the reader already knows what happened and what's going on, which is fine but it shouldn't be titled "Why a former Netflix exec is facing ..." It should have instead been titled "Former head of IT Operations who defrauded Netflix will face 7 years in jail."
I think some people may be confused because in the case the the dude was some biz dev type, involved with Netflix _investing_ in the startup, then this arrangement (him being on their board, an advisor, have stock) is quite common. The difference is that here he was the IT director, and Netflix was a customer not an investor, and the arrangement wasn't disclosed.
If, in order for it to work, everyone up the chain from you (or next to you even) has to be unaware of it, it's probably wrong. If the other bidders on a business relationship have to be unaware of it, it's probably wrong. You're basically profiting off ignorance/deception.
I mean, even if you don't understand conflict of interest, this should at least ring a bell.
Candor and integrity should be fundamental values in all people. It's not like you can't conduct a profitable business or become very successful if you prioritize those attributes.
One main reason I started my first computer consultancy was that I found out that although computer stores and Value Added Resellers advertised independent objective advice to customers, they accepted major software & hardware vendors giving bonuses "spiffs" directly to the salespeople, blatantly corrupting their 'objective advice' (vs supporting the overall organization's ability to sell and support the equipment). One of the first things that went in the employee manual, and of course had to can some salesguy who tried to collect a spiff under the radar (our actual practice was the spiff goes to the company or goes uncollected, and if collected, we generally added half to discretionary bonuses).
Pretty small step from that culture of working to directly corrupt "independent" advice to trying to collect it on the other end. I'd like to know how many startups actively offer this kind of deal to execs in order to get the bigger deal?
I think the current generation has absorbed so much cynicism that a concept like a legally enforceable honest service just seems like a joke. It's a blanket assumption that everyone is out for themselves so why punish anyone for it. I've never personally observed or even suspected a kickback from having been paid, but vendor selection and contract enforcement is so arbitrary I'm not sure any corruption would have made much difference.
I've been on the receiving end of attempted bribery and other attempts at pressuring a couple of times and I made sure the party attempting that would never ever do it again. Daylight really is a pretty good desinfectant.
Yes, I'm flabbergasted by a lot of the responses. I've kept clinging on to the idea that everyone must have a moral compass, but the last few years are really hitting home that I may be in a minority to have such clear ideas about what is obviously wrong, and what is obviously right.
Almost everything Trump did or said was in the former category, he cared only for his own benefit it would seem.
A huge number of people don't get why they should vaccinate to protect others perhaps not as immunity fortunate as themselves.
"Myself first, second, and then my fellow, if I stand to gain." (Loosely translated from the Norwegian "først meg selv, så meg selv, og så min neste, hvis det er til eget beste")
Edit: Perhaps I'm clinging on to old ideas. Everything is "obviously" personal choice these days, and who am I to say my values are "better" than theirs. That we should all strive to "do good" is not universal, because why should people be forced to or expected to look after anyone but themselves?
IMO you do a poor job clearly outlining the transgressions and the legal issues at play. You bounce around phrases like "pay-to-play"but as someone not inside the startup world, I didn't get to the end of your article and understand exactly what he did that was illegal/immoral and the context for how it's harmful to startups. In other words, I know he is accused of doing something wrong but that's as deep as my understanding goes.
The article describes an absolutely standard kickback scheme. If you're an employee of a company and arrange to take kickbacks from vendors without the approval of your employer, you're defrauding your employer.
Gotcha. So, legally speaking, the victim of the crime here is Netflix, and if the exec had performed the same activities with the express permission of someone within Netflix with the authority to authorize such things (IDK, board of directors?) it would not have been illegal?
Is there additional/secondary fraud against the vendors as well, or is the fraud strictly against the employer in this situation?
(Edit: Board of Director approval is totally hypothetical, I understand that no BoD would ever actually condone such a thing.)
The vendors effectively helped defraud Netflix. If Kail initiated the scheme, demanding kickbacks for deals to move forward (as seems likely to be the case given the number of vendors involved) they're unlikely to face consequences, but they're morally culpable regardless.
It is not unlawful to offer incentives to the company itself in order for them to make a deal. In fact, that's effectively how most deals close (the incentive is usually simply monetary and takes the form of a discount). The problem here is that Kail abused his position as an agent of Netflix to profit at their expense.
Dinner and drinks are ok as long as they are not excessive and in line with the expected return for the company, say two people discussing business over lunch or dinner, with a maximum of $x / head. Fairly typical companies will have very explicit rules about what is and is not permitted to the point of spelling out exactly how much you are allowed to spend on a business relationship and the reverse: what to do when/if you are offered an invitation to join for dinner and who is to bear the expense.
Vacations are typically forbidden and would immediately be seen as a bribe. This has led to all kinds of things that are practically vacations but officially are business (such as: conferences in sunny resorts, conferences that take three weeks and so on). Other 'entertainment' can come in many different forms and if not disclosed can get both parties in hot water.
On the whole, pay your own way, do not accept anything that might be construed as a bribe afterwards (so no discount on that shiny item from the company you are deciding to do business with, or not), no gifts over a very low dollar value and in case of doubt clear with legal/linemanager/accountant, transparency is key here, just a failure to disclose can turn an otherwise innocent thing into a potential bribe.
It's really not all that hard to keep your nose clean.
Walmart procurement has very strict rules where if they accept any incentives i.e. dinner, drinks, vacation, entertainment, etc are grounds for immediate termination.
I can't imagine any BoD would be cool with an executive responsible for signing deals getting essentially paid for signing those deals given what a clear conflict of interest that would be. And the BoD itself would probably be found to be failing their fiduciary responsibility under those circumstances.
I could imagine some slippier cases. A lot of successful startup executives have a bunch of money and invest it in startups. They (of course) pick ones that they think will do a good job in their space. It isn't that crazy to imagine them recommending using a startup they've invested in, and it's also possible to imagine them making a convincing case to a board that the startup is the best option available.
They still can profit massively from that, though, so it's still kind of messy territory.
That's not a grey area at all. If you are a director and you are pushing your board to drive business to a company you have a significant stake in, you MUST disclose that.
A grey area would be more like whether you should offer to leave the meeting while they discuss the proposal.
Yep, I agree. I was responding to the comment from ghaff that they "can't imagine any BoD would be cool" with a deal getting signed in a clear conflict of interest. I can imagine a board going along with it.
Of course, the conflict definitely needs to be disclosed!
Oh I agree. I was really talking about the kickback case as in here. There are other types of conflicts which happen and may be fine so long as the person in question isn't making the decision on their own and, as you say, has disclosed it.
I don't really disagree. Just because there's a potential conflict of interest doesn't mean there's corruption. And the further you get from large companies with internal audit teams and established procurement practices the fewer controls there are the murkier things can get.
Per the peer comment, if you don't disclose the conflict, and let the BoD decide what to do in light of that conflict, then you're into the realm of looking like you're hiding something.
It's the principal/agent problem. If the director is an agent of the shareholders then conflict of interest IS corruption unless you have some sort of safeguard to stop it affecting your behaviour.
What are the disclosure laws if an exec has a stake in a public or private company, and there is an actual or potential vendor relationship with that company?
Are there even laws for this, or is it more about company policies set by the BoD?
Usually disclose and recuse. You’re conflicted, so you shouldn’t make the decision or be involved in making the decision, but if it’s the best vendor for the company the company isn’t prohibited from using their services. Most large companies will have a policy for declaring and managing that type of conflict.
In addition to generic criminal laws against fraud and bribery there’s also honest services fraud (which I’ve mentioned elsewhere in this thread) which boils down to depriving someone to whom you owe a duty of the right to your honest services.
But the article doesn't say that he was taking "kickbacks", but that he was hired as a "consultant". Is that illegal?
"We'd like to do business with Netflix, hmmm whom should we hire as a consultant, maybe someone at Netflix, surely knows a lot about the kinds of companies that do business with Netflix."
Edit: I agree it's immoral just like how FDA leaders approving drugs then getting hired by the drug industry is immoral, but IIRC the problem is that that's just circumstantial evidence... it's hard to prove that what they did was illegal.
His jobs at Netflix is to get the best deal for Netflix, not to get the deal that nets him the most money from the vendor. The vendor paying him is increasing the costs to the vendor, therefore presumably increasing the costs they will pass on to Netflix.
The problem there is the money comes first. In the case of former regulators, by the time they are hired by the drug company they're no longer a regulator. It's not clear the drug company has anything to gain from hiring them. Yes it's grubby, but it's hard to prove anything. If the money comes up front, that's easy to prove.
If they're hiring as a consultant the procurement officer at Netflix that decides to grant them the contract (and Netflix doesn't know about/approve this arrangement), that seems _very_ transparently to be a kickback to me.
> it's hard to prove that what they did was illegal.
Sure, it's a lot of work. That's why we spend money on prosecutors. But they literally _just_ proved that in a way that convinced 12 people "beyond a reasonable doubt", so it's certainly not impossible.
It just seems weird to be asking: "is the described scheme illegal?" in an article describing a conviction for the described behavior, unless you're questioning the validity of the judicial process in this case (which itself is a fine thing to do)
The words you are looking for are 'conflict of interest'. If you are acting on behalf of a corporation and you have such a conflict of interest you are required to disclose it.
Maybe, instead of hiring a single person, you should hire Netflix itself. Netflix itself surely knows a lot about the kinds of companies that do business with Netflix.
Let Netflix worry about compensating the people who are doing the work.
Eh. "you're defrauding your employer." - that gets into an opinion. There isn't a law for that. Like the FEDS tend to do -- they got real creative with "mail fraud" and "wire fraud". I was surprised to not see "racketeering" for the FEDS bs trifecta. Their money laundering charge I would say is 100% bs: creating an LLC isn't laundering -- but who cares! the jury wont understand anything.
Its definitely against standard contractual terms (i.e conflicts of interest terms) and here they would all probably come under fraud in the inducement; i.e Kail induced Netflix to enter into contractual terms based on misrepresentations of what Netflix was gaining when it signed the contract (leaving out his personal gain which absolutely would be a material benefit that netflix itself could have gained had it known those terms existed).
"There was just one catch to landing that deal: It had to hire the streaming company’s vice president of IT operations, Michael Kail, as a consultant and an advisor, and pay him with fees and stock options."
It seems very unclear to me. I don't understand why that's illegal or wrong. Someone was hired and paid using fees and stock options? Seems fine to me. I don't understand corporate structure enough to understand why that's problematic...
“leveraged his status as a leader of the IT community in Silicon Valley to subvert the trust of Netflix and others to profit at their expense”
How did he leverage it in a way that was illegal? I'm not questioning that he did it, I literally don't understand. The diversity of responses here highlights what's confusing. People are saying hiring him at all was the problem? Other responses say that hiring him without Netflix knowing is the problem? It's hard for me to understand the specific transgression.
"I will only sign this contract on behalf of my company if you give money to me personally" is not in any way ambiguous in terms of morality.
If you don't understand why that's wrong, I strongly suggest maybe taking a few philosophy or ethics classes.
In short: He was supposed to be acting on behalf of his employer - that's what being an exec means. He instead used the resources of his employer (not his to use, except on behalf of the employer) to dangle a lucrative deal in front of a much smaller company - which, at this point, is akin to exercising quite a bit of force, because these deals can be make-or-break especially for small places.
He then made that deal contingent on enriching himself personally.
That's about as crooked as you can get without inflicting physical harm.
I'd add that this is an example of why many companies have those eye-rolling annual ethics mini-video classes that they make people take. Because I guess it sometimes does need to be said.
I don't think anybody is confused about the morality of "I will only sign this contract on behalf of my company if you give money to me personally". The problem is that this is never mentioned in the article. In fact at no point does the article say that the agreement was with the VP and not okayed by the decision makers at Netflix. It seems pretty clear to me why people are confused.
"Michael Kail will be sentenced Oct. 19 in San Jose for taking stock, cash and gifts from tech firms trying to do business with the streaming service."
If nothing else, the "gifts" part makes it clear its personal.
- I work in purchasing approval position for company A
- Company B would like to do business with Company A
- If I say "B, I can get you deal with my employer A, but you need to give me extra money" - this is against every business conduct guideline / contract / terms of employment in every company I worked for, and against law in many jurisdictions.
In case that somehow slipped / you missed it: person was SIMULTANEOUSLY employed by A, while being given money by B to approve things on behalf of A. That's simple kickback / bribery.
It wasn't a morally-dubious but frequently-legal case of "revolving door" where a person does this sequentially. They were approving deals as exec for netflix, and earning money to approve those deals by small companies, at the same time.
I think this is less the fault of the reporter and more an audience that is unfamiliar with the notion of a kickback scheme and why it’s illegal. Might I recommend reading up on what a kickback is?
He was working at Netflix. He ensured that the deals between Netflix and the startups would be greenlit, as long as the startups handed him some cash/stock under the table. It’s classic bribery. The article is a bit confusing by only mentioning the implementation of the bribe (“consulting”), but it’s just bribery.
It's a kickback because there's a clear conflict of interest just as if he were given a week on a tropical island as a quid pro quo even if that quid pro quo only took place in a nudge-nudge wink-week sort of way (which it certainly didn't in this case).
How is it not crystal clear to you what the conflict of interest is here?
When someone hires you to do a job, they hire you to make decisions that are in the best interest of the company. If you are getting paid bribes from suppliers when you buy their services for the company, how can you be trusted to be objective?
I'm curious, what geography do you work in? European country, India, China, USA, Canada? My curiosity is because this seems self evident to me, but it may be cultural thing, and I'm curious to know your cultural background.
Netflix (or, more specifically, whoever they talked to at Netflix) said "Sure, we will buy your product, but you have to pay Michael Kail."
Nine other companies were told the same thing by Netflix.
The question here is whether Netflix paid Netskope because that was genuinely the right thing for Netflix, or whether Netflix paid Netskope because Michael Kail, who had the authority to make purchases using Netflix's money, personally benefited from the deal. It's a conflict of interest.
Maybe a simpler example, and possibly easier to understand: Suppose Michael Kail, in the evenings after he got home from Netflix, started a company called Kailcorp that provided IT services. Then when he got back to the office, he said, "We should sign a deal with Kailcorp and pay them lots of money." Is it clear why this would be illegal / why he would be profiting at Netflix's expense? (Genuine question - maybe it's not.)
If so, then the only distinction here is that Kail didn't start the company himself, he subverted ten other companies (with real products) into the same thing.
It is pretty standard practice to submit any consulting/advisory contracts to HR at your full time employer before you sign the deal. They can verify there is no conflict of interest. You also generally need to declare these relationships when you start a new job. This article is not clear if these procedures were followed. I'm guessing that these deals were secretive, hence the crime.
There was just one catch to landing that deal: It (the startup hoping to do business with Netflix) had to hire the streaming company’s vice president of IT operations, Michael Kail, as a consultant and an advisor, and pay him with fees and stock options.
That's "pay-to-play"; you don't hire me as an "advisor", you don't get the Netflix contract.
When it's a commonly committed crime but only certain people get prosecuted, it reaks of high-level corruption. Sounds like this exec stepped on the wrong toes.
No, it's just that prosecuting such cases takes a lot of time and effort. Besides that this guy seems to be hell bent on making things worse for himself, he should have probably folded earlier on rather than to keep pushing. Not that I mind.
And 'commonly' doesn't translate into 'every exec does it', but it does happen, in my experience about 2 to 3 percent of the businesses out there have such a thing going on. That's only in my backyard, it is very well possible that different localities or professions would have a multiple or a fraction of that, and it is possible that we're not looking hard enough and that the numbers are much higher.
There's a huge difference between angel investors taking a share of the company and acting as an advisor and what happened here.
When you talk to these angel investors, do they offer you contracts for your new company at their existing companies? Like if you sell product X as part of your new company, are they saying they'll make sure the companies they're involved with buy product X if you give them shares of the company and cash kickbacks? If not then your comparison doesn't hold.
I think what you're describing is an investor in two companies setting up deals between those companies. There is nothing wrong with that because the investor is in the role of a part owner in both cases. They're not an employee of either company. But I'm guessing, it's not clear to me exactly what kinds of arrangements you're referring to.
Hold up -- Angel investors give you money in exchange for equity. That's usually how it works. Are you saying that instead of giving money, these angel "investors" are executives a major companies who are trading customer deals at the company they work for in exchange for personal equity? Or are you just saying that they invest their money and provide connections in addition to their money?
In the primary situation, they are benefiting by getting stock in exchange for giving their company's business to the startup (illegal kickback). In the second situation, they're referring companies they have a personal financial interest in for business to enhance the value of their investment (conflict of interest).
There is also the role of the VCs who facilitate much of this. They use VPs in big companies to offload crappy purpose built startups for huge profits then get their friends to offer the VP sweetheart deals and or future employment. AFAIK the arms-length / chinese walls keep it legal in appearance. Basically any big tech company with lots of money and terrible management is prone to this.
Acquisitions. Say a big company lacks in category, an exec from that company can let a VC know that they would like to buy a company in that category and are willing to pay a certain amount. The VC then goes about bringing the company into existence. Do a song and dance about how it's a real company. Buy a bunch of positive press. Cram it full of new grads. Then before it can collapse under its own weight offload it.
They only go to jail if the kickbacks are obvious. Most of the time it's promises of future employment or employment of federal worker's kids, spouses, family members, or the retaining of a firm they hold an interest in. There's so many ways around the direct illegal approaches.
It's even more straightforwardly illegal with government clients, where there is a presumption that the employer (the people) can't possibly be agreeing to a sweetener for the employee.
I'm not saying people don't get away with it but the US government is actually stricter than many/most companies about gifts/perks from organizations that the government is doing business with.
1. It's incredibly illegal for an agent of the government to do this, and people get fired and prosecuted for this.
2. It is possible to couch this in a revolving-door sort of arrangement - once the agent stops working for the government, they get a cushy job at the vendor. In theory, the vendor has no reason to hold up their end of the bargain, once the person they are bribing is out of office. In practice, that person can then leverage their government connections to smooth out future business deals... Which in itself is not illegal, and is convenient cover for the job.
All the time. Michael Kratsios, former Federal CTO, and prior close associate of Peter Thiel gives a contract to a Thiel portfolio company (Scale) for $92M while he's Federal CTO and also undersecretary of the DoD with a fairly opaque budget and procurement (something called a "broad agency announcement"). He retires as Federal CTO and surprise, he's now an executive at Scale. This is all in the open not even subject to innuendo or implication.
In the U.S. government. It happens some, but it totally illegal. It’s hard to get fired working for the U.S. government and this is one of the few ways you can get fired.
It's just as illegal there if you're a government employee. If you're an elected official, general principle still applies but rules are a bit different.
Yes, but there are controls in place to limit it, many large corps have similar controls the problems usually arise when you get unicorns which grow faster than they can build processes to account for stuff like this. I’m sure now Netflix will work on the issue, possibly this case started bec they began working on preventing stuff like it.
This does remind me of Deloitte winning a contract for building a website using technology only Deloitte could use [1]. Surprise, surprise: the website sucked.
there's a long road from "I'll buy from you but don't forget that I retire in 5 years' time, I hope there's a cushy job waiting for me" to "I'll buy from you, here's my bank account, make me a consultant wink wink"
Sole source contracts happen all of the time. Where it becomes murky is if the contracting officer ends up retiring his government job and takes a highly paid job with vendor.
Small criticism but your article wasn't direct about where this exec crossed the line from corporate nepotism to criminal fraud and money-laundering.
The press release from the DoJ details how he structured his kickbacks without netflix's knowledge and set up a shell company to do so -- even lying directly to netflix leadership:
"When an inquiry from the Netflix CEO ensued, Kail falsely denied that he was formally working with Platfora."
Criticisms aside, thank you for helping to shine a light on corporate malfeasance.
I've definitely seen a fair amount of brazen stuff like this over several decades in IT. One path that's pretty interesting to follow is announcements about new board members at software providers.
Often, you can see their prior (or even current) job, and press releases about them selecting that software some short(ish) time before.
> Often, you can see their prior (or even current) job, and press releases about them selecting that software some short(ish) time before.
That may or may not be a problem, depending on policies and how it was handled.
Generally, you need to disclose any conflicts of interest. Then, its up to your company on what will be done next. You are probably going be removed from the actual decision-making process (regardless if you are ultimately going to be the one closing the deal - after your peers approved the decision).
If everything was disclosed and there was no kickbacks, it might have been ok (although the press release may overstate the role they played in the selection).
If not, you may be in hot water with your company and even the justice system.
If you are aware of such stories I'd caution against sharing the details with people online without first ascertaining your own legal position before passing this information on.
One item seems to have caused a lot of confusion in the comments so I will take a stab at clarifying:
It is perfectly legal for Netflix to ask for options or any other consideration in exchange for the contract. Companies do this sort of thing frequently. They know that merely signing a large contract with a large firm will increase the value of the contractor.
It is not legal for someone working for Netflix to ask for shares in their own personal capacity as individuals. That is what runs afoul of the law.
> It is not legal for someone working for Netflix to ask for shares in their own personal capacity as individuals
It can be, I think. If Netflix were properly informed of and signed off on the arrangement, it would just be an elaborate compensation mechanism. It would be a lot of paperwork. And they wouldn't approve that.
What if you are a majority shareholder for a company? Say mark Zuckerberg asking for shares in companies providing service to Facebook? Is that legal? I'm guessing if it's part of the deal then it's legal.
Was it that the person set up their own Corp to “manage” the relationship, and then took a fee/commission from the contractor in order to gain access to Netflix? That sounds more plausible, and akin to what goes on in the corporate lobbying world where “consultants” functionally sell access to politicians or other VIPs - difference being if you work for the person you’re selling access to it’s illegal (sometimes).
I am confused. Why is the company allowed to do this and not any employee. I mean, isn't this insider trading on the company's part? They could in theory take options, then after the value of the firm increases, they could sell them and pay the money to their execs - isn't this strategy just an elaborate insider trading scheme?
The companies being asked to include options/warranty/equity usually aren't public, so this wouldn't be insider trading on that basis. Overall, it's better to think of it as Big Co is making an investment in Little Co that it thinks will appreciate as a result of Big Co's business. The cost of that investment is included in the price of whatever Little Co is selling, ergo, there's a large implied discount because Big Co's business is so valuable.
Insider trading is illegal because it is theft from the company, not because it is unfair. Hedge funds spend a fortune gaining an advantage that is material and non-public. The key is that they didn't steal it from the company.
So if the buying company forced an employee to give them options without the selling companies consent, that would be insider trading. But if the deal is company to company, then there shouldn't be an issue.
To quote Matt Levine: This is definitely not legal advice.
It reminds me of Matt Levine's insider trading, saying(? I don't think it's one of the laws).
"It's not about fairness, it's about theft"
Which was also applicable to that college admissions thing. The problem is not that people were buying their way into schools. It's that they were paying someone other than the school to do so.
The situation as a whole feels a bit dodgy, but the core legal problem is the guy took something that really belonged to Netflix.
> There was just one catch to landing that deal: It had to hire the streaming company’s vice president of IT operations, Michael Kail, as a consultant and an advisor, and pay him with fees and stock options.
I completely get how a startup would take this deal, however gross it is, but what I don't understand is how the exec got away with it from Netflix's side. And the fact this wasn't just 1 but 8 other startups he did this to/with as well. I can't tell from the article if Netflix was aware or unaware of this "Agreement" and if they weren't aware... how? Did no one ever mention "Oh yeah, we hired Kail like you asked/required us to"?
This was a vendor/customer relationship. Once that's set up, the only communication would be via accounts payable and technical staff, and probably wasn't frequent or deep. It's perfectly possible that nobody ever mentioned it.
The companies paying Kail know enough to never mention this to anyone else at Netflix. They know what they are doing. And this is why it is common in industry--it's commonly undetectable, and, sadly, that alone will influence many folks' moral compass heading.
One point that was mentioned that was interesting was...
> "When an inquiry from the Netflix CEO ensued, Kail falsely denied that he was formally working with Platfora."
This data point suggests that Kail was pushing underwhelming or otherwise odd-shaped vendor products frequently and/or persistently enough that people at Netflix suspected he was a shill for vendors. The fact that Reed Hastings is presumably calling Kail out for this means the bad smells were pretty powerful. Kail probably does not have final boss-level skills at reading the room.
HR and rules are for the little people. VPs can do pretty much whatever they want for a LOOOONG time at large tech companies before any consequence catches up with them.
That doesn't make anything I said less valid. You just experienced the losers of the internal game of thrones, the question is "fired why?" and "how long did it take?"
Big pharma CTO mandated the use of a certain software while everyone knew they were coming from the company and sits on their board. I'm certain the kickbacks are still happening but in different forms: job, advisory role ...so on and so forth.
The journalist got it wrong. The startups weren't victims. They were clearly complicit in the crime. They could have very easily reported the bribery scheme to the Netflix board and gotten him fired, but they took the contract instead. The DOJ claimed that the people at Netflix who used the services assumed they were evaluating the services and not paying for them.
There are many better articles about this story from reputable news sites. The more interesting story from this article is what is Business of Business and Thinknum? Is it another Ozy?
The prosecutors were making a case against Kail. If they make it seem like the startups were complicit or even proposed it, that would hurt their case against Kail.
These arrangements were obviously illegal, and it beggars belief to suggest that so many startups were unaware of that.
If complicity weakens the case against Kail, why are you suggesting the startups did something illegal? You can't have it both ways. The complicity is either a crime alongside Kail's crime (and completely independent), or it isn't.
They both did something illegal. Did something I say make you believe I think otherwise?
The prosecutors chose to go after Kail because he is easier to nail. They get to charge him separately for the fraud he committed with each startup, so it's more likely that at least one will stick. The startups are required to help the DOJ build a case and get a warning that they won't get off so easily if they're caught again. Since they weren't charged this time, these cases are fair game to litigate in the future together with any new charges.
What these startups did is obviously illegal, and they and the DOJ are obviously well aware.
Believing that a corp you do business with does things illegally doesn't relieve you from some duty to report it (especially if you become involved). Very likely, providing evidence relieved them from being prosecuted.
This is so common it’s hard not to do. Not doing it definitely stunted my startup but it’s a lifestyle company and I don’t mind building slower.
Edit: I should add that while I was working at a FAANG (before doing a startup) the team I was on would constantly be blocked from building X only for a VP to buy a company that said they did X but didn’t. Because we still needed X we would buy a new company each year. We could tell the VP was setting them up to sell to us. We would joke about leaving to do a start up for the VP to not only make more money but so we could finally have a working X in the company.
Edit2: With my current start-up it's not uncommon that we are instructed to sell to a customer via a nominated 3rd party. We don't know for sure, but we strongly suspect, that the 3rd party markup is how the executives are skimming off extra money. At least it keeps us out of it.
M&A stupidity is not the same as fraud though. M&A is hard. It's not unreasonable for execs to tell the team not to do X because they're buying it, and then to screw it up.
It's also normal for companies to want to buy via a dealer because they don't want to deal with your little startups legal issues, compliance, regulatory, billing. They just want to deal with small tier of vendors.
In fact, that's kind of a startup idea: AppStore for SaaS because most corps don't want to deal with your little vendor BS. Everyone would be happy to pay an extra 10% just to have everything easy and clear.
I'm privy to more details than I am giving out. I've been in SV for over 15 years and I have seen a lot in that time. I'm aware of what is normal. There is normal purchasing intermediaries and then there are purpose built bribe vehicles. We're not talking 10% it's more like 100% to 1000%.
Yes, I'm not denying it's common, just that it doesn't have to be that.
That so many M&A deals are so blatantly shady it completely shocks me that CEOs/Boards/Shareholders aren't more vigilant about it.
In your view, are the the most respected firms more or less immune from that, (maybe because they do really well and don't need to), or are they the worst offenders? Or is there a differentiation for simple favours for favours i.e. VC ABC wants to find a home for a project and it actually does make some sense that company XYZ would want to buy it, the deal is done and that's that. Maybe the M&A lead at XYZ later does get a nice job somewhere, but is it really that sweet of a deal to the point wherein it constitutes fraud? Is the M&A guy really getting a simple consulting job that pays 'many millions'? Or is it in XYZ's best interest to have a good relationship with the VC firm and to buy the semi crap companies so they get access to the good one's as well? And what percentage of M&A deals would you say follow this angle?
I don't know of any firm immune to it and I've worked with a couple of the most prestigious and hear about many others. I've long given up wishing people were better. And unfortunately I expect it to get much worse. As the financial crushing of the middle class increases I would expect much more corruption as being middle class / poor becomes more humiliating. I expect this to give way to mobsterism that would make current levels of capitalist fraud look like paytime.
To clarify on Edit #2, are you saying that you're selling to the customer through a reseller, and you suspect that the reseller is actually an executive at the company who is skimming margin by purchasing from you at a list price and marking it up to the end customer?
I was Applied Research, feature X was for internal use. The companies were supposed to be tallent and tech acquisition, they claimed to have feature X but were faking it. The 'talent' was fresh out of university people crammed in last minute to bulk up numbers. The VCs funding the startups had a pre-existing relationship with the VP who joined the company in a similar earlier acquisition. One of the VCs approached me about doing a purpose built start-up of my own, the purchasing company and sale amount was already determined, quick easy money. It was clear making working technology was orthogonal to the real objective of extracting huge amounts of money large tech companies. I only cared about the tech so it wasn't of interest to me. Even 10 years later feature X doesn't exist even though it's entirely tractable. It's possible that it may never get built which would be a shame.
It doesn't bother me anymore. It's just people being people. I'm enjoying the series The Expanse lately because of the way it integrates realpolitik into the storyline.
I'm actually asking about this part: "With my current start-up it's not uncommon that we are instructed to sell to a customer via a nominated 3rd party. We don't know for sure, but we strongly suspect, that the 3rd party markup is how the executives are skimming off extra money. At least it keeps us out of it. "
This implies something other than the crazy rigged acquisition scenario you describe above (which is also absolutely bonkers).
Sorry, I misread as Edit #1. We know in certain countries in certain areas nothing gets done without some kind of bribe / kickbacks so we assume some of finders fee we pay for leads goes back to the customers exec. Sometimes we get asked to increase prices to increase their margins. I.e. make a Pro version for 10x the cost for them to buy. Sometimes the customers complain to us how expensive it is and then we tell them how much it should be costing them which is a fifth of the price. Usually the exec is untouchable though so it doesn't change anything. Funnily enough, only time we've been directly asked for graft was from a Swiss customer and we offered a junket which they didn't like, I guess they wanted more.
>In his own memorandum to the court, requesting that he be sentenced to a year of house arrest, Kail, 49, described himself as a “global power leader, top dev ops influencer and a thought leader.”
People like him are so ego-centric, so used to getting their way and never being told anything they do is wrong. That's how they end up in situations like this. They don't think they are doing anything wrong, they don't think they are taking anything that isn't theirs, they think the world owes it to them.
> Kail faces a maximum sentence of twenty years in prison and a fine of $250,000, or twice his gross gain or twice the gross loss to Netflix, whichever is greater, for each count of a wire or mail fraud conviction, and ten years in prison and a fine of $250,000 for each count of a money laundering conviction.
As well as
> Kail was indicted May 1, 2018, of nineteen counts of wire fraud, three counts of mail fraud, and seven counts of money laundering
> The jury returned a verdict of guilty on 28 of the 29 counts.
At max sentencing that would be over 400 years of prison for just the fraud. I have no idea how you go from that to asking for 1 year of house arrest
He "faces" a maximum 20 years, but that number doesn't mean anything; it's just the maximum possible sentence that would apply if every count was sentenced at the highest possible level and served consecutively. The prosecution is asking for something like 6 years.
Well, you gotta admit he does a lot of work. I'm too wiped after my 8-5 to even work on fun stuff, so I'm kinda impressed how people find the time to do all this.
Ridiculously pompous thing to say once the decision to convict has been made.
Even in TV episodes of Law & Order, the furthest defense attorneys go is to ask to serve house arrest before trial because their client is "a pillar of the community" aka very wealthy.
First off, he didn't describe himself that way; his lawyer did. That's pretty standard stuff in a sentencing memorandum. Secondly, have you read the entire 53 page memorandum? I recommend everyone do so before rushing to judgement.
https://www.courtlistener.com/docket/6769891/269/united-stat...
So this guy traded his reputation and possibly his freedom for some small kickbacks? When his other option was stay at Netflix as a VP? When RSUs were around $9 (current stock price: $635)?
I wonder how much money he threw away assuming he had stayed 5-6 years instead. $5m? $10m?
You're exactly right. He would have made a ton more money by just staying and working at Netflix and collecting stock awards at his level. However, these kinds of shady scummy people can never do this type of long-term thinking. They're always out there to suck a company dry in the short term and then it's onto the next one. You've probably seen this behavior before in the sales department.
No, you misunderstand. If the stock and advisory role were given to Netflix as part of the deal, it would have been fine. That's not what happened here.
The benefits went to the executive directly. He asked for personal bribes to sign contracts on behalf of Netflix. He enriched himself at the expense of his employer. This is illegal.
Is this the person Netflix refers to in its infamous culture memo?
"On rare occasions, freedom is abused. We had one senior employee who organized kickbacks on IT contracts for example. But those are the exceptions, and we avoid over-correcting. Just because a few people abuse freedom doesn’t mean that our employees are not worthy of great trust."
This article is a bit old (back in May), I'm curious what the latest is.
One thing I find extremely strange is that, I looked this guy up online, and his Twitter feed is just so, well, "tech mundane". He seems to tweet nearly daily, e.g. yesterday he tweeted "Love the new Macbook Pro features/options, but to armchair #cloud, I'd limit the local storage option and improve the performance/availablity/resiliency of #iCloud" (which to be honest seems like a rather dumb tweet to me but that's besides the point).
I mean, I don't expect the dude to go into hiding or anything, and to each their own, but if I were facing significant prison time, and I knew I was a pretty big story in the tech world because I was guilty of serious corruption, the last thing I would be doing is making random tech tweets.
I would assume you're not the type to post buzzword filled nonsense in the first place. I often think that the people who fill my LinkedIn with posts like that are generally a little detached from reality.
This is very common in many non-FAANG companies. The way these guys do it is to set up a third party staffing company, say X, owned by relatives and friends, then buy services (usually contractors) through this third party company. Usually, large companies have some vendor management tool. Here, the hiring manager picks candidates that come from X.
When I was working at AT&T in New Jersey, my manager always hired contractors from one third party company, which is owned by the wives of his brother (then another ATT employee) and other ATT employee. Eventually, many managers colluded with this particular third party company so much so that other third party staffing companies couldn't place any people.
So, these staffing companies complained to the Ethics department. ATT Legal started investigation, and fired my manager, his brother (another employee), another guy. They couldn't do much further due to these reasons.
(a) the staffing company is owned by the wives of the two employees
(b) the staffing company is NOT the direct vendor of ATT. The primary vendor is another entity, who takes $1 per hour per candidate.
“he stole the opportunity to work with an industry pioneer from honest, hardworking, Silicon Valley companies.”
…I had to double-check this was coming from justice.gov, not a satire site or PR blog. That isn’t to say that there aren’t honest and/or hardworking SV companies, or that they weren’t wronged. It’s just never a phase I’ve seen before.
I don't know Chamath, but his presence online makes me think he is shady af. His whole TSLA "selling my shares while telling everyone else not to sell" scheme alone gets him a black mark in my book. Then all the SPAC stuff he did makes it even more unwholesome.
He talks about it in interviews. While he was at Facebook, he started an investment fund outside of work. Now I do not want to get sued for mischaracterizing what he did. You will have to listen to those interviews yourself.
I am aware of the investment fund he started both while he was at Facebook and after it. Neither of them were done in secret and in fact Facebook was an investor in it. Furthermore the companies that the funds invested in had no business dealings with Facebook. You can see the list of companies it invested in as it's public info.
I have heard of many startups bringing early customers onto their advisory board - it seems like a relatively common practice. I am curious what makes this fraud? The timing? Or the fact that the Netflix VP did not disclose this to His employer?
Kali didn't go on to the advisory board on behalf of Netflix - that would be perfectly rational.
Instead, the startup had to do 2 deals: One with Kali directly for "advice", and then a second with Netflix that Kali, in his capacity as a VP there, would sign.
Besides being unethical; this is now a clear conflict of interest. Netflix (and shareholders of Netflix by extension) may have signed up for a crappy product from the startup only because startup had a side deal with Kali.
I'm not knowledgeable at all in this matter but the issues here are clear at least to me. Let's forget the conflict of interests he would face when working for both companies. He was charged with bribery, the issue here is that hiring him as a paid consultant was put as a condition for the contract approval. A deal which would benefit exclusively him and not his employer. Quite literally the companies were paying to receive lucrative contracts.
I do not understand this. I mean, politicians do this all the time and do not go to jail (Spain).
I do not mean people offer themselves for briving.
But did anyone ever think what would happen if politicians did not have much power to regulate? Companies would not be able to lobby.
That means there would not be nearly as much incentive to brive as there is today.
Once a regulator is in the middle, the incentive for corruption is there.
I do not think people use Netflix because of the corrupt business of this guy. They use it because it is entertaining or find it useful. The same way people will keep studying Picasso (I hate his art, but anyways) because they consider it art, and he was a misogynist.
But his art is his art, the same way Netflix is entertaining for some people.
There is less political corruption in the US than people think. Everything is so scrutinized these days, especially compared to the rest of the world. White House Chief of Staff John H. Sununu's travel expenses scandal was a big deal at the time, and this was in 1992 (before social media) and the amount of $ was pretty small. I think insider trading is possible concern though, although that too has gotten considerable scrutiny in the media.
Sununu case was more about politics than corruption per se. He was living large on government expense account, with some things coming straight like "obnoxious rich guy flaunting his wealth" caricatures. He also was never prosecuted, only fired - because he became a political liability.
So I think claim that "there is less political corruption in the US than people think" is going way too far. Most of the corruption is never even uncovered (just check how many government officials and congressmen became rich after they started selflessly serving the people, and how wondrously successful many of them are e.g. in stock trading), and the cases that are uncovered are rarely punished with anything but dismissal and maybe light monetary slap on the wrist. One must be exceptionally unlucky - which usually has more to do with political situation than anything - to land in jail for corruption, and unfortunately that's not because there's no corruption, but seems to be rather because there's so much of it than nobody wants to rock the boat too much. You'll need the funds for the next election campaign, won't you?
> although that too has gotten considerable scrutiny in the media.
Politicians should not have power to rule. There are 1 million ways to benefit indirectly from favors to lobbies, do not be innocent. Sometimes demonstrating corruption is really difficult.
You are worried about business that give people improvements or products every day, but you are not worried about regulators that twist stuff to get benefits without producing anything for people and that tax the people that produce?
I always found this view strange: someone that has nothing to do with benefiting others telling that they are good because they f*ck up the people that benefit societies. Yes, they do. Yes, not because they are good, maybe because there is mutual interest. No problem.
Do not tell me about corporations that have monopolies or a lot of power. All those come from absurd regulations. In the absence of them, things would be better. And more fair.
Maybe it is you who wants politicians to regulate.
I want them disappeared as much as possible and that they work giving service to others, not f*cking the very pillars of the benefactors of our society, which are business that produce something useful, by taxing them and imposing obligation after obligation, and, when they are friends, giving them competitive advantage via regulations with excuses to protect this or that, absurd regulations that only have the incentive to exchange favors, making effectively non-viable ideas and business that could succeed and improve all people's lives and remove government handouts.
The people that should govern should be people specialized in the tasks they do, and those tasks vary, in my ideal world, from nothing to security + minimal laws (do not kill, do not harm).
All the rest is giving them reasons to accumulate power that only is misused to polarize people and to give advantages to friends.
I doubt that. In the contracting world, I've repeatedly seen multi-million dollar contracts given to essentially shell corporations. Sure, it's nothing as overt as this case, and technically legal, but there is almost always a vested interest on the government side to go with one company or another. That interest usually has to do with the security of their government position. The ethical difference is a matter of degree.
Yet they still take unnecessary resources through taxes. So it will not be me who will claim for their existence. The number of politicians should be minimized and with low ideology-propagating behaviors.
This is not what I see at all. In fact, the more I researched about USA lately, the more surprised I was about all the polarization. Even more, and this one disappointed me even more: the USA I see today, the discourses I see, the principles I see being applied is like destroying the pillars that founded that nation.
I am not american, but I really, really, I mean, really admire the foundations on which that country was founded. You are destroying them IMHO.
For some (non-casual) reason USA has been prosperous, the cradle of the modern civilization (with all its downsides, I know many of them, yes) and that reason was the mindset of having opportunities and chances to improve your lives without the nose of all those bureaucrats getting into your lives.
The media you mention, the control, the politicians, the regulations. Each of those is a door to corruption. De-regulation (or minimal regulation, if that cannot exist) is by its own right the least corrupt of the systems: it does not give chances for favors and crony capitalism.
It's about knowledge, and depends on how it was presented to the companies. If the originator of the bribe was Kail, and if it was not presented as a quid-pro-quo, the companies may not have known better and would have assumed that he is disclosing the relationship appropriately to his company. The startups would have to disclose it within their own company, but they weren't playing both sides and were not effectively 'stealing' from their own company or from Netflix; Kail, on the other hand, was taking money directly from the pile Netflix was owed, and not disclosing it.
I just assumed this is how business was done at that level. For example in the health insurance industry "Producers" receive all shorts of benefits from carriers to push their plans onto clients.
Because of greed. For most humans, what you have is never enough.
A few years ago, Netflix had a reputation of paying very well to lower level senior employees (think L5 and L6), but not as competitively for higher level employees (L7+).
Because even the salary/bonus of a VP at Netflix is never really enough for some folks. And, as sibling comment eludes to, there's always one more ladder rung above you. No, of course you don't get it. Yes, of course you'd live just fine on that salary with tons of money left over. So would I...until I become a VP at Netflix.
But it's the bigger question of whether a person of such morals has VP material written all over them, or if the position causes one's formerly-solid morals to slip a bit (or a lot).
Someone else mentioned politics, but I think it's really apt to draw some lines since these are federal crimes.
Politicians and government agents will work toward getting legislation or contracts through and then "retire" to work privately for the same companies. This is probably not legal (i.e. bribery), but it's basically impossible to prove the crime. On a similar note, politicians can ask for contributions as part of lobbying efforts that go directly to their campaigns. That might not go right into their pocket (which somehow make it legal), but it certainly makes continuing their career easier.
I don't think either is particularly morally just, but the similarities are pretty stark. The government (and public) end up losing and becoming the victim just like Netflix was the victim of these actions.
> Kail then urged his Netflix employees to find a use for the product, despite their objections and preference for a competing product that Netflix was already paying for.
There should be a special aggravating attachment for such abuse of employees :)
We met him at tech conference in SV almost a decade ago.
He passed on our info of saas pass to a "competitor" onelogin (which got acquired recently). Turns out they were already using onelogin. No idea if he had shares in onelogin at the time.
Seprately there was a Google Apps (later rebranded to G Suite and now Google Workspace) conference at Fort Mason around 2013 or 2014ish. At that event a Google employee Clay Bavor said they have an internal saying for product rollouts and new features. It was WWMKD. What would Mike Kail do?
This case is particularly interesting because he was convicted by a jury of the somewhat controversial charge of honest services fraud[1] in addition to the more common criminal fraud charges. Jeffrey Skilling (of Enron fame) was convicted under the same law (also among other charges) and successfully appealed to the Supreme Court where his convicted was reversed and his sentence was subsequently reduced. Skilling v. United States[2] and Black v. United States[3] (Conrad Black, the Canadian media mogul) significantly narrowed the scope of the crime. The Court came eversoclose to finding the law unconstitutionally vague but instead limited its applicability to situations where a fiduciary duty exists and there is evidence of bribery or a kickback scheme. Since Skilling the charge has most often been used for holders of political office, like Rod Blagojevich[4] but prosecutors couldn’t even get the charge to stick there. (Trump pardoned both Black and Blagojevich before leaving office.) More recently the charges have been brought against participants in the “Varsity Blues” college admissions scandal.
The Supreme Court definitely left the door open for this law to be ruled unconstitutional so I’m curious whether any of the very wealthy and newly convicted-at-trial defendants will pursue the matter.
Edit: Reading the DOJ press release and the way it’s worded I’m not so sure whether Kail was convicted of honest services fraud. It seems there was one count for which the jury did not return a guilty a verdict and I’d bet it was this one.
Between this and that couple that tried to sell nuclear submarine secrets I feel like people are engaging in criminal activity for so little (relative) gain.
Per the article it seems like his total take was $500k. As VP of IT Operations at Netflix he must've been making at least that much per year. Seems crazy to me to take on that level of risk for not that much upside (if you're a well-paid tech worker).
Lots of comments here about how sentences are harsher for harming corporations and the extremely rich rather than common people. (See this case, Theranos, etc.)
Is it possible that Netflix is _funding_ (or providing substantial material support to) the prosecution of this case, a bit like we've seen in Chevron v Donziger?
See, he should have been an HR executive, instead.
HR execs are expected to pull this stuff as a matter of routine. The other CxOs know that if they prosecute their HR director, the next one will be just the same, or it will be hard to hire one. If your HR director doesn't, why would they be in HR?
I have never been involved with enterprise sales per say. Is this common practice in the industry? I mean, all the products mentioned in the PACER are fairly popular products. Also,what are the other alternative ways a new enterprise tech startup break into the industry.
> if the exec were a corporation, it would have been legal
No. It would not.
"Kail approved contracts to purchase IT products and services from smaller outside vendor companies and authorized their payment." This is a commonly outsourced function. If I hire a company to manage my IT procurement and learn they're getting undisclosed kickbacks, they'd be breaking the same laws Kail did.
It depends on the fine points of if the company is managing procurement or selling 3rd party services to fit a need. If the latter, it is a markup, not a kickback
This was exactly what I was thinking. Shouldn't the real point to this be we need to make this illegal across the board. It doesn't seem like it would have suddenly made more sense if Netflix got the kickback.
Does anyone know how the actual conversation for something like this goes? I just can't imagine having the chutzpah to ask for a bribe. Is there some kind of euphemistic lingo people use to make it clear they want a bribe without saying the words?
First, to demand a bribe only happens when you are in a position of authority to grant what someone wants, and then you offer them some terms to get what they want in an easier way via a side-payment.
So the person being bribed is (usually) not stealing from the person paying the bribe. They are stealing from whoever put them in that position of trust.
So for a company, they are ripping off the shareholders if they choose a vendor not based on how competitive the vendor is, but based on a side payment. The person paying the bribe receives a benefit.
But things get tricky when the bribe-taker is employed by the government and the bribe-payer is also a taxpayer. But still, if you want the ticket to be waived or the construction plan approved, you're happy to pay the bribe.
For example in communist countries healthcare was terrible, but if you could pay a bribe, then your loved one would get better treatment -- for example their beds would be cleaned more regularly. The doctor would pay more attention to them, etc. So the family of the loved ones would be the ones to approach the doctors with incentives, hoping this would be enough to get better treatment.
That's one extreme example. Here in capitalist Miami, we went to the beach and a local hotel had beach chairs and umbrellas that could be rented by the day. It was free for guests of the hotel, but $60 for someone not in the hotel. But we were told that if we paid the guy in cash, for merely $40 we could get the chair and umbrella for the day. Just a small little side-payment to help grease the wheels. We wanted the chair, and could save $20. It was the Hotel that lost out on $60. But long term, what happens is that the Hotel sees there is a long line of people wanting to hand out beach chairs, and the salaries for those adjust down, and perhaps some money needs to change hands with whoever appoints the umbrella dispenser. Then later on, some money might change hands to get to be person who appoints the person that dispenses the umbrellas. So over time, those economic rents dissipate as people realize "hey, I am a gatekeeper to something valuable, I can take a cut for myself." That process continues until there is no surplus value left that anyone is in charge of dispensing. That means small side-payments are made everywhere, from dealing with the police to getting a decent room in a hotel, to a table in a restaurant and eventually to even getting some meat from the butcher.
In such a society, it's basically impossible to be honest, even if you wanted to, because the endemic bribery is a stable equilibrium.
People have no idea how lucky they are to live in a society that values law and order, and how impossible it is to reform the corrupt society once corruption sets in and becomes expected as opposed to newsworthy.
These casuals dismissals and mocking of people who have an innate desire to follow rules and act with integrity is really foolish once you consider people die trying to enter law-abiding societies, as it's really hard for most people to have opportunities in life when everything is dominanted by side-payments or political dealmaking rather than who can provide the best service for the lowest price.
Can someone explain why this is prosecuted as a crime rather than left as a matter for civil lawsuits? The only actual victim here seems to be Netflix, and they can afford to file their own civil suits.
Oh, just run of the mill bribery. It's a classic government bureaucrat trick done at a private firm. Seems unnecessary. Netflix VPs are well compensated, but there is no boundary for greed.
Isn't it widely known that the trick for the government is to do what the defense contractor wants when in office and then get a nice job with the after?
Since nothing is signed, there is no way to actually prove it is bribery.
Exactly. Seeing people here go to bat for a company like Netflix is eye-opening. It is way too easy to consolidate power as a major US corporation today.
He worked for Netflix, he was responsible for finding a vendor, and he basically chose a vendor based on who would pay him, personally, to let them be the vendor for Netflix. He didn't choose based on who would be the best vendor for Netflix, even though that's what Netflix was paying him to do. Netflix presumably would not have wanted him to do this if they had known what he was doing.
So many people are confused about this, but yes the crime is that the exec defrauded Netflix. Netflix is the main victim here. The article just did such a bad job of getting this point across.
The shady-sounding plot was described by the government during a criminal trial earlier this year in San Jose federal court. Kail was found guilty of more than two dozen fraud and money laundering counts. At his sentencing Oct. 19, prosecutors will ask that he get a stiff punishment of seven years in prison as well as be ordered to pay fines, restitution, and forfeit a $3.3 million home in Los Gatos, California.
That seems pretty stiff. goes to show how while collar crimes are not punished more leniently and how being rich does not shield one from justice, hardly.
He hasn't been sentenced yet. That's just what the prosecution is asking for. The defense is asking for house arrest. The judge might still let him off with a slap on the wrist.
Well, I'll be losing sleep hoping Netflix can make it through this tough time. Seriously, is there one person alive who believes the guy should get seven years in prison? Fire him, do your character assassination thing, but prison time? Why are our tax dollars being used to defend a multi-billion dollar corporation? Let Netflix run its own company. Change compensation structure or something to reduce corruption. Douche or not, this is not behavior worthy of jail time.
There are in fact plenty of people who believe that people shouldn’t be able to get away with white collar crime to the tune of millions of dollars with a slap on the wrist, when petty criminals get much worse sentences for more minor trespasses.
Sure, there's Bernie Madoff stuff, and then there's this. Are you comfortable with big corporations and government hegemony muscling employees into compliance? I'm not. The guy should undoubtedly be sued, but it feels wrong to create an equivalency here with violent offenders.
This guy defrauded the company to the tune of millions of dollars. I am perfectly comfortable with big corporations and governments muscling people into compliance, where thing to comply with is “not stealing from the company”.
Imagine you run a business, and your employee just steals one of the company vehicles. Do you think you should have any recourse beyond firing them? I mean, it’s only a few tens of thousands of dollars worth of loss to you, so if you don’t want the government to go after the guy that stole millions from Netflix, why expect the government to help you recover some paltry car? It’s not violent offense after all, just property.
As it happens, fraud is a crime, and government prosecutes crime to deter it. This is perfectly reasonable, and how things have always worked.
I think that's a bit of a false equivalency. The guy incorporated a domestic LLC, which unless he's a total moron, I assume the guy just thought that this is how business is conducted, and the US government would be okay to know about it. I don't believe any small business employee is going to incorporate an "I Steal Trucks LLC."
The American public gets defrauded by corporations daily. I seldom see white knights in the government volunteering to prosecute them on our behalf.
His LLC had nothing to do with how they caught his fraud, or his culpability. I don’t get the point you’re trying to get across with “I Steal Trucks LLC”.
> The American public gets defrauded by corporations daily. I seldom see white knights in the government volunteering to prosecute them on our behalf.
I absolutely believe he should go to prison. If a fine is the only punishment for a crime, then that law only exists for the lower classes. The only way to punish a rich person and deter other rich people from crime is to take away their freedom.
This isn't necessarily true in the general case, let alone in this specific case.
In the general case, some countries calculate fines according to the criminal's income for this very reason.
In this specific case, fines or, in the case of a civil lawsuit, damages in excess of the amount of money the person illegitimately gained would be sufficient.
Fines as a percentage of income do not solve the problem. If I'm a poor person living paycheck to paycheck with nothing left over for savings, a 5% fine would be devastating. If I'm a rich person living off of (debt secured by) my investments, a 5% fine, even if it's hundreds of thousands of dollars, is pocket change compared to my true income and wealth.
A fine is obviously not sufficient given how widespread this practice is. If the fine is double what you gained but you are less than 50% likely to get caught, logic dictates you should commit the crime. Again, prison is the only deterrent that works on the rich.
> If the fine is double what you gained but you are less than 50% likely to get caught, logic dictates you should commit the crime.
It turns out that people’s decisions whether or not to break the law have very little to do with any rational economic calculation about the probability of being caught. Consider how shoplifting is basically not enforced in San Francisco anymore. People just steal things from the store in broad daylight and nobody bothers even trying to stop them. Sure, this does result in a lot of shoplifting, but the question is, why does anyone bother paying when they could just brazenly take their desired merchandise out the door with no risk of ever facing any consequences?
> If I'm a poor person living paycheck to paycheck with nothing left over for savings, a 5% fine would be devastating.
If you’re a poor person living paycheck to paycheck with nothing left over for savings even after committing enough white collar crime to be convicted in a federal court, I am really curious what you did with all the money.
People always think the old saying “an eye for an eye” is brutal and vindictive, but originally it was about proportion. An eye for an eye means that if someone takes your eye, you can be satisfied by taking their eye in return instead of taking their life. In that vein, I think fines are extremely just for financial crimes.
Aren't there better targets to make a point with though? Military contractors, oil companies? We're talking about billions of dollars in bribes. Do you think this case will even put a dent in that corruption? This is not a lot of money and as the popularity of this thread insinuates, this is how things have always been. There is no Silicon Valley without these types of deals unfortunately.
Imagine if it was only a fine: say, 90% of all your money/assets. That sounds like a crazy gamble, but people gamble money all the time. Lots of people would be willing to take that risk.
But prison time scares everybody. You can't get those years back, no matter how wealthy you are.
I hear that. I just wonder what exactly it is we're accomplishing here in terms of justice. More corporate compliance and fear? Where is the line going to be drawn? Hyperbolic perhaps, but what's to stop the law from going after salaried people with side projects? Oh, you visited the stackoverflow career page during your 9-5? That's fraud. I'm exaggerating, but the precedent is there. Cases like this can create a slippery slope to complete subservience to big corporations.
> Oh, you visited the stackoverflow career page during your 9-5? That's fraud. I'm exaggerating
So you're saying that what this guy did isn't clearly fraud? I don't see how you could say that, unless you misunderstood the situation. It is, very clearly, 100% fraud.
In addition to the money Netflix was paying him as part of his salary, he was also secretly taking a cut of the money flowing to contractors.
It's like when a government sends aid money to another government after a natural disaster, but all the corrupt officials steal it so that eventually there's very little left for the original purpose.
Outside SV, I have friends in manufacturing. They tell me stories like this all the time. They have to get this executive on their side to win this deal or that deal. I wouldn't dare try to defend the morality of it, but this is capitalism right? I personally believe the corrupt officials example you bring up is much worse than this though. One is often a life and death situation and the other is about protecting the interests of a successful multi-billion dollar corporation.
Nope, just fraud. If a contractor makes a deal with the company, that's perfectly fine, normal capitalism. If they make a personal deal with an executive who is supposed to be representing the company in negotiations, then that's straight up bribery.
Capitalism certainly motivates people to commit this type of fraud, but that's why we have laws and regulations. Unregulated capitalism doesn't work.
I'm not saying it doesn't happen, or even that it isn't common (this whole comment section suggests that it's quite rampant), just that it's clearly wrong, both from a moral point of view, and because it can cause damage to shareholders. It can even hurt the larger market and society because it means that a company with a superior product/service/innovation will fail because their competitors aren't playing fair.
> the other is about protecting the interests of a successful multi-billion dollar corporation.
It's about protecting shareholders. What would the economy look like if the government didn't make an effort to prevent fraud? Investors wouldn't want to invest, companies wouldn't be able to find funding, etc.
the HN admin changed the link I posted. this is unethical - You are fundamentally changing what I posted. As a product manager here is a better solution - A.) Add a clear indicator that admin changed the link to redirect B.) Delete my link and post yours.
Waiting for the dang smackdown reply to this comment. You posted a secondary source (typically these get redirected to the primary source for any story), and used the editorialized title from the original journalist as your post title. Pretty commonplace on HN to correct these things so we can discuss the facts, not the reductive analysis of what someone writes about the primary source.
OP has a stake in the company whose link was posted, so it goes a bit deeper than that. That particular source had already been flagged as problematic taking the number of 'dead' links into account.
Even worse than I thought. OP should probably get a warning if not ban that site outright. Especially since they're clearly attempting to astroturf HN.
https://www.justice.gov/usao-ndca/pr/former-netflix-executiv...
Some fun details:
Kail did his criming through a shell LLC he set up called "Unix Mercenary".
He took between 10-15% of the total billings for each of the companies he hooked up with this scheme. None of those companies were charged (more's the pity).
They got him on mail fraud, wire fraud, honest services fraud, and money laundering. The victim of the fraud was, of course, Netflix itself.
Additional fun facts from PACER:
He's seeking to exclude his shares in Sumo Logic and Netskope from forfeiture, arguing that they were largely the result of his own hard work, which takes some serious chutzpah.
All of this apparently happened back in 2014 (the conviction is recent). If you're wondering what Netflix thought of all this, Kail apparently left Netflix for a job at Yahoo, from which he was fired after Netflix found out about his scheme and told Yahoo.
Kail's sentencing memorandum is a fun read (again: chutzpah). For instance, this gem:
Further, though Mr. Kail complained of problems with Sumologic (as one would see with any new startup), the product itself was “useful,” according to Ashi Sheth. (R.T. Vol. 8, p. 1670-71). As described below, at the time, Sumologic saved Netflix from paying for a far more expensive and inferior product called Splunk.