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).
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?
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?
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.
Since nothing is signed, there is no way to actually prove it is bribery.
They impudently promote tobacco smoking to the youth, how much they receive from tobacco companies, anyone knows?
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.
No, it goes to show that the only white collar crimes that are stiffly punished are those against other rich people.
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.
Shawdow changing what users post is wrong.
https://news.ycombinator.com/from?site=businessofbusiness.co...
and
https://twitter.com/thebizofbiz/status/1450491847739068420
Where they make a lot of hay on being #1 with a story on HN.
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.
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 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.
But prison time scares everybody. You can't get those years back, no matter how wealthy you are.
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.
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.
The American public gets defrauded by corporations daily. I seldom see white knights in the government volunteering to prosecute them on our behalf.
> The American public gets defrauded by corporations daily. I seldom see white knights in the government volunteering to prosecute them on our behalf.
Then you are not paying attention.
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.
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.
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.
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.
Kail's own sentencing memorandum points out that OpenDNS rewarded a different Netflix employee with stock options. Also, presumably, super illegal.
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...
Thank you for your honesty and self-awareness. This framing also amused me.
But neither of those are quite right:
1) the same tax deductions are available on your normal schedule C
2) while acting on behalf of your LLC you’re still personally liable for your actions (let alone your illegal schemes).
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)
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.
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.
All this for 500k? Seems like a lot of trouble for the equivalent of a year as a C-Level.
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 understand the sentiment that "it takes two", but I'm of the opinion that it's the one accepting bribes that is the root cause of the problem.
It is the people accepting bribes who are taking from their company, university, or government and creating a pay to play market.
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
If he was in the lower class then this post would not exist. He's be in jail and it would all be forfeit before due process.
Or maybe he was just that good about hiding it, IE only soliciting via the business entity which then took a “commission”?
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.
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.
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.
Edit: The 2021 angle is that he was sentenced today. You would know that from OP's original article, but not the newer DOJ link.
https://www.bloomberg.com/news/articles/2014-11-26/netflix-c...
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.
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.
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"?
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.
So very humble of him.
I wonder how much money he threw away assuming he had stayed 5-6 years instead. $5m? $10m?
You can form "customer advisory boards" which basically pay small percentages of common to early users to use the product.
Like, seriously, more than half of the companies funded by YC do this. I think this is the norm more than the outlier.
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.
The company would generally have no interest in that kind of setup.
When the advisory board is public, it appears to be 'above board' even though it might be a conflict of interest at least it's hiding in plain sight.
Then charge them all. That will put a halt to the practice pretty quickly.
"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."
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.
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.
This kind of fraud is so common in this industry.
“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.
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 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.
If you were caught paying bribes to a (corrupt) government official, wouldn't you be breaking the law?
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+).
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).
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.
There should be a special aggravating attachment for such abuse of employees :)
Easy to say when no one's offering, I guess.
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?
I guess don't do what Mike Kail would do.
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.
[1]https://en.m.wikipedia.org/wiki/Honest_services_fraud
[2]https://en.m.wikipedia.org/wiki/Skilling_v._United_States
[3]https://en.m.wikipedia.org/wiki/Black_v._United_States
[4]https://en.m.wikipedia.org/wiki/Rod_Blagojevich_corruption_c...
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?
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 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."
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?
Even those that weren't very competent were hired since if they were part of the same Ivy League alumni network.
I have no knowledge of the business dealings but the company definitely appeared to benefit from having those connections.
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.
"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."
That seems pretty clear to me.
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.
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.
Every single angel investor I have ever pitched asked for/suggested this.
If this is illegal 99% of the Valley is committing fraud.
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.
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).
Need more specifics.
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.
See https://www.nytimes.com/2015/12/01/nyregion/sheldon-silver-g...
i.e. executive helps Supplier X sign a at his company. The executive then leaves after a few months to get a senior job at Supplier X
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.
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.
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.
Yup, that's called a kickback, which is illegal.
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'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.
Once you have that basic model then all the rest of the variations: the company can allow it etc fall out of the model.
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.
In all the companies I worked for in the last 20 years he would have been fired instantly.
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?
You're actually accusing the prosecutor of getting it wrong... which seems a bit arrogant.
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.
The levels of deceit and lying are so thick.
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.
He must be living inside his own reality distortion field.
That's why he says it. He knows nothing else.
> 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
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.
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.
And, that scrutiny amounted to exactly nothing.
E.g. a group with socioeconomic power is corrupting a law in order to serve their own interests.
And US is very well known for its lobbying that people are trying to limit.
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.
Then it’s optimal to offer bribes indiscriminately, just to turn around and report them for accepting.
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.
We're still approving new coal and gas projects in 2021, and milage taxing EVs with not a CO² vehicle tax in sight...
Also the fact that he can fundamentally change what a user posts and then choose whether or not to disclose it in comment section is a flaw.
Russia would like to lead, but doesn't handle enough money.
In China it is still technically not legal. So, if you always do as you are told by the Party, you will not be prosecuted. Step out of line, and boom!
I don't know of any way to get back to corruption being illegal, even neglecting prosecution like in the old days.
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.
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"
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 you say "offload" crappy startups, do you mean getting the company acquired by that company or purchase the startups products?
“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.
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.
Conflict of interest. Netflix is defrauded because they could have selected a lower cost vendor, or developed the service in-house.
- 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.
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.
Netskope wanted Netflix to be a customer.
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.
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.).
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.
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?
This implies something other than the crazy rigged acquisition scenario you describe above (which is also absolutely bonkers).
See a bunch of people in this thread finding out they're probably committing tax fraud by underpaying themselves from their own s-corp to dodge taxes.
"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.
So, the disproportionate power that corps. may have is an issue of equality, but that's not this kind of corruption, at least not directly.
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.
We elect politicians to oversee government and make laws.
Anybody can 'lobby' them, we generally want that, because we want politicians to be informed and responsive.
We do have to be careful about undue influence, which is why we have rules for that.
Lobbying is only possible when someone can do influence favors to others. Full stop.
These arrangements were obviously illegal, and it beggars belief to suggest that so many startups were unaware of that.
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.
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.
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.)
(Edit: Thanks for the clarification, everyone!)
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.
"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.
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.
> 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)
Let Netflix worry about compensating the people who are doing the work.
Allowing people to editorialize headlines and pick biased sources skews the discussion.
Since we want to limit multiple similar discussion threads but allow everyone to continue talking, this is a good compromise.
Giving too much credit to a biased source or blogspam post goes too far in the direction of skewing the discussion IMHO.
Also the link or headline might change multiple times. Best to just keep it simple.
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.
"super labor intensive to boot" - it should be in the CMS code to show a flag if "edited".
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.
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.
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:
https://www.amazon.com/dp/1973918927/?coliid=IOSLH6YRD3CP6&c...
https://www.amazon.com/HBR-Guide-Buying-Small-Business-ebook...
For reference - I've done 250+ DDs myself and my firm has done over 500 over the last 6 years.
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?
https://jacquesmattheij.com/due-diligence-survival-guide/
and part II:
https://jacquesmattheij.com/due-diligence-survival-guide-par...
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.
A conflict of interest is not necessarily a problem as long as the conflict is disclosed so that dealings around that conflict can be scrutinized.
But if you never disclose it, then problem or not, no one will know.
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.
They still can profit massively from that, though, so it's still kind of messy territory.
A grey area would be more like whether you should offer to leave the meeting while they discuss the proposal.
Of course, the conflict definitely needs to be disclosed!
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.
Are there even laws for this, or is it more about company policies set by the BoD?
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.
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.
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.
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.
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....)
[1]: https://www.fidelity.com/learning-center/personal-finance/re...
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?
Obviously, an LLC cannot shield you from criminal liability.
(disclaimer: I work for Stripe which had a product that works like that, but not anywhere near that team)
> 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.
I have a highly paid accountant who says otherwise. Care to elaborate?
"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"
from https://www.nolo.com/legal-encyclopedia/limited-liability-pr...
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.
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.
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...
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.
"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"
from https://www.nolo.com/legal-encyclopedia/limited-liability-pr...
My understanding is it won't help you if you're just consulting by yourself, because everything is your own action.