[HN Gopher] Why I did not go to jail (2014)
___________________________________________________________________
Why I did not go to jail (2014)
Author : Tomte
Score : 126 points
Date : 2021-03-08 17:54 UTC (5 hours ago)
(HTM) web link (a16z.com)
(TXT) w3m dump (a16z.com)
| dang wrote:
| If curious, past threads:
|
| _Why I Did Not Go to Jail (2014)_ -
| https://news.ycombinator.com/item?id=18026790 - Sept 2018 (152
| comments)
|
| _Why I Did Not Go to Jail (2014)_ -
| https://news.ycombinator.com/item?id=11240717 - March 2016 (13
| comments)
|
| _Why I Did Not Go To Jail_ -
| https://news.ycombinator.com/item?id=7191642 - Feb 2014 (182
| comments)
| ChrisArchitect wrote:
| ya, curious why this has to be submitted over and over
| mc10 wrote:
| Not everyone here has actively followed HN since the last
| time it was posted (2018). I found this post to be
| interesting.
| emeraldd wrote:
| I thought I'd read this before. Still, there's this little
| tidbit that bears repeating: Secondly, I
| would regularly give a speech to the finance employees that
| went like this: "In this business, we may run into
| trouble. We may miss a quarter. We may even go bankrupt, but we
| will not go to jail. So if somebody asks you to do something
| that you think might put you in jail, call me."
| jancsika wrote:
| Toward the middle, referring to author's very trusted counsel:
|
| > "Ben, I've gone over the law six times and there's no way that
| this practice is strictly within the bounds of the law. I'm not
| sure how PwC justified it, but I recommend against it."
|
| Toward the end, about the CFO's sentence ostensibly for breaking
| the law referred to above at another company:
|
| > Once the SEC decided that most technology company stock option
| procedures were not as desired, the jail sentences were handed
| out _arbitrarily_.
|
| Emphasis mine. I don't think that word means what author thinks
| it means.
| phnofive wrote:
| The enforcement and form of securities laws is beyond me, but I
| think Ben's point is that Michelle went to prison for a crime
| she didn't know she was committing and had checked [citation
| needed] with PwC. I agree it's not arbitrary, but it does seem
| a bit unfair.
| thaumasiotes wrote:
| > I think Ben's point is that Michelle went to prison for a
| crime she didn't know she was committing and had checked
| [citation needed] with PwC.
|
| The article is written that way, but that view contradicts
| all the facts. As summarized in the other comments:
|
| - Really large numbers of executives were guilty of the same
| conduct described in the article. They didn't go to jail.
|
| - Michelle was not charged with anything related to the
| conduct described in the article. She was charged with
| evading her personal taxes.
|
| It seems unlikely that she had PwC audit her personal taxes.
| So the main point of the article seems to be that Ben
| Horowitz wrote it without bothering to learn what had
| happened.
| jimmaswell wrote:
| SEC seems almost as bad as the ATF sometimes.
| bpodgursky wrote:
| The point is that most tech company were doing things wrong by
| the letter of the law. But instead of going through and
| rounding up every CFO in the Bay area, they picked a couple to
| send to jail to make examples of.
|
| The choice of who to jail was basically arbitrary, given that
| almost everyone was guilty.
| kube-system wrote:
| There's nothing wrong with the way the author used the word,
| although this may be the lesser-common use of the way you're
| used to.
|
| see #2:
|
| https://www.merriam-webster.com/dictionary/arbitrary
| lolc wrote:
| > I don't think that word means what author thinks it means.
|
| I read that to mean the court didn't look at individual cases
| with much consideration and just handed out jail sentences to
| everybody involved. What do you think the author meant to say?
| ugh123 wrote:
| I think thats what he meant, but I doubt thats actually what
| happened. While the illegal accounting theme was similar
| across the industry, each individual case is unique and carry
| their own evidence. Michelle likely had less she could deny
| personally than others, and also probably had shittier
| lawyers than others.
| 1-more wrote:
| The pull quote from the song is an interesting choice. Lil Wayne,
| the other artist on the song, shot himself in the chest as a
| child and was saved by a cop and has actually been pretty pro-cop
| recently.
| luplex wrote:
| Near misses make for amazing stories. If you are thinking of
| telling a near miss story, do it!
| [deleted]
| wombatmobile wrote:
| This is only a near miss story if you adopt a certain moral,
| ethical, and egotistical framework which says that sailing
| close to the wind trumps common sense ethics if you can get
| away with it.
|
| It's the sort "near miss" that Allan MacDonald would have
| avoided on first principles.
|
| https://news.ycombinator.com/item?id=26380822
| skissane wrote:
| > Michelle (note: her name has been changed)
|
| I do wonder what is the point of that. It takes 2 minutes of
| searching to find it out.
| Legion wrote:
| Just because it isn't a state secret doesn't mean you have to
| put the name on blast.
| dylan604 wrote:
| 99.99%+ of people are not willing to take that 2 minutes though
| dec0dedab0de wrote:
| the title is "Why I Did Not Go To Jail"
|
| Does anyone understand why having employee options set a lower
| price would be illegal? Or is there just more details that were
| left out because the specifics are not necessary for the story?
| haney wrote:
| Not a lawyer, but I'd assume that the option price would impact
| both the tax treatment of the option and the reported
| financials of the company.
| akeck wrote:
| I think it's referring to this event:
| https://www.investopedia.com/articles/optioninvestor/09/back...
| propter_hoc wrote:
| Here's a good summary of the stock option backdating scandal.
|
| https://www.theglobeandmail.com/report-on-business/options-b...
|
| It was because the paperwork for the option grants were being
| written at the end of the month with a date based on the lowest
| price during the preceding month, a common practice at the
| time, but one that misrepresented when the options were
| actually granted, thereby enriching grantees at the expense of
| shareholders.
| dec0dedab0de wrote:
| So lying about the date, and not reporting properly was the
| problem not the price in and of itself. That makes much more
| sense.
| throwaway8581 wrote:
| White collar criminal liability in the US is absurd. Out of a
| political desire get the big bad rich people we have in the
| process turned every executive of a sufficiently complex
| operation into an unwitting criminal.
| rodone wrote:
| This is the dumbest possible take.
| cosmodisk wrote:
| There's the other end of the stick too: in many countries,
| where white collar crime is treated almost like a joke, both in
| terms of fines and jail time, you'd need to throw a shoe to a
| judge to get sentenced. US in general is a legal minefield with
| so many shades of grey. Not sure what's the ideal model but
| it's definitely not on either side of such stick.
| mrstone wrote:
| Do you think the author should not have been liable if he had
| implementing what Michelle was suggesting?
| PragmaticPulp wrote:
| > Out of a political desire get the big bad rich people we have
| in the process turned every executive of a sufficiently complex
| operation into an unwitting criminal.
|
| Yet we only saw a small number of arrests come out of the 2008
| housing crisis, despite widespread fraud. The few cases that
| were successfully prosecuted involved 9 and 10 figure fraud
| operations.
|
| At the core of the issues is the idea that ignorance of the law
| is no excuse. It may sound unfair that everyone can be bound by
| the law regardless of whether or not they understand every
| line, but the alternative requires that we let people off the
| hook for simply claiming they didn't understand the law.
|
| In this case, the crime wasn't a simple mistake. The Michelle
| character in this story thought it was a creative loophole in
| the law that allowed her to fudge the accounting numbers in
| favor of the company by arbitrarily using the lowest share
| price of the month instead of the share price at time of issue.
|
| This isn't the type of decision that one accidentally makes. It
| requires deliberate effort to search out and use the monthly
| low share price instead of the share price at time of issue.
| Ben Horowitz was fortunately skeptical, and consulted the
| general counsel for a proper reading of the law.
| Meekro wrote:
| "Ignorance of the law is no excuse" is not a just principle
| when the laws are so numerous and incomprehensible that
| _everyone_ is _always_ ignorant of the law. Plenty of people
| just end up getting bad legal advice, even when they thought
| they were paying top dollar for a good quality law firm.
| chki wrote:
| In some jurisdictions (I can only speak for Germany with
| some authority) if you've made a serious effort to get
| legal advice on a complicated topic and the legal advice
| was wrong this will (probably) mean that you're not guilty
| of a crime caused by the bad legal advice. Civil liability
| is a different topic obviously.
|
| (But the "probably" is there for a reason: it really does
| depend on the specific topic at hand and whether you
| actually tried hard enough to comply with the law)
| throwaway8581 wrote:
| Ignorance of the law is indeed not an excuse. But all that
| means is that it's not a legal excuse, as in it's literally
| not a defense you can raise. It says nothing about the
| morality of criminalizing innocent conduct.
|
| Many regulatory crimes require no mens rea at all. And even
| more criminalize things that no reasonable person would
| expect to be a crime. Criminal punishment is supposed to be
| for despicable conduct, not morally innocent behavior.
| rodone wrote:
| The story in the linked article details despicable conduct.
| nradov wrote:
| If you think you have found a legal loophole or gray area
| then the correct course of action is to send a letter to the
| responsible federal agency (like the IRS) and request a
| formal opinion letter as to the legality of your scheme. Once
| you have it in writing then you're in the clear and won't be
| prosecuted.
| TaylorAlexander wrote:
| Wait till you hear how our criminal justice system treats poor
| people.
| Meekro wrote:
| It seems terrible for everyone. Poor people get stuck with
| false accusations by the police, no bail, and public
| defenders who are either incompetent or overworked.
|
| Rich people (or middle class founders who dream of getting
| rich) get to deal with incomprehensible tax and accounting
| laws where no one can ever really be sure that they're
| compliant. Ben Horowitz had the luck to receive good legal
| advice and the wisdom to listen to it. No doubt some others
| who had the latter, still went to jail for lacking the
| former.
|
| How does one even reform something like this? Some kind of
| legibility requirement applied to all written law? Has such a
| proposal ever gained traction?
| rodone wrote:
| This is so packed with implicit assumptions that I don't
| even know where to begin. How about this: tax and
| accounting laws are not incomprehensible.
| cosmodisk wrote:
| A good start would be to write the law in a way an average
| Joe could understand it. I can already hear the legal
| sector screaming ' it's impossible!!'. A good example is
| the 'plain English' requirement for some documents issued
| by the financial institutions to retail customers in the
| UK. I saw first hand what that means when we did projects
| for banks: bank's analyst sends a report to a professional
| investor- the text is almost illegible and full of jargon.
| Asset management issues a piece to retail customer and it's
| all easy to read and understand, because it was written
| with such notion in mind.
| hn_throwaway_99 wrote:
| As I commented above, the Opsware CFO went to jail not just
| because of her role in the options backdating scandal, but
| because she lied on her personal tax returns.
|
| In particular, what the CFO was recommending was backdating the
| _grant date_ of the option, which was fairly common (if not
| legal) among tech companies back then. What she went to jail
| for was backdating the _exercise_ date of her personal options,
| which is kind of trivially obviously illegal to anyone who has
| ever filled out their tax returns. It 's like if you sold stock
| on Dec 20th, but pretended you really sold the stock on Dec
| 10th when it had a lower price so you'd pay less in capital
| gains taxes.
| shoo wrote:
| Options backdating schemes allow additional wealth to be
| transferred to an options recipient from the company. In doing
| so, they increase the company's compensation expenses. The next
| question to ask is: are the increased compensation expenses
| created by options backdating clearly disclosed to the company's
| investors, or does the company misrepresent its compensation
| expenses to investors as being artificially low? When expenses
| are misrepresented, then we are in the territory of security
| fraud.
|
| Howard Schilit writes about the options backdating scandal from
| this perspective in his book "Financial Shenanigans: How to
| Detect Accounting Gimmicks and Fraud in Financial Reports".
|
| > Most shenanigans discussed in this book share a common theme:
| company executives use accounting gimmicks to show impressive
| results in hopes of driving up the stock price so that their
| shares and options become very valuable. The options backdating
| scandal that erupted in 2006 is on a whole different level of
| dishonesty. Executives were able to skip the whole part about
| using accounting gimmicks, showing impressive results, and
| driving up the stock price. Instead, they cut right to the chase
| and secretly gave themselves stock options that had already
| increased in value. In so doing, executives found a simple way to
| loot the company's coffers without letting anyone know. They
| thought it was the perfect heist -- and it was, until they were
| caught.
|
| > If you were to put options backdating on one side of a scale
| that weighs dishonesty, and any other shenanigan on the other
| side, we believe that backdating would always be heavier. Why?
| Because all other shenanigans are designed to enrich management
| in a complicated, indirect manner, while backdating does so
| without any serious effort at all. Look at all the "hard work"
| Enron executives had to do to create all those crazy joint
| ventures to make results appear better! Look at the acquisition
| activity at Tyco and the gyrations that Symbol Technologies went
| through in order to get positive results! And no matter how much
| cheating went on at these companies, there was never a guarantee
| that the stock price would respond accordingly.
|
| > With options backdating, however, management barely had to lift
| a finger in order to cheat. And, of course, the process
| guaranteed a positive result. For this reason, we crown
| backdating as the King of all Shenanigans. The options backdating
| scheme was really quite simple. Before finalizing an option
| grant, executives pulled up the stock chart and looked back in
| time to find a date on which the stock price was at a much lower
| level. They then said hocus pocus and "backdated" the paperwork
| to make it seem as if the stock option had really been granted on
| that earlier date. And voila, the stock options had instant
| value. Of course, options backdating had accounting implications
| as well.
|
| > By not reporting the compensation expense resulting from these
| "in-the-money" grants, companies were overstating their earnings
| to shareholders. Few companies abused options backdating as much
| as semiconductor giant Broadcom Corp. The saga began when
| Broadcom's board initiated a review of option-granting practices
| on May 18, 2006, two days after a seminal CFRA (Center for
| Financial Research and Analysis) survey on options backdating
| listed Broadcom as one of the companies "presenting the highest
| risk of having back-dated options". After two months of
| investigating, Broadcom finally admitted what it had done and
| estimated that this abuse of the system had allowed the company
| to avoid a whopping $750 million in compensation expense. But
| that was not the end of the story. The following January,
| Broadcom shocked investors by announcing an unbelievable $2.2
| billion expense, which tripled the original estimate and trumped
| the $1.5 billion estimated restatement record held by former
| backdating champion UnitedHealth Group.
|
| > Some executives still argue to this day that the media blew the
| backdating scandal out of proportion and that the misdated grants
| were simply caused by "careless record keeping." Au contraire.
| (We weren't permitted to use stronger language in this PG-rated
| book.) The sheer pervasiveness of this scandal across hundreds of
| companies actually makes it seem that many executives considered
| backdating to be a perk of running a public company.
| PragmaticPulp wrote:
| > Options backdating schemes allow additional wealth to be
| transferred to an options recipient from the company.
|
| The issue is that the company is owned by shareholders.
|
| So the wealth transfer is from shareholders, including public
| investors, to employees.
| [deleted]
| datavirtue wrote:
| Wow. I left a company a few years ago that was doing this. It
| caused money to rain down on the employees that participated (I
| was one of them) but it sounded like something that was
| completely up to the company to do if they wanted, and certainly
| not illegal. We had to undergo repeated lectures and training on
| insider trading. I do have to admit that employees were buying
| because it was low and they knew that certain new services were
| going to be released and the ensuing news would drive the stock
| price up. It did, and let's just say quite a few people got some
| windfall from the temporary bump in price. Easy double-your-
| money. I felt like this was insider trading but everyone was
| doing it so I must be wrong.
| yetanothermonk wrote:
| Did the PwC auditors have skin in the game? Do they have to stand
| by their decision when questioned or is it just a stamp of
| approval?
| cm2187 wrote:
| I don't think they are supposed to give you advice on how to
| structure it (post the Enron scandal), they are there to say
| it's compliant or not.
| dan-robertson wrote:
| PwC are a big company and probably are pretty good at avoiding
| liability for themselves. Once upon a time companies with a
| partnership structure (eg law firms, accounting firms, private
| investment banks) were legally partnerships. In a partnership,
| partners have unlimited joint and several liability, which
| means that every partner could be held liable to an unlimited
| amount for anything any partner (or the partnership) did. I
| think this encouraged partnerships to avoid being liable or
| doing illegal things. These days there is a legal structure
| called a limited liability partnership (in the U.K. this was
| designed specifically for the big accounting companies like
| PwC) and true partnerships are less common.
|
| It's not obviously a bad thing, unlimited liability is pretty
| rare these days (people have unlimited liability but usually
| act through limited liability companies. Lloyd's underwriters
| (used to?) have unlimited liability. I can't think of other
| examples. Maybe partnership structures were good for keeping
| people honest but I don't really understand why a partnership
| is different from an LLC, and I feel like they don't scale well
| to large organisations.
| simonebrunozzi wrote:
| There's an old joke / adage in Italian, which goes something
| like this:
|
| A lawyer and a client are discussing an agreement. The lawyer
| says: here we f* them; here we f* them; here they f* you. Here
| also. And the client is left asking: why when we f* them it's
| us, and when they f* us it's just me?
|
| This is just to say that, most likely, PwC didn't pay anything,
| nor any of their lawyers or consultants go to jail.
| jacquesm wrote:
| This is one of the more important bits to be periodically
| reposted on HN. Compliance with the law is not 'optional', and if
| you cross that line there is a fair chance that it will come back
| to bite you. Regulated industries, stock transactions (and
| options, as in this bit of startup history) all have their
| peculiarities and you need to realize that not all of these end
| up with the proverbial slap on the wrist if you end up doing them
| in a way that is wrong.
|
| Then there is outright negligence, which would make things even
| worse. If compliance is an ugly word to you then please go and do
| something that just involves you and that does not expose others
| (shareholders, employees, customers) to the risks that you
| apparently are comfortable with but that they are probably not
| comfortable with.
|
| As much as I applaud the writer for covering for Michelle and
| putting her actions in the best light: a 3.5 month non-suspended
| sentence is not something that is handed out lightly for a white
| collar issue. Both Michelle and the other execs at that company
| profited from doing this at the expense of the other
| shareholders, but that's not what landed her in jail. Keep in
| mind that nobody died, and that the difference between the worst
| and the best date within a month to backdate those options to
| could not have been so massive that we're looking at huge
| differences in pay-out compared to the total value. It is the
| principle that matters, ask Martha Stewart (a billionaire) how
| her attempt to save $45K ended up to see why this is so, and
| check out what mobster Al Capone got convicted of. Also note that
| even asking for outside counsel may not be enough to get you off
| the hook, and that no matter what your accountant tells you in
| the end you are responsible for your actions.
|
| Don't go to jail. If your boss tells you to do something that
| might land you in jail: resign.
|
| And take legal compliance serious, as serious as though your
| company and your future depend on it, one day they just may.
| simonebrunozzi wrote:
| > If your boss tells you to do something that might land you in
| jail: resign.
|
| Let me make it better: resign, but also take precautions, in
| case after your resignation, your boss offloads some guilt to
| you.
| vmception wrote:
| Cousin Gregg with the receipts!
| [deleted]
| jmchuster wrote:
| > a 3.5 month non-suspended sentence is not something that is
| handed out lightly for a white collar issue
|
| Only a single American banker saw jail time from the 2008
| mortgage crisis https://ig.ft.com/jailed-bankers/
| mikem170 wrote:
| My first thought was that "the system" is broken. It's too big
| and complicated. It's inhumane.
|
| And it's not just corporate tax law. Health care is a dumpster
| fire. Lots of overly complicated modern bureaucracies. We're
| not as smart as we think we are.
| istjohn wrote:
| It seems there is more to this story than the author lets on.
| Michelle cheated on her personal taxes:
| https://news.ycombinator.com/item?id=7193033
| vmception wrote:
| > some good luck and an outstanding General Counsel, and the
| right organizational design.
|
| outstanding General Counsel +10 LUCK
|
| right organizational design +6 LUCK
|
| roll twice, add totals
| hn_throwaway_99 wrote:
| Edit: Actually, disregard what I wrote below, a comment on an
| earlier HN post explains it:
| https://news.ycombinator.com/item?id=7193033. The CFO was really
| jailed for personal tax fraud, not just for her role in the
| backdating scandal.
|
| ---
|
| While this article is reposted every couple of years, I always
| feel that I'm missing something in trying to understand why the
| CFO went to jail.
|
| This page from the SEC lists the huge number of companies that
| somehow paid a penalty or settled as part of the backdating
| scandal, and it's lots of big names in the tech industry. For
| example, the CFO of Apple at the time:
| https://en.wikipedia.org/wiki/Nancy_R._Heinen. However, it was
| really hard for me to find many people who actually ended up
| going to jail over their roles. So I can only conclude that
| either (a) the OpsWare/Mercury Interactive CFO had a really
| shitty lawyer, or (b) her involvement was more direct and
| culpable than is let on in this a17z blog post.
| andkenneth wrote:
| I guess also where there's smoke, there's a good possibility of
| fire.
| notsureaboutpg wrote:
| I feel like this could be a huge break for GC Jordan. Would
| anyone mind helping me find him? Many others, including me, would
| also like to avoid jail and would compensate him for helping us
| do so.
___________________________________________________________________
(page generated 2021-03-08 23:00 UTC)