[HN Gopher] Former Netflix executive convicted of receiving brib...
___________________________________________________________________
Former Netflix executive convicted of receiving bribes from
contractors
Author : ugwigr
Score : 384 points
Date : 2021-10-19 15:00 UTC (8 hours ago)
(HTM) web link (www.justice.gov)
(TXT) w3m dump (www.justice.gov)
| invisible wrote:
| 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.
| iammisc wrote:
| So after reading the article, I'm still not sure of the crime, or
| the motivations (from netflix's perspective at least). Can
| someone help me?
| Kranar wrote:
| 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.
| ksdale wrote:
| 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.
| iammisc wrote:
| Oh I see... so this is just bribery. And 'Netflix' the
| organization didn't know basically.
| ksdale wrote:
| Exactly.
| numair wrote:
| If this is all illegal, the stories I was told by early Facebook
| employees about how Chamath made his money are more confusing
| than ever.
| Kranar wrote:
| Can you go into some details or point me to some sources?
| ram_rar wrote:
| Can you elaborate?
| TheMagicHorsey wrote:
| 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.
| germandiago wrote:
| 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.
| paulpauper wrote:
| 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.
| HatchedLake721 wrote:
| I know it's a complicated topic, but lobbying can be
| considered as corruption.
|
| 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.
| germandiago wrote:
| I agree with this 100%
|
| Lobbying is only possible when someone can do influence
| favors to others. Full stop.
| Phillip98798 wrote:
| 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.
| germandiago wrote:
| 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.
| smsm42 wrote:
| 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.
|
| And, that scrutiny amounted to exactly nothing.
| ncmncm wrote:
| In the US, corruption at high-enough levels has been
| explicitly legalized. US now leads the world in legalized
| corruption.
|
| 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.
| philwelch wrote:
| 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.
| jopsen wrote:
| Why? Is the VP compensation package at Netflix really that bad?
| geodel wrote:
| He was just a poor millionaire in billionaires' world.
| aluminussoma wrote:
| 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+).
| mikestew wrote:
| 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).
| renewiltord wrote:
| 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.
| adrr wrote:
| It's also common place in the agency(marketing,creative) world.
| Execs won't give your agency work unless you kickback money to
| them.
| tomjen3 wrote:
| 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.
| spoonjim wrote:
| And the Purdue execs will pay a fine. Victimize people, not
| corporations, if you want to go scot free.
| Phillip98798 wrote:
| 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.
| tptacek wrote:
| The DOJ press release is clearer than this article is:
|
| 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._
| loeg wrote:
| The DOJ release says he was indicted in 2018 -- was this known
| at the time? And what's the 2021 update?
|
| 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.
| temp_praneshp wrote:
| > 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
| dang wrote:
| We've changed the URL to that from
| https://www.businessofbusiness.com/articles/why-a-former-
| net.... Thanks!
| ugwigr wrote:
| add an indicator to indicate the admin changed what I
| (@ugwigr) posted. Materially changing the content your users
| post is wrong.
| jacquesm wrote:
| He did just that.
| ugwigr wrote:
| in the comment? how many people would read his comment
| versus the subject line?
|
| 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.
| Oddskar wrote:
| How astute of you to observe that HN does not always hold
| your hand.
| ugwigr wrote:
| why would i want HN to hold my hand?
| NikolaeVarius wrote:
| How dare we expect people to read
| ugwigr wrote:
| think of the UI as a funnel - to expect the same number
| of readers for each comment as for the subject is
| stupidity
| dangrossman wrote:
| That's how it's always worked here on HN.
| ugwigr wrote:
| does not mean it is right
| kjaftaedi wrote:
| It doesn't mean it's right, but on this site it is.
|
| 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.
| tptacek wrote:
| You're right, it doesn't mean that. But independently of
| that point, what HN does here is right.
| ugwigr wrote:
| in your opinion it is right, in my opinion it is wrong.
| jacquesm wrote:
| And more than any other online forum would do, it's in
| fact an exercise in transparency, and super labor
| intensive to boot.
| ugwigr wrote:
| "more than any other online forum would do" - still does
| not mean it is right
|
| "super labor intensive to boot" - it should be in the CMS
| code to show a flag if "edited".
| jacquesm wrote:
| Entitlement is a flaw.
| ugwigr wrote:
| yes it is, captain obvious. now what is the entitlement
| you allude to?
| jacquesm wrote:
| 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.
| ugwigr wrote:
| - "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.
| tptacek wrote:
| 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.
| dastbe wrote:
| 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.
| ugwigr wrote:
| - "get everything you have to say flagged." I do not care
| about comments getting flagged or HN karma - " happens
| all the time" . perhaps this is why it is important to
| consider whether the UX can be improved. I am not saying
| links should not be replaced - I am saying the UX should
| be improved when this happens.
|
| _
| tptacek wrote:
| 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.
| ugwigr wrote:
| The community should know when the content is materially
| altered.
| pvg wrote:
| That's exactly the purpose of the moderator comment, as
| people pointed out near the start of all this.
| batch12 wrote:
| 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.
| ugwigr wrote:
| ok. what did you disagree with if not my point? I do not
| care in the least bit about HN's karma
| batch12 wrote:
| A better way of phrasing would be -- until I understood
| your point. I meant "saw your point" as in "I see your
| point".
| ugwigr wrote:
| got it. Makes sense.
| hammock wrote:
| How did Netflix find out about the scheme?
| hintymad wrote:
| 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.
| hammock wrote:
| What was he promoted for?
| 5faulker wrote:
| A clearer way to say it would be "The DOJ press release clearer
| than this article is:"
| ljm wrote:
| > He's seeking to exclude his shares in Sumo Logic and Netskope
| from forfeiture
| [deleted]
| LanceH wrote:
| > one of those companies were charged (more's the pity).
|
| 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.
| nkrisc wrote:
| 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.
| kiklion wrote:
| Add a reward for whistleblowing on people accepting bribes?
|
| Then it's optimal to offer bribes indiscriminately, just to
| turn around and report them for accepting.
| ectopod wrote:
| You are right. In post-war Germany the paying of bribes was
| made legal and tax deductible. This was successful in
| reducing bribery.
| g9yuayon wrote:
| > 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.
| ljm wrote:
| > He's seeking to exclude his shares in Sumo Logic and Netskope
| from forfeiture
|
| 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.
| 1B05H1N wrote:
| _Kail ultimately received over $500,000 and stock options from
| these outside companies_
|
| All this for 500k? Seems like a lot of trouble for the
| equivalent of a year as a C-Level.
| sciurus wrote:
| Presumably the stock options had a chance of being worth far
| more than $500k.
| rout39574 wrote:
| 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.
| tempestn wrote:
| 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.
| fshbbdssbbgdd wrote:
| 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...
| spenczar5 wrote:
| Thanks, this is indeed a better source.
|
| 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.
| gmadsen wrote:
| this seems like such a low reward high risk grift. A Netflix
| exec needs to risk his entire life over $450K?
| tptacek wrote:
| The DOJ adds up Kail's gains into the mid 7 figures,
| inclusive of the stock grants he was given by the companies
| he shook down.
| [deleted]
| tptacek wrote:
| I think it's probably pretty common, because I've worked jobs
| where clients have floated the idea (it was gross, we turned
| them down).
|
| Kail's own sentencing memorandum points out that OpenDNS
| rewarded a different Netflix employee with stock options.
| Also, presumably, super illegal.
| sokoloff wrote:
| 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.).
| boppo1 wrote:
| You mean they said "we'll write the contract so you get a
| finder's fee"?
| numair wrote:
| 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.
| tootie wrote:
| 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...
| chunky1994 wrote:
| 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)
| nilsbunger wrote:
| People often set up an LLC for their consulting thinking it
| will help with 1) taxes and 2) liability.
|
| 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).
| camgunz wrote:
| 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....)
|
| [1]: https://www.fidelity.com/learning-center/personal-
| finance/re...
| nilsbunger wrote:
| 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?
| camgunz wrote:
| 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.
| nilsbunger wrote:
| 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"
|
| 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.
| tptacek wrote:
| 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".)
| camgunz wrote:
| Oh no thank you! I'll look around and get a 2nd opinion.
| Kindness evidently does exist over the internet :)
| cmeacham98 wrote:
| 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.
| jacquesm wrote:
| Not necessarily, see 'piercing the corporate veil'.
| dahfizz wrote:
| 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.
| nilsbunger wrote:
| An LLC doesn't help you against your own actions:
|
| "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...
| jacquesm wrote:
| 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.
| zrail wrote:
| 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)
| nilsbunger wrote:
| 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.
| rsyring wrote:
| 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.
| sokoloff wrote:
| 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.
| twodave wrote:
| 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.
| mdorazio wrote:
| 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.
| camgunz wrote:
| 100% this, get an accountant and maybe a lawyer. It is
| very, very worth it.
| brianwawok wrote:
| 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
| nilsbunger wrote:
| 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.
| mbesto wrote:
| > People often set up an LLC for their consulting thinking
| it will help with 1) taxes and 2) liability.
|
| I have a highly paid accountant who says otherwise. Care to
| elaborate?
| nilsbunger wrote:
| See up-thread, I guess? There is some nuance to it for
| sure.
| jacquesm wrote:
| 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.
| mbesto wrote:
| > 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.
| jacquesm wrote:
| 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.
| bozhark wrote:
| With so many DDs, do you have any pointers or directions
| for those looking to learn better DD?
| mbesto wrote:
| 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:
|
| https://www.amazon.com/dp/1973918927/?coliid=IOSLH6YRD3CP
| 6&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.
| rand846633 wrote:
| > Happy to answer any questions.
|
| 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?
| jacquesm wrote:
| > 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.
| rand846633 wrote:
| 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.
| jacquesm wrote:
| 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).
| jacquesm wrote:
| I wrote a couple of articles about it:
|
| 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.
| Cd00d wrote:
| >not a lawyer! just a guy using words he has heard!
|
| Thank you for your honesty and self-awareness. This framing
| also amused me.
| taurath wrote:
| 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"?
| aidenn0 wrote:
| 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.
| mc32 wrote:
| So all the Sox compliance in the world did nothing to prevent
| this fraud?
| elliekelly wrote:
| 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.
|
| https://www.bloomberg.com/news/articles/2014-11-26/netflix-c.
| ..
| simonh wrote:
| 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?
| vkou wrote:
| Laws don't prevent murder, but they are an after-the-fact
| tool we can use to beat a killer over the head with.
| mc32 wrote:
| Agreed, but we already have laws against fraud and bribery.
| The controls are the things that don't seem to be very
| effective at stopping fraud.
| dymk wrote:
| 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.
| ransom1538 wrote:
| 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.
| hikerclimber1 wrote:
| What about former Wells Fargo ceo? He was a crook and is still
| allowed to be advisor to some financial firm.
| cabcabcab wrote:
| This is so incredibly common and is actually taught as tactic at
| many accelerators.
|
| 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.
| ludocode wrote:
| 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.
| kami8845 wrote:
| In those instances, do the managers at BiggerCorp who initiate
| the deal get the equity or the company?
| nhumrich wrote:
| Usually, the manager.
| mabbo wrote:
| > Like, seriously, more than half of the companies funded by YC
| do this. I think this is the norm more than the outlier.
|
| Then charge them all. That will put a halt to the practice
| pretty quickly.
| Taylor_OD wrote:
| Until YC funds a company that specializes in making shell
| company^2 to make sure your C suite side deals are
| undetectable.
| deathhand wrote:
| Ctrl + F "Biden", no results. That's so sad! It's the same thing
| Hunter did, and Hillary has been accused of. I like the morality
| that is seen in this thread but can we take it a bit further? FDA
| is mentioned a few times. What about the FTC? Ajit and net
| neutrality? It's everywhere!
| ncmncm wrote:
| 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?
| joshstrange wrote:
| > 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"?
| lern_too_spel wrote:
| 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?
| bpodgursky wrote:
| > "The startups that paid to play, and possibly many others,
| believed this was how Netflix did business," the prosecutors
| said.
|
| You're actually accusing the prosecutor of getting it
| wrong... which seems a bit arrogant.
| lern_too_spel wrote:
| 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.
| splistud wrote:
| 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.
| [deleted]
| luckydata wrote:
| 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.
| jshen wrote:
| This isn't true at the big company I'm at. I've seen several
| VPs fired in the 10 years I've been here.
| luckydata wrote:
| 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?"
| menomatter wrote:
| 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.
| dboreham wrote:
| 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.
| mytailorisrich wrote:
| That's the key question.
|
| In all the companies I worked for in the last 20 years he would
| have been fired instantly.
| singlow wrote:
| As soon as the right person found out about it...
| jcims wrote:
| How would it be detected?
| toephu2 wrote:
| 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."
|
| https://jobs.netflix.com/culture
| 1cvmask wrote:
| 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?
|
| I guess don't do what Mike Kail would do.
| Mizza wrote:
| 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?
| splistud wrote:
| As a shareholder of Netflix, I was directly harmed. I am most
| assuredly a common person.
| Mizza wrote:
| Fair point.
| whymauri wrote:
| >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."
|
| So very humble of him.
| Aeolun wrote:
| I just don't understand how he can possibly think saying
| something like that is a good idea.
|
| He must be living inside his own reality distortion field.
| funnyflamigo wrote:
| Seriously, given -
|
| > 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
| tptacek wrote:
| 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.
| brianwawok wrote:
| White collar crime isn't typically punished anywhere near
| the max.
| bmurphy1976 wrote:
| 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.
|
| That's why he says it. He knows nothing else.
| tptacek wrote:
| The crazy bit here is that he's fighting in sentencing to
| retain the Netskope stock!
| [deleted]
| [deleted]
| radicaldreamer wrote:
| "I'd like the maximum sentence please"
| rkalla wrote:
| He also has a church and is a life coach on Only Fans... you
| know, real classy person. :smh-forever:
| SavantIdiot wrote:
| 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.
| scns wrote:
| Cocaine?
| junon wrote:
| Sounds like Andrew Lee (of Freenode fame).
| slothtrop wrote:
| ah yes, the crown prince
| walshemj wrote:
| If I where a Judge id add a few years for that kind of shit
| rchaud wrote:
| 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.
| geodel wrote:
| I wish some of those "influenced" and thought followers write
| articles on how devops world is poorer with Mr Kail now
| incarcerated.
| jpollock wrote:
| That happened to a startup I was part of back in the late 90's.
| We gave out substantial stock grants to senior managers at
| customers.
| paulpauper wrote:
| _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.
| ludocode wrote:
| 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.
| capableweb wrote:
| One case doesn't prove anything. There are thousands of cases
| showing that white collar crimes are in fact punished less than
| other types of crimes.
| colpabar wrote:
| > goes to show how while collar crimes are not punished more
| leniently
|
| No, it goes to show that the _only_ white collar crimes that
| are stiffly punished are those against other rich people.
| oars wrote:
| Why weren't these companies charged as well? They are paying
| bribes to an executive to use their products and services.
|
| If you were caught paying bribes to a (corrupt) government
| official, wouldn't you be breaking the law?
| ugwigr wrote:
| 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.
|
| Shawdow changing what users post is wrong.
| pacoWebConsult wrote:
| 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.
| jacquesm wrote:
| 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.
|
| 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.
| pacoWebConsult wrote:
| 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.
| ugwigr wrote:
| as I suggested, admins should feel free to delete my post and
| even ban me from posting - but fundamentally changing what I
| posted is wrong.
| s1artibartfast wrote:
| A redirected tag would be transparent and address both
| concerns
| ugwigr wrote:
| exactly
| kcsavvy wrote:
| 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?
| prasadjoglekar wrote:
| 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.
| lobocinza wrote:
| 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.
| omarhaneef wrote:
| 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.
| menomatter wrote:
| 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.
| JumpCrisscross wrote:
| > _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.
| tempestn wrote:
| Yes, and of course they'd then be taxed on that compensation
| as well.
| [deleted]
| ryanmcbride wrote:
| thanks for putting it so plainly this cleared up all my
| questions
| gimmeThaBeet wrote:
| 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_.
| omarhaneef wrote:
| yes, both of those parallels came to mind as I was writing.
| You're exactly right, from my perspective, in underscoring
| the similarity.
|
| Once you have that basic model then all the rest of the
| variations: the company can allow it etc fall out of the
| model.
| taurath wrote:
| 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).
| nowherebeen wrote:
| > It is not legal for someone working for Netflix to ask for
| shares in their own personal capacity as individuals.
|
| Yup, that's called a kickback, which is illegal.
| elliekelly wrote:
| 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.
|
| [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..
| .
| tweedledee wrote:
| 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.
| [deleted]
| novaRom wrote:
| How many of their unethical practices actually waiting to be
| revealed?
|
| They impudently promote tobacco smoking to the youth, how much
| they receive from tobacco companies, anyone knows?
| Phillip98798 wrote:
| 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.
| ludocode wrote:
| 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.
| philwelch wrote:
| 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.
| ludocode wrote:
| 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.
| Phillip98798 wrote:
| 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.
| bogwog wrote:
| 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.
| philwelch wrote:
| Judging by how many people end up there, prison time does
| not seem to be a particularly effective deterrent either.
| Phillip98798 wrote:
| 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.
| bogwog wrote:
| > 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.
| vkou wrote:
| The best target to make an example of is the one you
| caught.
| xyzzyz wrote:
| 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.
| Phillip98798 wrote:
| 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.
| xyzzyz wrote:
| 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.
| Phillip98798 wrote:
| 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.
| csmythe15 wrote:
| 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
| earthscienceman wrote:
| Some feedback from an outsider:
|
| 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.
| autarch wrote:
| The first sentence of the second paragraph says:
|
| "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.
| earthscienceman wrote:
| 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.
| dboreham wrote:
| He was playing both sides of the deal : acting for
| Netflix in selecting a vendor, while simultaneously
| acting as a paid consultant to the vendor.
|
| Conflict of interest. Netflix is defrauded because they
| could have selected a lower cost vendor, or developed the
| service in-house.
| tptacek wrote:
| You can't "hire" Netflix's VP of IT to stay at Netflix
| and approve all your purchase orders.
| ghaff wrote:
| 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).
| SamoyedFurFluff wrote:
| 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?
| groby_b wrote:
| "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.
| poizan42 wrote:
| 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.
| groby_b wrote:
| It is right in the subhed?
|
| "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.
| ghaff wrote:
| 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.
| TheMagicHorsey wrote:
| 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.
| NikolaNovak wrote:
| The way I see it:
|
| - 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.
| geofft wrote:
| Michael Kail worked for Netflix as VP of IT ops.
|
| 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.
| cmckn wrote:
| 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.
| nitrogen wrote:
| The movie _The Informant!_ illustrates how this kind of
| thing might happen.
| hardtke wrote:
| 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.
| tptacek wrote:
| 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.
| ransom1538 wrote:
| 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.
| chunky1994 wrote:
| 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).
| philipkiely wrote:
| 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.)
|
| (Edit: Thanks for the clarification, everyone!)
| earthscienceman wrote:
| This is exactly why I'm confused. I would also like this
| clarified.
| ghaff wrote:
| 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.
| spenczar5 wrote:
| 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.
| ghaff wrote:
| 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.
| jsmith99 wrote:
| 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.
| jsmith99 wrote:
| 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.
| spenczar5 wrote:
| 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!
| ghaff wrote:
| 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.
| stadium wrote:
| 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?
| elliekelly wrote:
| 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.
| tptacek wrote:
| 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.
| tcbawo wrote:
| What seems especially common are indirect incentives such
| as dinners, drinks, vacations, and other entertainment
| perks.
| jacquesm wrote:
| 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.
| notyourday wrote:
| Walmart procurement has very strict rules where if they
| accept any incentives i.e. dinner, drinks, vacation,
| entertainment, etc are grounds for immediate termination.
| [deleted]
| tomp wrote:
| 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.
| tptacek wrote:
| Yes, it obviously is illegal. He was just convicted of
| fraud.
| simonh wrote:
| 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.
| inetknght wrote:
| 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.
| jacquesm wrote:
| 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.
| jacquesm wrote:
| The fact that this even needs explaining is pretty sad.
| prasadjoglekar wrote:
| It's in the second paragraph.
|
| 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.
| numbsafari wrote:
| 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?
| throw4823442 wrote:
| I used to work for a company that actively sought out and
| hired the adult children of high level executives.
|
| 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.
| kwertyoowiyop wrote:
| "Nepotism"
| Kranar wrote:
| 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."
| handrous wrote:
| > 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.
| dralley wrote:
| https://www.bloomberg.com/opinion/articles/2021-08-31/thera
| n...
| 0xFACEFEED wrote:
| Heh, yea. Good observation.
|
| 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.
| handrous wrote:
| 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"
| amznthrwaway wrote:
| I don't think the lesson is that it's necessary; but
| rather that if you are successful as a business, you will
| probably get away with the crimes.
| [deleted]
| nonameiguess wrote:
| 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.
| cabcabcab wrote:
| Every single early stage company I know does this.
| dboreham wrote:
| 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.
| toss1 wrote:
| Yup, it is, at every level
|
| 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?
| pmarreck wrote:
| I have an easy breakdown:
|
| 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.
| tootie wrote:
| 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.
| ksdale wrote:
| 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.
| eganist wrote:
| s/understand/care
| ksdale wrote:
| 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.
| loopercal wrote:
| I think a lot of people feel "clever" and like what
| they're doing is, while not expressly allowed, not
| forbidden either.
|
| 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.
| ksdale wrote:
| 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.
| nindalf wrote:
| 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.
| nitrogen wrote:
| It's also for everyone not involved to notice something
| is wrong if they overhear a contract-related conversation
| that mentions kickbacks.
| veltas wrote:
| 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.
| jacquesm wrote:
| 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.
| anonymous4828 wrote:
| Doesn't this sort of thing happen in government all the time?
| singlow wrote:
| Maybe, but if they are caught they can go to jail too.
| Several hundred[1] government employees are prosecuted for
| corruption each year.
|
| [1](https://trac.syr.edu/tracreports/crim/646/)
| barney54 wrote:
| 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.
| vkou wrote:
| Yes, but no, but yes.
|
| 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.
| ghaff wrote:
| 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.
| prasadjoglekar wrote:
| 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.
|
| See https://www.nytimes.com/2015/12/01/nyregion/sheldon-
| silver-g...
| vxNsr wrote:
| 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.
| namdnay wrote:
| 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"
| wombatpm wrote:
| 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.
| kvathupo wrote:
| 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.
|
| [1] - https://news.ycombinator.com/item?id=25975636
| gadders wrote:
| I think a lot of the time the quid pro quo is delayed (or
| gives that perception)
|
| 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
| tptacek wrote:
| 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.
| cabcabcab wrote:
| This is _super_ common in the Valley. This isn 't the exception
| it's the norm.
|
| _Every_ single angel investor I have ever pitched asked for
| /suggested this.
|
| If this is illegal 99% of the Valley is committing fraud.
| simonh wrote:
| 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.
| tedivm wrote:
| 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.
| csmythe15 wrote:
| That's more of what I'm looking to substantiate...thank you.
| tweedledee wrote:
| 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.
| [deleted]
| tyingq wrote:
| 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.
| outworlder wrote:
| > 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.
| atarian wrote:
| I thought that was very interesting too. Especially when you
| pointed out that tweet from Alexis.
| jacquesm wrote:
| 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.
| mewse-hn wrote:
| 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.
| perfecthjrjth wrote:
| 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.
|
| This kind of fraud is so common in this industry.
| sat1 wrote:
| Eye-opening.
| hikerclimber1 wrote:
| What about former ceo of Wells Fargo? He's now an advisor though
| he was barred from the industry.
| runako wrote:
| 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?
| [deleted]
| jnwatson wrote:
| The weird aspect of the whole thing is that if the exec were a
| corporation, it would have been legal.
| JumpCrisscross wrote:
| > _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.
| s1artibartfast wrote:
| 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
| elliekelly wrote:
| Well you can't exactly defraud yourself, can you?
| computermagic wrote:
| 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.
| wnevets wrote:
| 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.
| cpb wrote:
| I guess some people just don't get quality onboarding content
| from compliance.
| elliekelly wrote:
| I checked your profile hoping maybe you had a quality
| onboarding compliance content startup. Maybe one day...
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