Why I Did Not Go to Jail (2014) | Hacker News Reader

Why I Did Not Go to Jail (2014)

a16z.com

249 pointseruditely152 comments

> Michelle was surprised, as her previous company had run this practice for years with full approval from PricewaterhouseCoopers, its accounting firm. I said: “That’s all fine and good, but I still need Jordan to review it first.”

Jordan came back with an answer that I did not expect: “Ben, I’ve gone over the law six times and there’s no way that this practice is strictly within the bounds of the law. I’m not sure how PwC justified it, but I recommend against it.”

One of the foundational reasons for the spectacular implosions of both Enron and WorldCom was the behavior of their common auditor, the ginormous accounting firm Arthur Andersen (https://en.wikipedia.org/wiki/Arthur_Andersen). Andersen was willing to certify pretty much anything these companies wanted to do as fully legal and above-board, because these were big clients and Andersen didn't want to lose them to some other accounting firm by inconveniently insisting that they keep honest books. So they were free to rip people off in all sorts of creative ways for years, protected from close scrutiny by Andersen's seal of approval.

All of which is to say that, if you represent serious cash flow and you're tempted to push the legal envelope, you probably shouldn't expect a Big Four accountant to be the one to talk you out of it.

Quick reminder for anyone who might have missed it:

Accenture is a spinoff from Anderson Accounting.

Do with that knowledge what you will: https://en.wikipedia.org/wiki/Accenture#Emergence_of_Accentu...

This is a useful bit of knowledge, but to guard against people making irrational judgments about Accenture, it's important to note that (1) It was primarily Anderson's consulting divisions that went to Accenture, and (2) these large auditing firms have offices all over the US and world, and in these types of cases, it was really only a branch or two that were complicit in the fraud.

In the same way that we shouldn't condemn the employees of <INSERT TECH COMPANY> because senior leaders decided to <Censor/Abuse/Manipulate users> we shouldn't condemn otherwise ethical accountants because of the misdeeds of their colleagues - especially when they pass more stringent ethical requirements than developers.

Ironically, people couldn't differentiate the isolated incident, and AA liquidated/sold because no one wanted to do business with them. [0]

[0] en.wikipedia.org/wiki/Arthur_Andersen#Demise

The tech examples will often involve employees directly responsible for building, improving and maintaining the systems of abuse that are central to the ill deeds of the senior leaders you're referring to. The senior leaders can't do what they do without those systems.

This concept is fundamentally why 4,000 of Google's employees staged a protest against Google working on AI systems for the military. They have an inkling about what such systems will be used for.

So it begs the obvious question about how complicit you are if you build software systems that you know are going to be used for immoral things; that you know ahead of time how they're going to be used by said senior leadership. To say nothing of the fact that often said systems are built for the sole purpose of enabling abuse, so there's very little question about the line of moral responsibility (whether of privacy or in the aiding of censorship in authoritarian nations, et al). This obviously isn't a new debate within tech though, it goes all the way back in the industry (eg IBM's counting machines).

> how complicit you are if you build software systems that you know are going to be used for immoral things

There's another path to not building and not participating it. It might be possible to be subversive and design these systems to best fit your values:

"My bias was always to build decentralization into the net. That way it would be hard for one group to gain control. I didn’t trust large central organizations. It was just in my nature to distrust them." -- Robert Taylor

https://theymadethat.com/people/l8tu24/bob-taylor

"Ironically, people couldn't differentiate the isolated incident, and AA liquidated/sold because no one wanted to do business with them."

"Ironically" is not the word you should be looking for, there. "Fittingly", or "Unsurprisingly", perhaps. Even if you know not all the apples in the barrel were bad, you know that it was a barrel with more than one bad apple, so you throw that barrel out.

Ironically, people often dismiss the scale of a problem by saying it was limited to a few "bad apples", when the point of the apple/barrel metaphor is that one bad apple can spoil the whole bunch, so having one bad apple in it is just as bad as every apple being rotten.

Does that one work?

I think unfortunately may have been a better word for the parent, but your apples metaphor doesn't make sense in this case.

The company now known as Accenture was spun off in 1989, and was not involved with Enron.

>Andersen was willing to certify pretty much anything these companies wanted to do as fully legal and above-board, because these were big clients and Andersen didn't want to lose them to some other accounting firm by inconveniently insisting that they keep honest books

According to friends in the Big 4, this seems like standard practice.

As much as Sarbanes-Oxley can be a pain in the ass there are reason for its existance. And having n to change your external auditor ever so often is a good thing. As is bein SOX compliant in general. Companies that aren't or just barely tend to have some ugly, not illegal just ugly, stuff going on sometimes.

Andersen was willing to certify pretty much anything these companies wanted to do as fully legal and above-board, because these were big clients and Andersen didn't want to lose them to some other accounting firm by inconveniently insisting that they keep honest books.

Anecdotally, this happens at all levels of accounting.

I've hired two accountants in my lifetime. Both times I was asked something along the lines of, "I can be as as clean or dirty as you want me to be. Just let me know now, before we get started."

I'm reminded of an anecdote I heard once: When interviewing an accountant, the founder showed the accountant some financial and asked the accountant "What story do these numbers tell?" to which the accountant replied "What story do you want them to tell?"

That kind of anecdote comes in an insane number of variations. Even if it's based in truth, it's probably been distorted through retelling.

In other words, don't try to pass off jokes as anecdotes.

Shrug. Then add me to the list of someone who had this asked of me directly. Twice.

Maybe you'll find it interesting that the Greek word for joke is anecdoto.

That is interesting, thank you.

"What story do you want them to tell?"

Welcome to the non-black-and-white world of gray. That mentality goes far beyond just accounting. Anything beyond a basic measurement is open to interpretation.

It is definitely true that accounting is not at all straightforward, it's actually really challenging to figure out what's really going on in an enterprise, it's not just some arithmetic.

Which is why an accountant who is good at figuring out what's really going on is so valuable.

An accountant who specializes in making the numbers tell the story the CEO wants them to tell is not an accountant who can tell you anything useful about the company's financials. If you just want propaganda/marketting instead of accounting I guess that's fine, so long as you don't end up going to jail for it.

That things are open to interpretation doesn't mean there's no difference between trying to figure out what's going on, and trying to spin it to what you'd like to be going on.

Like a boss whose reports only tell him what he wants to hear. I'd tell the "what story do you want them to tell" guy -- what would I pay you for if you're just going to tell me the story I already know I'd like to be true?

Of course, plenty of people do pay that guy, because they're just trying to put one over on everyone else.

That is the complete opposite of any of my experience.

CPAs are generally extremely conservative. And unless you are paying them immense amounts of money, they are almost always reticent to do anything even remotely risky.

After all, their license and this livelyhood is on the line.

I've been a chartered accountant in a past career.

From my experience a sizeable percentage Chartered Accountant's / CPAs are happy to do whatever they are directed to as long there is plausible deniability (and you can generally find that if you look closely (or don't look closely enough).

I don't see this as special to accountant's I see it as a function of human nature.

I've seen a couple comments about Arthur Andersen, Enron, and Accenture in this thread and I just want to detail everything that went down in that situation.

Full Disclosure: I recently left a position with one of Accenture's subsidiary. I also hate that company.

The Supreme Court actually vacated Arthur Andersen's conviction for their actions in Enron. The SC basically said the jury instructions were too vague, and the jury could have believed that Arthur Andersen thought they did everything right and legally but still voted to convict. Arthur Andersen was never retried since there wasn't much left at that point anyway.

Arthur Andersen Accounting (or whatever they formally called themselves) and Arthur Andersen Consulting had already broken up into two different companies. They set up some weird agreement where the more profitable of the two would pay a cut of the profit difference to the other company. Consulting is always more profitable than accounting (which is why all the Big 4 have gotten back into even in the age of Sarbane-Oxley, where they can't audit a company they consult for), so Arthur Andersen consulting had to send a big-ass check to the accountants every quarter and they wanted to get out of that. The blow up of Arthur Andersen accounting presented the perfect opportunity. Arthur Andersen Consulting changed their name to Accenture to distance themselves from the Enron scandal, but it was mostly PR because they didn't have anything to do with Enron anyway.

McKinsey, however, had consultants all through Enron. I believe Skilling worked for McKinsey right out of college and threw them a ton of work. There's no way people at McKinsey didn't know what Enron was up to, but they somehow got off scot-free

McKinsey wasn't their legal auditor, blessing their financial statements. That's like saying any management consultant or contractor at Enron at the time should be punished. That makes no sense.

McKinsey was far more than just a management consultant for Enron. They were deeply embedded in the decision making process and even if they didn't do anything outright criminal they certainly share moral responsibility for Enron's misdeeds.

https://www.newyorker.com/magazine/2002/07/22/the-talent-myt...

You're both right and wrong. The auditor has professional ethical and legal obligations. Clearly that is a special case of being particularly culpable.

However, everyone who knew what was happening and the scam being run should probably have been deemed complicit

> Andersen Consulting changed their name to Accenture to distance themselves from the Enron scandal

The name change was in place before Enron went bankrupt, and was a condition of the settlement with Andersen Consulting. It was very fortunate timing indeed.

Reminds me of https://www.ft.com/content/c1231f40-f695-11e7-88f7-5465a6ce1... . Excerpt from article -

--------------

Ramalinga Raju, Satyam’s then chairman, admitted to overstating the company’s cash balance by $1bn, as well as exaggerating the company’s headcount by 13,000. “It was like riding a tiger, not knowing when to get off without being eaten,” he wrote of the growing deception. The company later admitted that the total irregularities amounted to $1.7bn.

----------------------

How these things get past auditors is beyond me.

Here is Ben 3 years previously recommending that executives break the law to preserve their standing with each other:

"It is important to note that just about all of these kinds of policies violate the Right to Work laws in California. Specifically, if you block a hire based on this kind of policy and the employee loses their job and cannot find work, your company is liable for his wages. As a result, the business relationship with the other company must be extremely important for you to employ any kind of “hands off” policy."

https://a16z.com/2011/02/23/is-it-ok-to-hire-people-from-you...

Violating California labor law is unlikely to land you in jail-- most of the penalties are financial.

I mean, given the tone of this post and the talk of how important it is to run everything by the counsel, "not committing a crime that literally leads to the executives being jailed" is a pretty low bar.

...albeit a higher bar than many of his peers could clear.

Advocating the violation of labor laws is generally considered a bad look irregardless of the punishment be it jail or fines.

Thanks for finding that. I remember reading this in the book, and immediately thought of the anti-poaching deal Google, Apple, Intel, Adobe, etc had with each other. It's identical to the activity they were found guilty of... He actually recommends you do this.

When he suggested collusion with other companies, I realized the book may have some bad advice in it.

Yikes.

> With that in mind, the best way to deal with these situations is openly and transparently. Once the you become aware of the conflict between hiring the superstar employee and double-crossing your valued friend, you should get the issue onto the table by informing the employee that you have an important business relationship with his existing company and you will have to complete a reference check with the CEO prior to extending the offer. Let him know that if he does not want that to happen, then you will stop the process now and keep the process to date confidential. By speaking with your friend before making the hire, you will be able to better judge the relationship impact of hiring her employee. In addition, you may avoid making a bad hire as often candidates who do well in interviews turn out to be bad employees.

I'm not sure "open and transparent" is how I'd describe that.

Straightforward and discreet, maybe.

Illegal, another word.

Legally "suboptimal", in that you're confessing to the future victim of a crime that you're about to inflict a crime on him. Not only do you become liable, we've just established conspiracy to commit, rather than just the crime itself. This generally doubles the penalty. Bonus idiot points for doing it over email.

I read the book and this was one position I found indefensible. Employees must have the ability to move companies, and any attempt to block it is bad and immoral. If an employee of any of my friends applied we would absolutely consider them and give them an offer, over any objections their old boss had.

> A good rule of thumb is the reflexive principle of employee raiding which states: “if you would be shocked and horrified if company X hired several of your employees, then you should not hire any of theirs.”

This seems really childish. I would only be shocked if friendly/partner companies /actively recruited/ staff from me. I would never be shocked if they hired a current employee who felt the new job was a better fit. In fact I would be happy for everyone involved.

Frankly, the proprietary "your" or "my" employees is already the wrong way to think.

I don't belong to my CEO - my CEO needs to give a reason to want to offer them my time. And while it is unlikely I'd find out, if I did find that management at my company made slimy deals with other firms to hurt my career, I'd be out the door immediately, loudly explaining to my coworkers and extended network of technical types why.

The superhero-CEO myth in the valley needs to go. It isn't even healthy for them.

There is a difference between "this is criminal" and "this might make you civilly liable to pay someone's wages."

Referring to the latter as "break[ing] the law" in the context of discussing criminal activity is misleading.

Thats because

> your company is liable for his wages

doesn't cross his threshold of

> In this business .... we will not go to jail

its consequentialism 101. do the consequences deter you.

A criminal charge from the US FEDERAL GOVERNMENT WITH INFINITE RESOURCES vs a civil charge from a bankrupt state against the most capitalized entities on the planet

HMMM TOUGH CHOICE

you may have been indoctrinated to respect due process of all laws as written from any united state and from the national republic itself, thats not the same game that everyone is playing.

The game he was playing was "become a billionaire." I was a member of the protected class in the Apple-Pixar-Google etc case. When I left, I got a 50% raise. I estimate that that collusion cost O(10,000) people between $50,000 and $500,000 each (my settlement was less than $10K, and my personal loss was ~$40,000/yr * 5 years).

Given that Ben is discussing executives here, let's say: O(1,000) people what, $100,000 to $1,000,000 each?

Thats insightful

why are you using big O notation?

I often see this used informally as shorthand for "on the order of", which is another way people say "approximately".

"on the order of" is not synonymous with "approximately"

"on the order of" 1000000 means any number from 1000001 through 9999999

I would expect "approximately" to mean accurate to within the next order of magnitude down. e.g. I would expect "approximately 500000" to mean a range of 400000 to 600000; maybe 350000 to 650000 if you're stretching it.

> "on the order of" 1000000 means any number from 1000001 through 9999999

Not exactly. It can also mean anything from 500,000 to 4,999,999, or 316,228 to 3,162,277...

See https://en.m.wikipedia.org/wiki/Order_of_magnitude

But yeah, it doesn't mean approximately

It's because the notation is pronounced "order of", which is also the vocabulary used when you do Fermi estimation: you don't care about exact numbers, but you want to guess the order of magnitude / power of ten correctly. It's linguistic overloading if you want.

People, please stop downvoting this reasonable question

You shouldn't have been downvoted for that, it's a perfectly reasonable question. I had the same question myself.

Here's the funny part: there is no such thing as O(10,000) in big O notation. Big O doesn't concern itself with constant factors, it's about how performance changes with the size of the dataset. If two algorithms run in constant time but one takes twice as long as the other (maybe it's a debug build), they aren't O(1) and O(2), they are both O(1).

So it's not surprising that anyone would be confused by O(10,000). In big O, this would be an impossible value. It just wouldn't make sense.

The best solution, as always, is to use plain English. You will never go wrong by saying "about 10,000".

Formally, the Landeau notation allows for O(10,000)... But 1 = O(10,000) and 10,000 = O(1), so there is relatively little use for writing anything other than O(1).

Others mentioned that Sharlene Abrams is "Michelle" here and posted links but this link seems to be better [1].

Interestingly, this case was about backdating _executive_ options _including her own_. I can't claim any knowledge of what PWC did or didn't approve of and some casual searching hasn't found any action taken by the DOJ or the SEC against auditors in relation to SV option backdating (please correct me if I'm wrong).

A quick search found that at one point option grants needed to be reported within 2 months but the SEC changed this to 2 business days and some companies and individuals were indicted because they failed to do so. Was this after this case or before? I'm not sure on the timing.

Whatever the case, this seems pretty wilful non-compliance (and, arguably, fraud) so I'm not surprised some went to jail. I'd also be surprised if anyone thought backdating anything that affected tax and legal obligations was legal, particularly a CFO.

As for anyone who thinks those who commit this kind of fraud shouldn't go to jail, I'd say jail is about the one thing the rich are afraid of. If you have $20m then a $3m fine might suck but it's not the end of your world. A year in jail in so much worse.

[1] http://retheauditors.com/2014/02/13/vc-horowitz-implicates-a...

> As for anyone who thinks those who commit this kind of fraud shouldn't go to jail, I'd say jail is about the one thing the rich are afraid of. If you have $20m then a $3m fine might suck but it's not the end of your world. A year in jail in so much worse.

Except the intention here obviously was not to defraud, but to follow the law, which was so incomprehensible as to make even professionals fall into its traps. And it's not "the rich" going to jail here, but the professionals that are responsible for making that mistake. Maybe that professional happens to be "rich", but most people involved will walk free, as long as there's a scapegoat.

No, people shouldn't go to jail for this. These regulations shouldn't even exist. Even "socialist Europe" isn't as bad as the US in this regard.

Other than the assertions in the blog post it's not really clear why we should believe this version of events. Consider this article, which suggests the opposite: https://web.archive.org/web/20150108121957/http://go.bloombe...

"Abrams did not actually go to jail for backdating stock options. What she pleaded guilty to in a criminal case[1] was listing a false exercise date for her options on her tax returns. That meant more of her profits got taxed as capital gains (at a lower rate), less as ordinary income. Lowering your marginal tax rate is a silly reason to risk jail, but that’s a separate question. In his post, Horowitz says, “Michelle ultimately served 3 1/2 months in jail for her part in [her old employer’s] stock option practice — the same practice that we nearly implemented at Opsware.” Well, sort of. Certainly the charges against Abrams were a consequence of the backdating investigation.

It’s safe to guess, though, that backdating company loans to executives (something else that happened at Abrams’ earlier company) and switching around exercise dates to cut his own taxes weren’t practices Horowitz was planning to implement. You don’t need a great general counsel to steer clear of this. Just following the instructions on TurboTax would probably do it."

https://web.archive.org/web/20150108121957/http://go.bloombe...

[1] https://web.archive.org/web/20130530050608/http://www.justic...

I don't think the rule that was violated here is very complicated at all. I'll get the technical details wrong, I'm sure, but the underlying ethic of the situation is obvious:

If you issue a stock option with a strike price equal to the day's market price of an option, it's "at the money". These options are tax-favored, presumably because it doesn't have intrinsic value (until it's "in the money", when the company shares later appreciate).

What you can instead do, if you're a cheat, is to pretend you're issuing tax-favored incentive options "at the money", but backdate them so that their price at issuance is the low price within some window. These options are effectively "in the money" (whatever the difference is between the low price set for the option and the current higher price is locked-in profit) when issued, have intrinsic value, and should be fully taxable, but you're falsely claiming otherwise.

Right, you should never expect to receive something of value as compensation in a way that doesn't trigger a tax liability.

I mean, besides free workplace cafeterias, work shuttles, and employer health coverage.

I mean I take your point but there were specific rules around at-the-money vs. in-the-money options issuance, and for, like, pretty obvious reasons.

I'm being cheeky; I agree that the options thing isn't some hard-to-understand esoteric case.

These options are effectively "in the money" (whatever the difference is between the low price set for the option and the current higher price is locked-in profit) when issued, have intrinsic value, and should be fully taxable, but you're falsely claiming otherwise.

For what it's worth, options that are not "in the money" are still worth a lot of money and have intrinsic value. I'm not making a ridiculous claim here, this is what the Black Scholes model would say for example and it's why companies don't just hand out options freely to anyone. Yet according to our tax law they do not have value and are not taxable. (This is why options exist in the first place.) So, IMO the whole thing is complicated because the tax law has a somewhat arbitrary rule for determining what options are taxable.

IANAL but it is also not required to give out strike prices that match the exact day someone is hired. You have some flex in the time period. So these rules just aren't as simple as one might hope.

I guess my argument would just be that it seems pretty clear why it would be shady to go back in time and pick a false issuance date to create the impression that options issued at a higher price were really issued at a lower price in order to lock in untaxable profit.

I used to think that too. But I also thought it would be shady to claim that options had no value when those same options can be traded for money, to lock in an untaxable transfer. That, however, is a key part of how options tax law works. So my current claim is just that intuition is not a good guide to what is or is not legal or ethical for options taxation.

The IRS thankfully does not use Black Scholes to calculate what I owe taxes on.

Well, if the IRS did it that way, probably nobody would be using stock options in the first place.

An option that is not in the money has no intrinsic value by definition. It has time value.

I don't think it's accurate to say that it has no intrinsic value by definition. If you do a fundamental analysis on the options without reference to their market value, the Black Scholes formula will tell you that an option, even an option out of the money, is worth something. That is the definition of intrinsic value.

Options out of the money also clearly have a market value, for public companies at least.

Intrinsic value has a very specific meaning in the options world (different from the everyday meaning you are referring to): https://www.investopedia.com/terms/i/intrinsicvalue.asp

According to the first sentence in the article you link, "Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, using fundamental analysis." That's precisely what I am talking about.

Read more than the first sentence before you double down.

Not sure how to feel about this.

Story seems to be that this lady went to jail from a knock-on effect of a stock option backdating scheme, which led to taxes being wrong. But many firms seemed to have done this, presumably with somewhat independent legal advice.

I'm not close enough to the details to really understand it, or even understand whether it smelled.

But I can remember a time when accountants were shopping around tax-saving schemes in the City of London, and I came across one of the sales guys. There would be all sorts of strange schemes, for instance involving the schemers "advising" P Diddy on his lyrics. Or publishing a book of their own poetry. And the explanation diagram would always fill up entire A4 pages with various sorts of entities. I'd get told the scheme was sound, approved by top lawyers, etc.

But I never participated, it just seemed too contrived to make sense. The stuff was always marketed as "you'll save tax" but everyone knows whether they're making an income, and what the rough tax rate is. So if you're paying a lot less something smells.

Michelle got actual jail time for a simple, honest accounting mistake? I don't buy it. Rich, connected people don't serve time for white collar crimes in the USA unless the criminality is severe.

Right. The person in question plead guilty to criminal tax evasion, an exceedingly rare charge. Nobody gets charged with tax evasion for reasonable but incorrect interpretations of the tax code. In this case the evasion was intentional, flagrant, and large.

This is why this text did not land in the book.

I still think something is missing from the story. They state the scheme was designed by outside legal counsel. Lawyers are paid to know the law. Under federal law, for it to be criminal tax evasion, the conduct has to be willful. Doing something with advice of legal counsel is almost definitely not a willful violation of the law.

The reason for this apparent paradox is that all of the key statements in this blog post are false. Just go read the US Attorney's press releases or the perpetrator's guilty plea if you want facts.

You are only getting the story as presented by the CEO, so I assume I am not getting the entire picture.

It wasn't a mistake, she should have known better. That's her job. She knew it was sketchy but got signoff from some sketchy accountants. That doesn't means she's no longer liable, just that the accountants are also liable.

I'm not sure the author would have gone to jail as the title implies. He seems to think that the cops would have arrested everyone standing within 50 feet of her, but since their firm was apparently operating inside of the bounds of the law it's hard to figure out what they would charge him with. Of course he still had to fire her to keep his company's name out of the headlines, but not because he was personally liable for her actions at her previous job.

PWC is supposed to be the definition of non-sketchy accountants, and like 50% their fee goes to maintain that appearance. Not saying they didn't sabotage that prestige here, but it's not like she deliberately selected for sketchy accountants.

So the question is, after the incredible track record for fraud by Wall Street businesses like them, why do major companies and investors still trust them?

According to the Bloomberg article somebody else posted, she hid some of the details of what she was doing from the auditors, and this was revealed at trial using the auditors' notes.

Right, but then in that case her problem is (as I was trying to say above) not that she was "hiring sketchy accountants" but that she was "deceiving non-sketchy accountants".

It just seems like a lot of the discussion is trying to leave this at the feet of the auditors. Can't really blame them for your wrongdoing if you endeavored to deceive them, in my opinion.

To reiterate, I don't disagree at all, I was only objecting to the characterization of the core problem as "finding sketchy accountants". Giving accountants sketchy information? Sure. The accountants themselves being stenographers for hire? No.

So I generally sort of agree with this as a rule of thumb, but you should keep in mind that you're essentially refuting the premise of "Three Felonies A Day", a very popular book on HN. (I don't think it's an especially cogent book, but still, worth thinking about!)

Rich, connected people don't serve time for white collar crimes in the USA

Tell that to Jeffrey Skilling.

https://en.wikipedia.org/wiki/Jeffrey_Skilling

You need to finish the quote: ...unless the criminality is severe...

To be fair, they usually mean that it’s rare for rich and connected people to get jailed, not that it’s literally impossible.

The one exception to this rule is rich people who screw over other rich people. Arguably Skilling falls under this rule, as does Bernie Madoff.

Also, he writes,

> Once the SEC decided that most technology company stock option procedures were not as desired, the jail sentences were handed out arbitrarily.

The SEC does not jail people, courts do. I don't see how the SEC's motivations would lead judges to hand out arbitrary jail sentences.

(2014)

Previous discussion: https://news.ycombinator.com/item?id=7191642

Also https://news.ycombinator.com/item?id=11240717 from a couple years later.

Pretty important comment in there that the person Ben is talking about didn't go to jail for this accounting strategy but rather tax fraud!

The idea of a GC reporting to a CFO is a lunacy. It is like a controller reporting to a CRO.

Edit: I am fascinated by the downvote.

The job of GC is to prevent a company from doing things that would create legal issues for the company. Both CEO and CFO have a reason to push the company to take risks, including legal risks. Neither should be able to fire the GC. Therefore GC should report to the board of directors not to the CEO and definitely not to the CFO.

The job of a controller is to oversee accounting. The top level person who is likely to engage in creative accounting is the head of sales/chief revenue officer. Controller reporting to the CRO creates an incentive of a controller to take CRO positions rather than purely accounting positions. Therefore controller should either report to CFO or CEO.

Read about this form of fraud, and more, in the book "financial shenanigans" !

Quoting from this review of the book: https://100investmentbooksayear.wordpress.com/2014/12/17/rev...

> Failure to proper account for stock option backdating expense, where management secretly give themselves stock options that had already increased in value. By not reporting the compensation expense resulting from these “in-the-money” stock options grants, companies are overstating their earnings. Look out for unusually “lucky” timing on the issuance of stock options.

Edit: from the old thread, here's the SEC's statement:

https://www.sec.gov/litigation/litreleases/2009/lr20964.htm

> On May 31, 2007, the Commission charged Abrams and three other former senior Mercury officers with perpetrating a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other Mercury employees undisclosed, secret compensation by backdating stock option grants and failing to record hundreds of millions of dollars of compensation expense. The Commission's complaint alleges that during this period certain of these executives, including Abrams, backdated stock option exercises, made fraudulent disclosures concerning Mercury's "backlog" of sales revenues to manage its reported earnings, and structured fraudulent loans for option exercises by overseas employees to avoid recording expenses.

Backdating options is one thing. Failure to report the additional expenses incurred by backdating options fraudulently overstates the profitability the company, harming all other investors

>Michelle (note: her name has been changed)

Does this really obscure "Michelle's" identity? CFO at a major, well run enterprise company, worked at Opsware until ~2005, and later she served 3.5 months in prison. (Not sure if gender was randomized.)

That seems to be enough to figure out who it was.

Edit: Per romed's comment, Sharlene Abrams seems to fit those criteria:

Confirming the ~4 month sentence: https://www.law360.com/articles/229277/ex-mercury-cfo-gets-4...

https://www.reuters.com/article/mercury-plea/former-mercury-...

https://news.ycombinator.com/item?id=18027437

And I also found this, which recounts the same details of the story and confirms Abrams: https://dealbook.nytimes.com/2014/02/06/how-ben-horowitz-avo...

It is not meant to permanently obscure it; only to avoid specifically naming them for Google Searches as a courtesy. It's not like "Michelle" didn't do what Ben said she did; she in fact did a lot worse.

Ben was merely extending a basic courtesy.

Fair enough, but it seems he added a lot of unnecessary detail that made her easy to identify with high confidence. The exact length of the prison sentence? The year of resignation? The title at current and previous job?

That seems like a lot of work that went at cross purposes to anonymization.

I think it is highly unlikely that more than one CFO of his company was ever jailed. At least, I sure hope not!

The general rule for startups is to innovate in product space and not in the mechanics of running (and taxing of) the business. This will put a startup at the disadvantage of FAMGA. But that is only one of many disadvantages.

The irony of this CFO example is that the innovation was ethics, run it by a lawyer, and the conventional wisdom was unethical, to backdate the options. But irony notwithstanding, the law won out.

If your inner voice says you and your C corporation might be getting away with something then you should probably run that by a lawyer. If that something involves someone else not knowing something else (the essence of fraud) you definitely should run that by a lawyer or just follow the general rule.

I am disappointed so many people seem to accept the view that Michelle is in fact substantially to blame and deserves her punishment. I have the opposite view: the government is absolutely to blame, for creating an incomprehensible tax and accounting system. It is unacceptable to me, for example, that the IRS (or SEC) does not just notify people directly and immediately if they have made a mistake - honest or otherwise - on their accounting statements. It's as if a company built an unusable software system, and also somehow had the legal power to send people to jail for making mistakes while using it.

Is there a legal equivalent of "code smell"?

Pretty much ethics. If there's anything that's being done or offered that wouldn't be affording to random public joe then think very hard about why it's being done.

For some things there's a good reason, for others it's reasonable to ask why a specific timeframe? Why not 5% more, or 100% more.

"backdated" is the stinkiest of legal smells.

Neat story. Definitely underscores the importance of not just blindly copying others. Just because "everyone's doing it" does. not. make. it. right.

Old rule: "Measure twice. Saw once."

Another old rule: "Believe none of what you hear and half of what you see and still will believe twice too much."

I learned a similar lesson in math: Intuitive descriptions and conceptions and pictures and examples are from really good up to crucial, but they are not sufficient. Instead, make strong efforts to stay really close to carefully stated theorems and proofs.

Sure, there are books, lectures, etc. on applied math that try to make the subject easier by omitting the proofs and often even the carefully stated theorems. On further inspection and more learning, what I found was that the with the easier treatments, in practice omitting the theorems and proofs also omitted crucial discipline, care, and checking and brought in too many errors.

Sometimes have to work with such "easy" sources and work too fast, but in that case try not to bet more than can afford to lose -- in the sense of the OP, don't take a chance of going to jail.

Corollary: call Jordan Breslow if you are looking for real advice, which is something rare. He has a professional web page here: https://www.gettinglegalright.com/ it seems he is the real hero.

It's neat how some rap references, lip-service to integrity, and some local color about Berkeley hippies can make a multi-millionaire's story seem sympathetic, given it's about hiring a CFO who ultimately went to jail for accounting fraud.

i disagree, Ben writes a really good account of growin up in the 'hood' and shares some unique socioeconomic perspectives from the descendants of ideological enemy, their grandfather being the founder of American Communist party, also being Jewish to add.

Rarely do autobiographies leave such lasting impression but the "Hard Thing About..." book was a really transparent look at Ben's humanity IMHO.

Usually I would not hesitate to share cynicism but I find Ben resonates better with people like me who also grew up in the 'hood' and are tryna make it.

His entire book is like that.

On the one hand, it does rub the wrong way. I'm supposed to believe this is a man of and from the street?

OTOH, it adds useful background color to his story. Probably finely studied and tuned for publication, but still useful.

You should check out the audiobook.

And firing her for something she did at a previous job that you believe was accidental.

Reading that legal doc made me wish there was a Genius for laws.

> Michelle ultimately served 3½ months in jail ... Michelle had no intention of breaking any laws and no idea that she’d broken any laws.

There is something desperately wrong with our legal system when a situation like that is even possible.

Ignorance is no excuse for breaking the law. Especially when it's your job to not be ignorant of it.

The blog post is a highly misleading one-sided account of a notorious white-collar crime. You should read more about it from other perspectives.

Do you have a recommendation?

https://www.reuters.com/article/mercury-plea/former-mercury-...

https://www.sec.gov/litigation/litreleases/2009/lr20964.htm

etc.

Kind of interesting, too, that the original article talks about the backdated options being granted to "employees", while from your links, it appears that this was very much a thing for executives only.

An executive risking jail time to help employees out does not sound that plausible, to be honest.

Now an executive risking jail time to enrich themselves? Now we’re talking.

Thank you! So, Michelle is Sharlene.

From the sec link it is pretty clear she knew what she was doing. Backdating options was just one part of a larger scam.

> > Michelle had no intention of breaking any laws and no idea that she’d broken any laws.

> There is something desperately wrong with our legal system when a situation like that is even possible.

Is there? If I intend to do something which is illegal, but don't know that it is illegal or intend to break any law, should I be immune to criminal punishment? If I mistakenly believe the legal scope of self-defense includes using deadly force against threats which are only fuzzily-anticipated in the future, should murdering the roommate a vaguely suspect of harboring ill-intent against me be non-criminal?

When the law cares about intent, it is usually intent to commit the act which the law addresses, not intent to break the law by so doing. If this really wrong?

> Is there?

Yes.

> If I mistakenly believe the legal scope of self-defense includes using deadly force against threats which are only fuzzily-anticipated in the future, should murdering the roommate a vaguely suspect of harboring ill-intent against me be non-criminal?

There is a big difference between the laws relating to the use of deadly force and accounting laws. Accounting laws are orders of magnitude more complicated and more difficult to understand. So yes, if you come up with some clever accounting trick, and you check with a lawyer, and the lawyer tells you it's OK, then you should not be liable if the lawyer gets it wrong. What else can possibly be reasonably expected of someone?

> There is a big difference between the laws relating to the use of deadly force and accounting laws. Accounting laws are orders of magnitude more complicated and more difficult to understand.

Which is relevant if ignorance of the law is an excuse, but not if it is not.

> So yes, if you come up with some clever accounting trick, and you check with a lawyer, and the lawyer tells you it's OK, then you should not be liable if the lawyer gets it wrong.

The only specific reference to a lawyer looking at it in this story was to the lawyer getting it right (an accounting consultancy got it wrong, previously.) But, in any case, unless it was criminal for the lawyer to get it wrong, this would completely defang accounting law since a lawyer blessing an illegal practice would not be guilty of anything, and anyone who got a lawyers blessing would not be guilty of anything.

> a lawyer blessing an illegal practice would not be guilty of anything

They'd be guilty of professional malpractice.

> They'd be guilty of professional malpractice.

Professional malpractice is not a crime but a tort, and the tort requires the client to be harmed by the failure rather than, as in this scenario, owing their liberty to it. So, the criminal law would be completely defanged. And it's unlikely the lawyer would be liable for balance, either.

Your scheme results in people who do due diligence to comply with the law being punished. Do you seriously not see it as a critical defect?

How would an ignorance defense possibly be workable?

If you seek professional, respectable counsel, and that professional, respectable counsel tells you the wrong thing, is "ignorant" even the right word? What exactly are you supposed to do in that case? Get a second opinion? When they conflict, get a third? Who's to say any of them will be right, if we're worried about correctness in the first place? How do you know when to stop? Even becoming a lawyer yourself isn't necessarily going to protect you, because you may well interpret the law incorrectly.

This is really a no-win situation.

"I didn't know I was breaking the law" is not accepted as a defense because then defendants can simply always say they didn't know what the law was. It's true that this is more complicated for accountants, but presumably that's why we make them get licenses.

This is not "I didn't know I was breaking the law." This is, "I did my due diligence (i.e. I checked with a lawyer) and had every reason to believe that what I was doing was legal." I think that's a reasonable defense.

It is; the defense is called "advice of counsel".

Would you feel the same about manslaughter? If someone drove carelessly and killed your child, would you want them to get away unpunished because they didn't intend to break the law?

Knowing that driving carelessly is against the law is a pre-requisite for getting a drivers license. It also doesn't require a law degree to understand that driving carelessly is against the law. There is a big difference between that and a situation where you think of some clever accounting trick, take the initiative to check with a lawyer, have the layer tell you that it's fine, and then you end up going to jail anyway.

Given how lightly white collar crime is prosecuted in this country, this makes me assume not that the law is draconian and unjust, but rather that there is more to the story than we're getting here.

[deleted]

"Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize."

https://news.ycombinator.com/newsguidelines.html

this is four years old, the title should be updated.

Thanks, added.

That song is such a banger. The era of Drake's rise and Weezy at his best.

The whole practice of putting non-violent people in jail is just so absurd.

Tax evasion is theft.

Whatever. The only kind of people that should actually be jailed is those who are prone to physical aggression or invasion into others' private space.

Suppose you live in a house, inside which you enjoy your private space. Maybe you own it or have a mortgage or something. If I defraud you in a spectacular fashion, such as forging loan applications from you and then not paying back the money to the lenders, there's a fair chance you'll end up being pursued by the lenders and going bankrupt and losing your assets including the house effectively losing your private space

In this scenario should i be jailed?

No, you shouldn't be as long as this isn't going to help me regain what I've lost and I don't want the government to spend my tax money on maintaining the jail to keep you in where you are going to be useless and miserable.

Perhaps there are people who can be satisfied by the fact the person who has made them struggle is put in struggle but I certainly am not of this kind of irrational, your struggle isn't something I can eat or live in.

I would prefer to force you to return what I have lost + some extra and would even love to help you to find as a well-paid job as you can manage with if you don't have the money so you can earn it and pay me.

Okay, I think I can understand your perspective in the sense that purely punitive "justice" isn't necessarily a particularly good use of resources and lives.

On the other hand, there's still a question of "how do we prevent someone from doing the same thing in future to another victim?"

In this case, the logical thing to do for an amoral actor is simply to defraud people left and right and pay them back if you ever get caught. You're very likely to come out on top.

I mean, you can make a case for that. But you can also make a case that not much else seems to really deter these high net worth people from doing illegal things. What would you propose as an appropriate punishment for willfully breaking tax law?

how about paying x * amount of tax evaded, where x > 1 and the penalty is uncapped? if a significant fraction of tax evasion lead to convictions, it wouldn't be good business to try.

the obvious issue is that we don't see a high conviction rate for tax evasion, but this is an issue regardless of whether the penalty is jail or a fine. no matter how severe the penalty is for a crime, people seem to do it anyway if there is a strong incentive and they don't believe they will be the unlucky individual. sooner or later everyone is doing it, just to keep up, and the only people who actually get hit with the hammer are the lowest-hanging fruit (often small fish) or those who get singled out for political reasons.

For example, massive fines, that are larger than their net worth, so that they are forced to pay a portion of their income for a while afterwards.

But, yes, prison should not be used as a punishment, but rather to isolate people who are physically dangerous (note that this does not equal violent crime - it's possible for a person to commit a crime of violence, but not actually be a danger to society afterwards).

If we really want to have a physically punitive justice system, corporal punishment is infinitely better than years in prison: it teaches a lesson, but people can move on quickly from that - it doesn't turn their whole life upside down, and it doesn't put them in an environment where they're more likely to criminalize than rehabilitate.

But ideally, the system should be preventative only where necessary (i.e. isolate the danger), and rehabilitative otherwise.

What alternative do you propose?

I love the split personality of HN.

Scenario 1: Poor minority is in jail for multiple car break-ins. "The whole practice of putting non-violent people in jail is just so absurd" gets multiple upvotes.

Scenario 2: Rich white woman goes to jail for tax fraud. "The whole practice of putting non-violent people in jail is just so absurd" gets multiple downvotes.

I'd question the notion that HN is overrun with bleeding-heart liberals.

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