Former Netflix executive convicted of receiving bribes from contractors

Kail's own sentencing memorandum points out that OpenDNS rewarded a different Netflix employee with stock options. Also, presumably, super illegal.

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).

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.

Thank you for your honesty and self-awareness. This framing also amused me.

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...

Embezzlement: Misappropriation of funds Fraud (in the inducement): (Specifically wire/mail fraud when talking about contracts): Misrepresentation of contractual terms to induce entering into a contract. (Here the misrepresentation is the amount of money that the vendor was going to charge netflix since technically his kickback would've reduced the expenses to Netflix)

As an intern at one place I had to spend hours studying and then taking a test to ensure I complied with anti-bribery rules. I’m sure this didn’t just come up because one person did something bad.

https://www.bloomberg.com/news/articles/2014-11-26/netflix-c...

Being able to detect whether a given employee has taken a bribe from a vendor might trip over SOX-relevant things incidentally but not directly. For example, you might need to certify that every employee has taken anti-bribery training every year, and that's your preventative mechanism so at least employees know what is permissible and what the consequences are.

It is 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.

With regard to kickbacks, I have no idea how it was 'sold' to the startup; for all I know it was sold as a separate entity that Netflix buys from which they have premade contracts for, etc. I wasn't there, but I wouldn't assume Sumo or Netskope are running around offering people bribes. My guess is it went the other way.

Generally, the company will have a limit (somewhere in the $25-$50 range) on gifts you could give or receive without prior authorization. So maybe I can take you to a bar or coffee shop and get you a drink or two while we talk. But not a dinner at a high end restaurant, or a sporting event or a vacation in Hawaii, because the risk of being corrupted (on the receiving end) or reputational risk from being seen as corrupt, was too great.

This is particularly potent issue for American companies because of the Foreign Corrupt Practices Act. The FCPA means that US companies (and their subsidiaries, contractors, etc.) have to draw these sorts of lines over the entire world, or be subject to heavy penalties, even in countries where it might be more common and legal.

One area that's more fuzzy is free passes to user events, i.e., a DreamForce or Oracle World. We clear these per our process and are fine to accept them because we were going to spend money on sending someone anyway. We saved the company money. Also: it was never indirect between individuals, it was company to company.

"There was just one catch to landing that deal: It had to hire the streaming company’s vice president of IT operations, Michael Kail, as a consultant and an advisor, and pay him with fees and stock options."

That seems pretty clear to me.

There was just one catch to landing that deal: It (the startup hoping to do business with Netflix) had to hire the streaming company’s vice president of IT operations, Michael Kail, as a consultant and an advisor, and pay him with fees and stock options.

That's "pay-to-play"; you don't hire me as an "advisor", you don't get the Netflix contract.

And 'commonly' doesn't translate into 'every exec does it', but it does happen, in my experience about 2 to 3 percent of the businesses out there have such a thing going on. That's only in my backyard, it is very well possible that different localities or professions would have a multiple or a fraction of that, and it is possible that we're not looking hard enough and that the numbers are much higher.

See https://www.nytimes.com/2015/12/01/nyregion/sheldon-silver-g...

[1] - https://news.ycombinator.com/item?id=25975636

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

[1](https://trac.syr.edu/tracreports/crim/646/)

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.

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.

I think it's because a lot of "hustle" culture and stories of the early business careers of very successful founders involve a bunch of stuff that sure looks like fraud or otherwise like something that ought to be illegal (it may not be, but I mean that it feels like the kind of thing that ought to be illegal, to a normal person) that works out great for them and sure looks like it was a necessary step on their journey to hundreds of millions of dollars and being on the cover of TIME or whatever.

Add in normal corporate business practices just feeling gross as hell on a pretty regular basis, and I can kinda see why people might see this as not really that different from how you're "supposed to" do things—if you aren't a chump, anyway.

Kinda like the college admissions bribery scandal. There was a lot of "oh, so their crime was not being rich enough to bribe the correct way?" in people's reactions, because... well, the system's officially corrupt, in a lot of people's opinions, so prosecuting unofficial corruption feels more like a very fancy organized crime racket putting the screws to the (relatively) little guy to protect their own corruption, than good old feel-good justice.

The key distinction that you outline is that the CIO did something behind the company's back that the company would almost certainly not have approved of. The CIO defrauded their own company by taking kickbacks in exchange for purchasing agreements; most people can see that as being wrong.

As I'm reading this article with no familiarity or background knowledge, I did not presume that this exec, Kail, was doing something that Netflix would not have approved of and using his position for his own benefit and to defraud Netflix.

If Netflix had been okay with Kail becoming a consultant or partner of the startups that Netflix entered into an arrangement with, then there would be no issue.

Anyways, this article is written as if the reader already knows what happened and what's going on, which is fine but it shouldn't be titled "Why a former Netflix exec is facing ..." It should have instead been titled "Former head of IT Operations who defrauded Netflix will face 7 years in jail."

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?

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.

Even those that weren't very competent were hired since if they were part of the same Ivy League alumni network.

I have no knowledge of the business dealings but the company definitely appeared to benefit from having those connections.

Almost everything Trump did or said was in the former category, he cared only for his own benefit it would seem.

A huge number of people don't get why they should vaccinate to protect others perhaps not as immunity fortunate as themselves.

"Myself first, second, and then my fellow, if I stand to gain." (Loosely translated from the Norwegian "først meg selv, så meg selv, og så min neste, hvis det er til eget beste")

Edit: Perhaps I'm clinging on to old ideas. Everything is "obviously" personal choice these days, and who am I to say my values are "better" than theirs. That we should all strive to "do good" is not universal, because why should people be forced to or expected to look after anyone but themselves?

When you talk to these angel investors, do they offer you contracts for your new company at their existing companies? Like if you sell product X as part of your new company, are they saying they'll make sure the companies they're involved with buy product X if you give them shares of the company and cash kickbacks? If not then your comparison doesn't hold.

In the primary situation, they are benefiting by getting stock in exchange for giving their company's business to the startup (illegal kickback). In the second situation, they're referring companies they have a personal financial interest in for business to enhance the value of their investment (conflict of interest).

Need more specifics.

Once you have that basic model then all the rest of the variations: the company can allow it etc fall out of the model.

So if the buying company forced an employee to give them options without the selling companies consent, that would be insider trading. But if the deal is company to company, then there shouldn't be an issue.

To quote Matt Levine: This is definitely not legal advice.

You're actually accusing the prosecutor of getting it wrong... which seems a bit arrogant.

It doesn't bother me anymore. It's just people being people. I'm enjoying the series The Expanse lately because of the way it integrates realpolitik into the storyline.

> 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

That's why he says it. He knows nothing else.

The company would generally have no interest in that kind of setup.

When the advisory board is public, it appears to be 'above board' even though it might be a conflict of interest at least it's hiding in plain sight.

E.g. a group with socioeconomic power is corrupting a law in order to serve their own interests.

And US is very well known for its lobbying that people are trying to limit.

This is not what I see at all. In fact, the more I researched about USA lately, the more surprised I was about all the polarization. Even more, and this one disappointed me even more: the USA I see today, the discourses I see, the principles I see being applied is like destroying the pillars that founded that nation.

I am not american, but I really, really, I mean, really admire the foundations on which that country was founded. You are destroying them IMHO.

For some (non-casual) reason USA has been prosperous, the cradle of the modern civilization (with all its downsides, I know many of them, yes) and that reason was the mindset of having opportunities and chances to improve your lives without the nose of all those bureaucrats getting into your lives.

The media you mention, the control, the politicians, the regulations. Each of those is a door to corruption. De-regulation (or minimal regulation, if that cannot exist) is by its own right the least corrupt of the systems: it does not give chances for favors and crony capitalism.

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.

Easy to say when no one's offering, I guess.

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.

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.