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?
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.
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.
Kickbacks, of course, are quite different, where a company official has a legal duty to negotiate in good faith in the best interests of their company and not make purchasing decisions based on which vendor gives them the biggest personal cut of the deal. It's hard for me to see the other side of that, how anyone can possibly not understand that that is illegal.
This reminds me of the ridesharing debacle. Uber was operating an illegal taxi service which upset a lot of local governments. It was taken to the courts multiple times. Uber won but one of the lessons to young founders was to go for it even if it's not strictly legal - laws can change.
Now I'm not saying what Uber did was necessarily a bad thing. But if I had the idea to disrupt taxi services and learned about the legality of it all, I'd have moved on to the next idea.
What the hell is the lesson of any of this? It sure seems to be "doing unethical and/or illegal things is downright necessary to succeed big-time in business, and doing them successfully will make you rich and, most bizarrely, respected—unless you screw the wrong people (i.e. the bigger scammers/criminals/morally-questionable people) then you're just a criminal and we'll all sneer and spit on you and fine you and send you to prison"
It's less likely to pay off when the illegal things are instead unethical, unpopular, and harmful to the public, at least if you get caught—and when they involve betraying the people closest to you, you're probably going to get caught.
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.
We're still approving new coal and gas projects in 2021, and milage taxing EVs with not a CO² vehicle tax in sight...
Almost everything Trump did or said was in the former category, he cared only for his own benefit it would seem.
A huge number of people don't get why they should vaccinate to protect others perhaps not as immunity fortunate as themselves.
"Myself first, second, and then my fellow, if I stand to gain." (Loosely translated from the Norwegian "først meg selv, så meg selv, og så min neste, hvis det er til eget beste")
Edit: Perhaps I'm clinging on to old ideas. Everything is "obviously" personal choice these days, and who am I to say my values are "better" than theirs. That we should all strive to "do good" is not universal, because why should people be forced to or expected to look after anyone but themselves?
IMO you do a poor job clearly outlining the transgressions and the legal issues at play. You bounce around phrases like "pay-to-play"but as someone not inside the startup world, I didn't get to the end of your article and understand exactly what he did that was illegal/immoral and the context for how it's harmful to startups. In other words, I know he is accused of doing something wrong but that's as deep as my understanding goes.
"There was just one catch to landing that deal: It had to hire the streaming company’s vice president of IT operations, Michael Kail, as a consultant and an advisor, and pay him with fees and stock options."
That seems pretty clear to me.
“leveraged his status as a leader of the IT community in Silicon Valley to subvert the trust of Netflix and others to profit at their expense”
How did he leverage it in a way that was illegal? I'm not questioning that he did it, I literally don't understand. The diversity of responses here highlights what's confusing. People are saying hiring him at all was the problem? Other responses say that hiring him without Netflix knowing is the problem? It's hard for me to understand the specific transgression.
If you don't understand why that's wrong, I strongly suggest maybe taking a few philosophy or ethics classes.
In short: He was supposed to be acting on behalf of his employer - that's what being an exec means. He instead used the resources of his employer (not his to use, except on behalf of the employer) to dangle a lucrative deal in front of a much smaller company - which, at this point, is akin to exercising quite a bit of force, because these deals can be make-or-break especially for small places.
He then made that deal contingent on enriching himself personally.
That's about as crooked as you can get without inflicting physical harm.
"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.
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.
Conflict of interest. Netflix is defrauded because they could have selected a lower cost vendor, or developed the service in-house.
- I work in purchasing approval position for company A
- Company B would like to do business with Company A
- If I say "B, I can get you deal with my employer A, but you need to give me extra money" - this is against every business conduct guideline / contract / terms of employment in every company I worked for, and against law in many jurisdictions.
In case that somehow slipped / you missed it: person was SIMULTANEOUSLY employed by A, while being given money by B to approve things on behalf of A. That's simple kickback / bribery.
It wasn't a morally-dubious but frequently-legal case of "revolving door" where a person does this sequentially. They were approving deals as exec for netflix, and earning money to approve those deals by small companies, at the same time.
When someone hires you to do a job, they hire you to make decisions that are in the best interest of the company. If you are getting paid bribes from suppliers when you buy their services for the company, how can you be trusted to be objective?
I'm curious, what geography do you work in? European country, India, China, USA, Canada? My curiosity is because this seems self evident to me, but it may be cultural thing, and I'm curious to know your cultural background.
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!)
They still can profit massively from that, though, so it's still kind of messy territory.
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.
A grey area would be more like whether you should offer to leave the meeting while they discuss the proposal.
Of course, the conflict definitely needs to be disclosed!
Are there even laws for this, or is it more about company policies set by the BoD?
In addition to generic criminal laws against fraud and bribery there’s also honest services fraud (which I’ve mentioned elsewhere in this thread) which boils down to depriving someone to whom you owe a duty of the right to your honest services.
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.
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.
"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.
Let Netflix worry about compensating the people who are doing the work.
The problem there is the money comes first. In the case of former regulators, by the time they are hired by the drug company they're no longer a regulator. It's not clear the drug company has anything to gain from hiring them. Yes it's grubby, but it's hard to prove anything. If the money comes up front, that's easy to prove.
> it's hard to prove that what they did was illegal.
Sure, it's a lot of work. That's why we spend money on prosecutors. But they literally _just_ proved that in a way that convinced 12 people "beyond a reasonable doubt", so it's certainly not impossible.
It just seems weird to be asking: "is the described scheme illegal?" in an article describing a conviction for the described behavior, unless you're questioning the validity of the judicial process in this case (which itself is a fine thing to do)
There was just one catch to landing that deal: It (the startup hoping to do business with Netflix) had to hire the streaming company’s vice president of IT operations, Michael Kail, as a consultant and an advisor, and pay him with fees and stock options.
That's "pay-to-play"; you don't hire me as an "advisor", you don't get the Netflix contract.
And 'commonly' doesn't translate into 'every exec does it', but it does happen, in my experience about 2 to 3 percent of the businesses out there have such a thing going on. That's only in my backyard, it is very well possible that different localities or professions would have a multiple or a fraction of that, and it is possible that we're not looking hard enough and that the numbers are much higher.
Every single angel investor I have ever pitched asked for/suggested this.
If this is illegal 99% of the Valley is committing fraud.
When you talk to these angel investors, do they offer you contracts for your new company at their existing companies? Like if you sell product X as part of your new company, are they saying they'll make sure the companies they're involved with buy product X if you give them shares of the company and cash kickbacks? If not then your comparison doesn't hold.
When you say "offload" crappy startups, do you mean getting the company acquired by that company or purchase the startups products?
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.
See https://www.nytimes.com/2015/12/01/nyregion/sheldon-silver-g...
i.e. executive helps Supplier X sign a at his company. The executive then leaves after a few months to get a senior job at Supplier X
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.
The press release from the DoJ details how he structured his kickbacks without netflix's knowledge and set up a shell company to do so -- even lying directly to netflix leadership:
"When an inquiry from the Netflix CEO ensued, Kail falsely denied that he was formally working with Platfora."
Criticisms aside, thank you for helping to shine a light on corporate malfeasance.
Often, you can see their prior (or even current) job, and press releases about them selecting that software some short(ish) time before.
That may or may not be a problem, depending on policies and how it was handled.
Generally, you need to disclose any conflicts of interest. Then, its up to your company on what will be done next. You are probably going be removed from the actual decision-making process (regardless if you are ultimately going to be the one closing the deal - after your peers approved the decision).
If everything was disclosed and there was no kickbacks, it might have been ok (although the press release may overstate the role they played in the selection).
If not, you may be in hot water with your company and even the justice system.