15 ms·

Why I Did Not Go to Jail (2014)

249 points by eruditely 8y ago

jsnell 8y ago
(2014) Previous discussion: https://news.ycombinator.com/item?id=7191642 https://news.ycombinator.com/item?id=7191642
- dang 8y ago
  Also https://news.ycombinator.com/item?id=11240717 https://news.ycombinator.com/item?id=11240717 from a couple years later.
- refurb 8y ago
  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!
  - gammatrigono 8y ago
    Yeah. Seems very disingenuous for Ben to claim Michelle went to jail for this practice when it was her own personal tax evasion that she was punished for.
MentallyRetired 8y ago
Reading that legal doc made me wish there was a Genius for laws.
notyourday 8y ago
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.
csours 8y ago
Is there a legal equivalent of "code smell"?
- mjevans 8y ago
  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.
- jacobsenscott 8y ago
  "backdated" is the stinkiest of legal smells.
lisper 8y ago
> 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.
- mfoy_ 8y ago
  Ignorance is no excuse for breaking the law. Especially when it's your job to not be ignorant of it.
- romed 8y ago
  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.
  - emodendroket 8y ago
    Do you have a recommendation?
    - romed 8y ago
      https://www.reuters.com/article/mercury-plea/former-mercury-interactive-cfo-to-plead-guilty-idUSN0920738920100909 https://www.reuters.com/article/mercury-plea/former-mercury-... https://www.sec.gov/litigation/litreleases/2009/lr20964.htm https://www.sec.gov/litigation/litreleases/2009/lr20964.htm etc.
      - microtherion 8y ago
        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.
        deleted 8y ago
        [deleted]
smacktoward 8y ago
> 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 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.
- hayksaakian 8y ago
  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_Accenture https://en.wikipedia.org/wiki/Accenture#Emergence_of_Accentu...
  - AJC-Official 8y ago
    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
lordnacho 8y ago
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.
noonenowhere 8y ago
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-your-friends-company/ https://a16z.com/2011/02/23/is-it-ok-to-hire-people-from-you...
- Scaevolus 8y ago
  Violating California labor law is unlikely to land you in jail-- most of the penalties are financial.
  - emodendroket 8y ago
    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.
    - rossdavidh 8y ago
      ...albeit a higher bar than many of his peers could clear.
  - valarauca1 8y ago
    Advocating the violation of labor laws is generally considered a bad look irregardless of the punishment be it jail or fines.
- rgbrenner 8y ago
  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.
mfoy_ 8y ago
Neat story. Definitely underscores the importance of not just blindly copying others. Just because "everyone's doing it" does. not. make. it. right.
jhpriestley 8y ago
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.
- reaperducer 8y ago
  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 https://en.wikipedia.org/wiki/Jeffrey_Skilling
  - alistairSH 8y ago
    You need to finish the quote: ...unless the criminality is severe...
  - village-idiot 8y ago
    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.
- romed 8y ago
  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.
  - lowry 8y ago
    This is why this text did not land in the book.
  - pmiller2 8y ago
    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.
jonstewart 8y ago
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.
- bbcbasic 8y ago
  Good ol tldrs. Thanks chump. I didn't want to read all that.
- browsercoin 8y ago
  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.
- jiveturkey 8y ago
  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.
- monochromatic 8y ago
  And firing her for something she did at a previous job that you believe was accidental.
misiti3780 8y ago
this is four years old, the title should be updated.
- dang 8y ago
  Thanks, added.
jiveturkey 8y ago
> *the old saying: “When the paddy wagon pulls up to the house of ill repute, it doesn’t matter what you are doing. Everybody goes to jail.” Oh yeah! That old saying! /s
- justtopost 8y ago
  I have heard it a few times. Why the scarcasm?
  - jiveturkey 8y ago
    guess i’m just not familiar with it. and i feel like i’m in the target age group for his book. “paddy wagon” is from long long ago ...
CalChris 8y ago
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.
qwerty456127 8y ago
The whole practice of putting non-violent people in jail is just so absurd.
- vkou 8y ago
  Tax evasion is theft.
  - qwerty456127 8y ago
    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.
    - shoo 8y ago
      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?
      - qwerty456127 8y ago
        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.
        8y ago
SilasX 8y ago
>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-months-for-tax-evasion https://www.law360.com/articles/229277/ex-mercury-cfo-gets-4... https://www.reuters.com/article/mercury-plea/former-mercury-interactive-cfo-to-plead-guilty-idUSN0920738920100909 https://www.reuters.com/article/mercury-plea/former-mercury-... https://news.ycombinator.com/item?id=18027437 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-avoided-an-options-backdating-scandal/ https://dealbook.nytimes.com/2014/02/06/how-ben-horowitz-avo...
- icelancer 8y ago
  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.
  - SilasX 8y ago
    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.
    - chris_wot 8y ago
      I think it is highly unlikely that more than one CFO of his company was ever jailed. At least, I sure hope not!
shoo 8y ago
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/review-financial-shenanigans-by-howard-m-schilit/ 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 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
phonon 8y ago
"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.bloomberg.com/market-now/2014/02/12/dont-worry-ben-its-a-long-way-to-san-quenti/ https://web.archive.org/web/20150108121957/http://go.bloombe... [1] https://web.archive.org/web/20130530050608/http://www.justice.gov/usao/can/news/2010/2010_09_16_abrams.guiltyplea.press.pdf https://web.archive.org/web/20130530050608/http://www.justic...
cletus 8y ago
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-auditor-pwc-in-story-about-dodging-backdating-bullet/ http://retheauditors.com/2014/02/13/vc-horowitz-implicates-a...
- zeroname 8y ago
  > 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.
  - emodendroket 8y ago
    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.bloomberg.com/market-now/2014/02/12/dont-worry-ben-its-a-long-way-to-san-quenti/ https://web.archive.org/web/20150108121957/http://go.bloombe...
bxEIGHTY8 8y ago
That song is such a banger. The era of Drake's rise and Weezy at his best.
tptacek 8y ago
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.
- SilasX 8y ago
  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.
  - tptacek 8y ago
    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.
    - SilasX 8y ago
      I'm being cheeky; I agree that the options thing isn't some hard-to-understand esoteric case.
- lacker 8y ago
  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.
epa 8y ago
[deleted]
- dang 8y ago
  "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 https://news.ycombinator.com/newsguidelines.html
wslh 8y ago
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/ https://www.gettinglegalright.com/ it seems he is the real hero.
d_burfoot 8y ago
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.
graycat 8y ago
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.

249 points by eruditely 8y ago

jsnell 8y ago

(2014) Previous discussion: https://news.ycombinator.com/item?id=7191642 https://news.ycombinator.com/item?id=7191642

dang 8y ago
Also https://news.ycombinator.com/item?id=11240717 https://news.ycombinator.com/item?id=11240717 from a couple years later.
refurb 8y ago
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!
- gammatrigono 8y ago
  Yeah. Seems very disingenuous for Ben to claim Michelle went to jail for this practice when it was her own personal tax evasion that she was punished for.

MentallyRetired 8y ago

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

notyourday 8y ago

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.

csours 8y ago

Is there a legal equivalent of "code smell"?

mjevans 8y ago
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.
jacobsenscott 8y ago
"backdated" is the stinkiest of legal smells.

lisper 8y ago

> 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.

mfoy_ 8y ago
Ignorance is no excuse for breaking the law. Especially when it's your job to not be ignorant of it.
romed 8y ago
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.
- emodendroket 8y ago
  Do you have a recommendation?
  - romed 8y ago
    https://www.reuters.com/article/mercury-plea/former-mercury-interactive-cfo-to-plead-guilty-idUSN0920738920100909 https://www.reuters.com/article/mercury-plea/former-mercury-... https://www.sec.gov/litigation/litreleases/2009/lr20964.htm https://www.sec.gov/litigation/litreleases/2009/lr20964.htm etc.
    - microtherion 8y ago
      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.
      - deleted 8y ago
        [deleted]

smacktoward 8y ago

> 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 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.

hayksaakian 8y ago
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_Accenture https://en.wikipedia.org/wiki/Accenture#Emergence_of_Accentu...
- AJC-Official 8y ago
  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

lordnacho 8y ago

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.

noonenowhere 8y ago

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

Scaevolus 8y ago
Violating California labor law is unlikely to land you in jail-- most of the penalties are financial.
- emodendroket 8y ago
  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.
  - rossdavidh 8y ago
    ...albeit a higher bar than many of his peers could clear.
- valarauca1 8y ago
  Advocating the violation of labor laws is generally considered a bad look irregardless of the punishment be it jail or fines.
rgbrenner 8y ago
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.

mfoy_ 8y ago

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

jhpriestley 8y ago

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.

reaperducer 8y ago
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 https://en.wikipedia.org/wiki/Jeffrey_Skilling
- alistairSH 8y ago
  You need to finish the quote: ...unless the criminality is severe...
- village-idiot 8y ago
  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.
romed 8y ago
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.
- lowry 8y ago
  This is why this text did not land in the book.
- pmiller2 8y ago
  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.

jonstewart 8y ago

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.

bbcbasic 8y ago
Good ol tldrs. Thanks chump. I didn't want to read all that.
browsercoin 8y ago
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.
jiveturkey 8y ago
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.
monochromatic 8y ago
And firing her for something she did at a previous job that you believe was accidental.

misiti3780 8y ago

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

dang 8y ago
Thanks, added.

jiveturkey 8y ago

> *the old saying: “When the paddy wagon pulls up to the house of ill repute, it doesn’t matter what you are doing. Everybody goes to jail.” Oh yeah! That old saying! /s

justtopost 8y ago
I have heard it a few times. Why the scarcasm?
- jiveturkey 8y ago
  guess i’m just not familiar with it. and i feel like i’m in the target age group for his book. “paddy wagon” is from long long ago ...

CalChris 8y ago

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.

qwerty456127 8y ago

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

vkou 8y ago
Tax evasion is theft.
- qwerty456127 8y ago
  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.
  - shoo 8y ago
    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?
    - qwerty456127 8y ago
      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.
      - 8y ago

SilasX 8y ago

>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-months-for-tax-evasion https://www.law360.com/articles/229277/ex-mercury-cfo-gets-4... https://www.reuters.com/article/mercury-plea/former-mercury-interactive-cfo-to-plead-guilty-idUSN0920738920100909 https://www.reuters.com/article/mercury-plea/former-mercury-... https://news.ycombinator.com/item?id=18027437 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-avoided-an-options-backdating-scandal/ https://dealbook.nytimes.com/2014/02/06/how-ben-horowitz-avo...

icelancer 8y ago
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.
- SilasX 8y ago
  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.
  - chris_wot 8y ago
    I think it is highly unlikely that more than one CFO of his company was ever jailed. At least, I sure hope not!

shoo 8y ago

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/review-financial-shenanigans-by-howard-m-schilit/ 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 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

phonon 8y ago

"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.bloomberg.com/market-now/2014/02/12/dont-worry-ben-its-a-long-way-to-san-quenti/ https://web.archive.org/web/20150108121957/http://go.bloombe... [1] https://web.archive.org/web/20130530050608/http://www.justice.gov/usao/can/news/2010/2010_09_16_abrams.guiltyplea.press.pdf https://web.archive.org/web/20130530050608/http://www.justic...

cletus 8y ago

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-auditor-pwc-in-story-about-dodging-backdating-bullet/ http://retheauditors.com/2014/02/13/vc-horowitz-implicates-a...

zeroname 8y ago
> 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.
- emodendroket 8y ago
  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.bloomberg.com/market-now/2014/02/12/dont-worry-ben-its-a-long-way-to-san-quenti/ https://web.archive.org/web/20150108121957/http://go.bloombe...

bxEIGHTY8 8y ago

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

tptacek 8y ago

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.

SilasX 8y ago
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.
- tptacek 8y ago
  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.
  - SilasX 8y ago
    I'm being cheeky; I agree that the options thing isn't some hard-to-understand esoteric case.
lacker 8y ago
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.

epa 8y ago

[deleted]

dang 8y ago
"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 https://news.ycombinator.com/newsguidelines.html

wslh 8y ago

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/ https://www.gettinglegalright.com/ it seems he is the real hero.

d_burfoot 8y ago

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.

graycat 8y ago

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.