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Former Netflix executive convicted of receiving bribes from contractors

487 points by ugwigr 5y ago

philwelch 5y ago
Can someone explain why this is prosecuted as a crime rather than left as a matter for civil lawsuits? The only actual victim here seems to be Netflix, and they can afford to file their own civil suits.
novaRom 5y ago
How many of their unethical practices actually waiting to be revealed? They impudently promote tobacco smoking to the youth, how much they receive from tobacco companies, anyone knows?
ncmncm 5y ago
See, he should have been an HR executive, instead. HR execs are expected to pull this stuff as a matter of routine. The other CxOs know that if they prosecute their HR director, the next one will be just the same, or it will be hard to hire one. If your HR director doesn't, why would they be in HR?
reilly3000 5y ago
Upon reading: “he stole the opportunity to work with an industry pioneer from honest, hardworking, Silicon Valley companies.” …I had to double-check this was coming from justice.gov, not a satire site or PR blog. That isn’t to say that there aren’t honest and/or hardworking SV companies, or that they weren’t wronged. It’s just never a phase I’ve seen before.
notJim 5y ago
Does anyone know how the actual conversation for something like this goes? I just can't imagine having the chutzpah to ask for a bribe. Is there some kind of euphemistic lingo people use to make it clear they want a bribe without saying the words?
- rsj_hn 5y ago
  First, to demand a bribe only happens when you are in a position of authority to grant what someone wants, and then you offer them some terms to get what they want in an easier way via a side-payment. So the person being bribed is (usually) not stealing from the person paying the bribe. They are stealing from whoever put them in that position of trust. So for a company, they are ripping off the shareholders if they choose a vendor not based on how competitive the vendor is, but based on a side payment. The person paying the bribe receives a benefit. But things get tricky when the bribe-taker is employed by the government and the bribe-payer is also a taxpayer. But still, if you want the ticket to be waived or the construction plan approved, you're happy to pay the bribe. For example in communist countries healthcare was terrible, but if you could pay a bribe, then your loved one would get better treatment -- for example their beds would be cleaned more regularly. The doctor would pay more attention to them, etc. So the family of the loved ones would be the ones to approach the doctors with incentives, hoping this would be enough to get better treatment. That's one extreme example. Here in capitalist Miami, we went to the beach and a local hotel had beach chairs and umbrellas that could be rented by the day. It was free for guests of the hotel, but $60 for someone not in the hotel. But we were told that if we paid the guy in cash, for merely $40 we could get the chair and umbrella for the day. Just a small little side-payment to help grease the wheels. We wanted the chair, and could save $20. It was the Hotel that lost out on $60. But long term, what happens is that the Hotel sees there is a long line of people wanting to hand out beach chairs, and the salaries for those adjust down, and perhaps some money needs to change hands with whoever appoints the umbrella dispenser. Then later on, some money might change hands to get to be person who appoints the person that dispenses the umbrellas. So over time, those economic rents dissipate as people realize "hey, I am a gatekeeper to something valuable, I can take a cut for myself." That process continues until there is no surplus value left that anyone is in charge of dispensing. That means small side-payments are made everywhere, from dealing with the police to getting a decent room in a hotel, to a table in a restaurant and eventually to even getting some meat from the butcher. In such a society, it's basically impossible to be honest, even if you wanted to, because the endemic bribery is a stable equilibrium. People have no idea how lucky they are to live in a society that values law and order, and how impossible it is to reform the corrupt society once corruption sets in and becomes expected as opposed to newsworthy. These casuals dismissals and mocking of people who have an innate desire to follow rules and act with integrity is really foolish once you consider people die trying to enter law-abiding societies, as it's really hard for most people to have opportunities in life when everything is dominanted by side-payments or political dealmaking rather than who can provide the best service for the lowest price.
csmythe15 5y ago
In case anyone is wondering, his sentencing (which was supposed to be Oct. 19) was pushed back to Nov. 15 at the last minute. I posted the court document on my twitter. https://twitter.com/ChristieSmythe/status/1451208869724753927?s=20 https://twitter.com/ChristieSmythe/status/145120886972475392...
csmythe15 5y ago
Hey, I'm the author of the article -- just wanted to point out that what made this story interesting to me is the implication that this kind of conduct could be very widespread. Prosecutors definitely hinted at that. If anyone knows of any similar stories, I'd be very interested in hearing them. christie.smythe@businessofbusiness.com
- earthscienceman 5y ago
  Some feedback from an outsider: IMO you do a poor job clearly outlining the transgressions and the legal issues at play. You bounce around phrases like "pay-to-play"but as someone not inside the startup world, I didn't get to the end of your article and understand exactly what he did that was illegal/immoral and the context for how it's harmful to startups. In other words, I know he is accused of doing something wrong but that's as deep as my understanding goes.
  - autarch 5y ago
    The first sentence of the second paragraph says: "There was just one catch to landing that deal: It had to hire the streaming company’s vice president of IT operations, Michael Kail, as a consultant and an advisor, and pay him with fees and stock options." That seems pretty clear to me.
    - earthscienceman 5y ago
      It seems very unclear to me. I don't understand why that's illegal or wrong. Someone was hired and paid using fees and stock options? Seems fine to me. I don't understand corporate structure enough to understand why that's problematic... “leveraged his status as a leader of the IT community in Silicon Valley to subvert the trust of Netflix and others to profit at their expense” How did he leverage it in a way that was illegal? I'm not questioning that he did it, I literally don't understand. The diversity of responses here highlights what's confusing. People are saying hiring him at all was the problem? Other responses say that hiring him without Netflix knowing is the problem? It's hard for me to understand the specific transgression.
whymauri 5y ago
>In his own memorandum to the court, requesting that he be sentenced to a year of house arrest, Kail, 49, described himself as a “global power leader, top dev ops influencer and a thought leader.” So very humble of him.
- catabyte 5y ago
  First off, he didn't describe himself that way; his lawyer did. That's pretty standard stuff in a sentencing memorandum. Secondly, have you read the entire 53 page memorandum? I recommend everyone do so before rushing to judgement. https://www.courtlistener.com/docket/6769891/269/united-states-v-kail/ https://www.courtlistener.com/docket/6769891/269/united-stat...
- rkalla 5y ago
  He also has a church and is a life coach on Only Fans... you know, real classy person. :smh-forever:
  - SavantIdiot 5y ago
    Well, you gotta admit he does a lot of work. I'm too wiped after my 8-5 to even work on fun stuff, so I'm kinda impressed how people find the time to do all this.
    - scns 5y ago
      Cocaine?
- junon 5y ago
  Sounds like Andrew Lee (of Freenode fame).
  - slothtrop 5y ago
    ah yes, the crown prince
- geodel 5y ago
jpollock 5y ago
That happened to a startup I was part of back in the late 90's. We gave out substantial stock grants to senior managers at customers.
joshstrange 5y ago
> There was just one catch to landing that deal: It had to hire the streaming company’s vice president of IT operations, Michael Kail, as a consultant and an advisor, and pay him with fees and stock options. I completely get how a startup would take this deal, however gross it is, but what I don't understand is how the exec got away with it from Netflix's side. And the fact this wasn't just 1 but 8 other startups he did this to/with as well. I can't tell from the article if Netflix was aware or unaware of this "Agreement" and if they weren't aware... how? Did no one ever mention "Oh yeah, we hired Kail like you asked/required us to"?
- luckydata 5y ago
  HR and rules are for the little people. VPs can do pretty much whatever they want for a LOOOONG time at large tech companies before any consequence catches up with them.
  - jshen 5y ago
    This isn’t true at the big company I’m at. I’ve seen several VPs fired in the 10 years I’ve been here.
    - luckydata 5y ago
      That doesn't make anything I said less valid. You just experienced the losers of the internal game of thrones, the question is "fired why?" and "how long did it take?"
      - jshen 5y ago
        For inappropriate behavior, and fired very quickly
  - menomatter 5y ago
    Big pharma CTO mandated the use of a certain software while everyone knew they were coming from the company and sits on their board. I'm certain the kickbacks are still happening but in different forms: job, advisory role ...so on and so forth.
kcsavvy 5y ago
I have heard of many startups bringing early customers onto their advisory board - it seems like a relatively common practice. I am curious what makes this fraud? The timing? Or the fact that the Netflix VP did not disclose this to His employer?
- prasadjoglekar 5y ago
  Kali didn't go on to the advisory board on behalf of Netflix - that would be perfectly rational. Instead, the startup had to do 2 deals: One with Kali directly for "advice", and then a second with Netflix that Kali, in his capacity as a VP there, would sign. Besides being unethical; this is now a clear conflict of interest. Netflix (and shareholders of Netflix by extension) may have signed up for a crappy product from the startup only because startup had a side deal with Kali.
- lobocinza 5y ago
  I'm not knowledgeable at all in this matter but the issues here are clear at least to me. Let's forget the conflict of interests he would face when working for both companies. He was charged with bribery, the issue here is that hiring him as a paid consultant was put as a condition for the contract approval. A deal which would benefit exclusively him and not his employer. Quite literally the companies were paying to receive lucrative contracts.
tweedledee 5y ago
This is so common it’s hard not to do. Not doing it definitely stunted my startup but it’s a lifestyle company and I don’t mind building slower. Edit: I should add that while I was working at a FAANG (before doing a startup) the team I was on would constantly be blocked from building X only for a VP to buy a company that said they did X but didn’t. Because we still needed X we would buy a new company each year. We could tell the VP was setting them up to sell to us. We would joke about leaving to do a start up for the VP to not only make more money but so we could finally have a working X in the company. Edit2: With my current start-up it's not uncommon that we are instructed to sell to a customer via a nominated 3rd party. We don't know for sure, but we strongly suspect, that the 3rd party markup is how the executives are skimming off extra money. At least it keeps us out of it.
- deleted 5y ago
  [deleted]
- jollybean 5y ago
  M&A stupidity is not the same as fraud though. M&A is hard. It's not unreasonable for execs to tell the team not to do X because they're buying it, and then to screw it up. It's also normal for companies to want to buy via a dealer because they don't want to deal with your little startups legal issues, compliance, regulatory, billing. They just want to deal with small tier of vendors. In fact, that's kind of a startup idea: AppStore for SaaS because most corps don't want to deal with your little vendor BS. Everyone would be happy to pay an extra 10% just to have everything easy and clear.
  - tweedledee 5y ago
    I'm privy to more details than I am giving out. I've been in SV for over 15 years and I have seen a lot in that time. I'm aware of what is normal. There is normal purchasing intermediaries and then there are purpose built bribe vehicles. We're not talking 10% it's more like 100% to 1000%.
    - jollybean 5y ago
cpb 5y ago
I guess some people just don't get quality onboarding content from compliance.
- elliekelly 5y ago
  I checked your profile hoping maybe you had a quality onboarding compliance content startup. Maybe one day...
  - cpb 5y ago
    Aww thanks! The one thing that sticks after all those clicks: don't accept deal sweeteners outside of the papered contract! Easy to say when no one's offering, I guess.
iammisc 5y ago
So after reading the article, I'm still not sure of the crime, or the motivations (from netflix's perspective at least). Can someone help me?
- ksdale 5y ago
  He worked for Netflix, he was responsible for finding a vendor, and he basically chose a vendor based on who would pay him, personally, to let them be the vendor for Netflix. He didn't choose based on who would be the best vendor for Netflix, even though that's what Netflix was paying him to do. Netflix presumably would not have wanted him to do this if they had known what he was doing.
  - iammisc 5y ago
    Oh I see... so this is just bribery. And 'Netflix' the organization didn't know basically.
    - ksdale 5y ago
      Exactly.
- Kranar 5y ago
  So many people are confused about this, but yes the crime is that the exec defrauded Netflix. Netflix is the main victim here. The article just did such a bad job of getting this point across.
germandiago 5y ago
I do not understand this. I mean, politicians do this all the time and do not go to jail (Spain). I do not mean people offer themselves for briving. But did anyone ever think what would happen if politicians did not have much power to regulate? Companies would not be able to lobby. That means there would not be nearly as much incentive to brive as there is today. Once a regulator is in the middle, the incentive for corruption is there. I do not think people use Netflix because of the corrupt business of this guy. They use it because it is entertaining or find it useful. The same way people will keep studying Picasso (I hate his art, but anyways) because they consider it art, and he was a misogynist. But his art is his art, the same way Netflix is entertaining for some people.
- paulpauper 5y ago
  There is less political corruption in the US than people think. Everything is so scrutinized these days, especially compared to the rest of the world. White House Chief of Staff John H. Sununu's travel expenses scandal was a big deal at the time, and this was in 1992 (before social media) and the amount of $ was pretty small. I think insider trading is possible concern though, although that too has gotten considerable scrutiny in the media.
  - HatchedLake721 5y ago
    I know it's a complicated topic, but lobbying can be considered as corruption. E.g. a group with socioeconomic power is corrupting a law in order to serve their own interests. And US is very well known for its lobbying that people are trying to limit.
    - germandiago 5y ago
      I agree with this 100% Lobbying is only possible when someone can do influence favors to others. Full stop.
    - jollybean 5y ago
      Lobbying does not imply that the politician is receiving any benefit, in fact, there's a lot of rules in place for that. So, the disproportionate power that corps. may have is an issue of equality, but that's not this kind of corruption, at least not directly.
jopsen 5y ago
Why? Is the VP compensation package at Netflix really that bad?
- geodel 5y ago
  He was just a poor millionaire in billionaires' world.
- mikestew 5y ago
  Because even the salary/bonus of a VP at Netflix is never really enough for some folks. And, as sibling comment eludes to, there's always one more ladder rung above you. No, of course you don't get it. Yes, of course you'd live just fine on that salary with tons of money left over. So would I...until I become a VP at Netflix. But it's the bigger question of whether a person of such morals has VP material written all over them, or if the position causes one's formerly-solid morals to slip a bit (or a lot).
- aluminussoma 5y ago
  Because of greed. For most humans, what you have is never enough. A few years ago, Netflix had a reputation of paying very well to lower level senior employees (think L5 and L6), but not as competitively for higher level employees (L7+).
tptacek 5y ago
The DOJ press release is clearer than this article is: https://www.justice.gov/usao-ndca/pr/former-netflix-executive-convicted-receiving-bribes-and-kickbacks-companies-contracting https://www.justice.gov/usao-ndca/pr/former-netflix-executiv... Some fun details: Kail did his criming through a shell LLC he set up called "Unix Mercenary". He took between 10-15% of the total billings for each of the companies he hooked up with this scheme. None of those companies were charged (more's the pity). They got him on mail fraud, wire fraud, honest services fraud, and money laundering. The victim of the fraud was, of course, Netflix itself. Additional fun facts from PACER: He's seeking to exclude his shares in Sumo Logic and Netskope from forfeiture, arguing that they were largely the result of his own hard work, which takes some serious chutzpah. All of this apparently happened back in 2014 (the conviction is recent). If you're wondering what Netflix thought of all this, Kail apparently left Netflix for a job at Yahoo, from which he was fired after Netflix found out about his scheme and told Yahoo. Kail's sentencing memorandum is a fun read (again: chutzpah). For instance, this gem: Further, though Mr. Kail complained of problems with Sumologic (as one would see with any new startup), the product itself was “useful,” according to Ashi Sheth. (R.T. Vol. 8, p. 1670-71). As described below, at the time, Sumologic saved Netflix from paying for a far more expensive and inferior product called Splunk.
- spenczar5 5y ago
  Thanks, this is indeed a better source. A lot of people here are saying this is incredibly common which is frankly pretty surprising to me. Does it really happen through shell LLCs? I am definitely aware of execs prioritizing startups they've invested in, which is... not a great look. But this seems to be a different thing. Kail wasn't an investor. He explicitly drafted agreements that paid him a fraction of the money flowing from Netflix. This seems almost like embezzlement to me (not a lawyer! just a guy using words he has heard!): > Two days before Unix Mercenary was registered, Kail signed a Sales Representative Agreement to receive payments from Netenrich, Inc. amounting to 12% of the billings from Netenrich, Inc. to Netflix for its contract providing staffing and IT services to Netflix. Later in 2012, Kail began to receive 15% of all billing payments that VistaraIT, LLC, a wholly owned company of Netenrich, received from Netflix. From 2012 to 2014, Netenrich, Inc. paid Unix Mercenary approximately $269,986, and VistaraIT, LLC paid Unix Mercenary approximately $177,863. The payments stopped in mid-2014, after Kail left Netflix.
cabcabcab 5y ago
This is so incredibly common and is actually taught as tactic at many accelerators. You can form "customer advisory boards" which basically pay small percentages of common to early users to use the product. Like, seriously, more than half of the companies funded by YC do this. I think this is the norm more than the outlier.
- mabbo 5y ago
  > Like, seriously, more than half of the companies funded by YC do this. I think this is the norm more than the outlier. Then charge them all. That will put a halt to the practice pretty quickly.
  - AlwaysRock 5y ago
    Until YC funds a company that specializes in making shell company^2 to make sure your C suite side deals are undetectable.
- kami8845 5y ago
  In those instances, do the managers at BiggerCorp who initiate the deal get the equity or the company?
  - nhumrich 5y ago
    Usually, the manager.
- ludocode 5y ago
  No, you misunderstand. If the stock and advisory role were given to Netflix as part of the deal, it would have been fine. That's not what happened here. The benefits went to the executive directly. He asked for personal bribes to sign contracts on behalf of Netflix. He enriched himself at the expense of his employer. This is illegal.
  - jollybean 5y ago
    It's the individual advisor, not the company, that gets the fee. 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.
runako 5y ago
So this guy traded his reputation and possibly his freedom for some small kickbacks? When his other option was stay at Netflix as a VP? When RSUs were around $9 (current stock price: $635)? I wonder how much money he threw away assuming he had stayed 5-6 years instead. $5m? $10m?
- deleted 5y ago
  [deleted]
- bloodyplonker22 5y ago
  You're exactly right. He would have made a ton more money by just staying and working at Netflix and collecting stock awards at his level. However, these kinds of shady scummy people can never do this type of long-term thinking. They're always out there to suck a company dry in the short term and then it's onto the next one. You've probably seen this behavior before in the sales department.
paulpauper 5y ago
The shady-sounding plot was described by the government during a criminal trial earlier this year in San Jose federal court. Kail was found guilty of more than two dozen fraud and money laundering counts. At his sentencing Oct. 19, prosecutors will ask that he get a stiff punishment of seven years in prison as well as be ordered to pay fines, restitution, and forfeit a $3.3 million home in Los Gatos, California. That seems pretty stiff. goes to show how while collar crimes are not punished more leniently and how being rich does not shield one from justice, hardly.
- capableweb 5y ago
  One case doesn't prove anything. There are thousands of cases showing that white collar crimes are in fact punished less than other types of crimes.
- colpabar 5y ago
  > goes to show how while collar crimes are not punished more leniently No, it goes to show that the only white collar crimes that are stiffly punished are those against other rich people.
- ludocode 5y ago
  He hasn't been sentenced yet. That's just what the prosecution is asking for. The defense is asking for house arrest. The judge might still let him off with a slap on the wrist.
omarhaneef 5y ago
One item seems to have caused a lot of confusion in the comments so I will take a stab at clarifying: It is perfectly legal for Netflix to ask for options or any other consideration in exchange for the contract. Companies do this sort of thing frequently. They know that merely signing a large contract with a large firm will increase the value of the contractor. It is not legal for someone working for Netflix to ask for shares in their own personal capacity as individuals. That is what runs afoul of the law.
- deleted 5y ago
  [deleted]
- nowherebeen 5y ago
  > It is not legal for someone working for Netflix to ask for shares in their own personal capacity as individuals. Yup, that's called a kickback, which is illegal.
- JumpCrisscross 5y ago
  > It is not legal for someone working for Netflix to ask for shares in their own personal capacity as individuals It can be, I think. If Netflix were properly informed of and signed off on the arrangement, it would just be an elaborate compensation mechanism. It would be a lot of paperwork. And they wouldn't approve that.
  - tempestn 5y ago
    Yes, and of course they'd then be taxed on that compensation as well.
- ryanmcbride 5y ago
  thanks for putting it so plainly this cleared up all my questions
- menomatter 5y ago
  What if you are a majority shareholder for a company? Say mark Zuckerberg asking for shares in companies providing service to Facebook? Is that legal? I'm guessing if it's part of the deal then it's legal.
Phillip98798 5y ago
Well, I'll be losing sleep hoping Netflix can make it through this tough time. Seriously, is there one person alive who believes the guy should get seven years in prison? Fire him, do your character assassination thing, but prison time? Why are our tax dollars being used to defend a multi-billion dollar corporation? Let Netflix run its own company. Change compensation structure or something to reduce corruption. Douche or not, this is not behavior worthy of jail time.
- xyzzyz 5y ago
  There are in fact plenty of people who believe that people shouldn’t be able to get away with white collar crime to the tune of millions of dollars with a slap on the wrist, when petty criminals get much worse sentences for more minor trespasses.
  - Phillip98798 5y ago
    Sure, there's Bernie Madoff stuff, and then there's this. Are you comfortable with big corporations and government hegemony muscling employees into compliance? I'm not. The guy should undoubtedly be sued, but it feels wrong to create an equivalency here with violent offenders.
    - xyzzyz 5y ago
      This guy defrauded the company to the tune of millions of dollars. I am perfectly comfortable with big corporations and governments muscling people into compliance, where thing to comply with is “not stealing from the company”. Imagine you run a business, and your employee just steals one of the company vehicles. Do you think you should have any recourse beyond firing them? I mean, it’s only a few tens of thousands of dollars worth of loss to you, so if you don’t want the government to go after the guy that stole millions from Netflix, why expect the government to help you recover some paltry car? It’s not violent offense after all, just property. As it happens, fraud is a crime, and government prosecutes crime to deter it. This is perfectly reasonable, and how things have always worked.
sat1 5y ago
Eye-opening.
spoonjim 5y ago
And the Purdue execs will pay a fine. Victimize people, not corporations, if you want to go scot free.
- Phillip98798 5y ago
  Exactly. Seeing people here go to bat for a company like Netflix is eye-opening. It is way too easy to consolidate power as a major US corporation today.
elliekelly 5y ago
This case is particularly interesting because he was convicted by a jury of the somewhat controversial charge of honest services fraud[1] in addition to the more common criminal fraud charges. Jeffrey Skilling (of Enron fame) was convicted under the same law (also among other charges) and successfully appealed to the Supreme Court where his convicted was reversed and his sentence was subsequently reduced. Skilling v. United States[2] and Black v. United States[3] (Conrad Black, the Canadian media mogul) significantly narrowed the scope of the crime. The Court came eversoclose to finding the law unconstitutionally vague but instead limited its applicability to situations where a fiduciary duty exists and there is evidence of bribery or a kickback scheme. Since Skilling the charge has most often been used for holders of political office, like Rod Blagojevich[4] but prosecutors couldn’t even get the charge to stick there. (Trump pardoned both Black and Blagojevich before leaving office.) More recently the charges have been brought against participants in the “Varsity Blues” college admissions scandal. The Supreme Court definitely left the door open for this law to be ruled unconstitutional so I’m curious whether any of the very wealthy and newly convicted-at-trial defendants will pursue the matter. Edit: Reading the DOJ press release and the way it’s worded I’m not so sure whether Kail was convicted of honest services fraud. It seems there was one count for which the jury did not return a guilty a verdict and I’d bet it was this one. [1]https://en.m.wikipedia.org/wiki/Honest_services_fraud https://en.m.wikipedia.org/wiki/Honest_services_fraud [2]https://en.m.wikipedia.org/wiki/Skilling_v._United_States https://en.m.wikipedia.org/wiki/Skilling_v._United_States [3]https://en.m.wikipedia.org/wiki/Black_v._United_States https://en.m.wikipedia.org/wiki/Black_v._United_States [4]https://en.m.wikipedia.org/wiki/Rod_Blagojevich_corruption_charges https://en.m.wikipedia.org/wiki/Rod_Blagojevich_corruption_c...
renewiltord 5y ago
Oh, just run of the mill bribery. It's a classic government bureaucrat trick done at a private firm. Seems unnecessary. Netflix VPs are well compensated, but there is no boundary for greed.
- tomjen3 5y ago
  Isn't it widely known that the trick for the government is to do what the defense contractor wants when in office and then get a nice job with the after? Since nothing is signed, there is no way to actually prove it is bribery.
- adrr 5y ago
  It’s also common place in the agency(marketing,creative) world. Execs won’t give your agency work unless you kickback money to them.
jnwatson 5y ago
The weird aspect of the whole thing is that if the exec were a corporation, it would have been legal.
- elliekelly 5y ago
  Well you can’t exactly defraud yourself, can you?
- computermagic 5y ago
  This was exactly what I was thinking. Shouldn't the real point to this be we need to make this illegal across the board. It doesn't seem like it would have suddenly made more sense if Netflix got the kickback.
  - H8crilA 5y ago
    How would Netflix get a kickback paid from money from Netflix?
- JumpCrisscross 5y ago
  > if the exec were a corporation, it would have been legal No. It would not. "Kail approved contracts to purchase IT products and services from smaller outside vendor companies and authorized their payment." This is a commonly outsourced function. If I hire a company to manage my IT procurement and learn they're getting undisclosed kickbacks, they'd be breaking the same laws Kail did.
  - s1artibartfast 5y ago
    It depends on the fine points of if the company is managing procurement or selling 3rd party services to fit a need. If the latter, it is a markup, not a kickback
ugwigr 5y ago
the HN admin changed the link I posted. this is unethical - You are fundamentally changing what I posted. As a product manager here is a better solution - A.) Add a clear indicator that admin changed the link to redirect B.) Delete my link and post yours. Shawdow changing what users post is wrong.
- pacoWebConsult 5y ago
  Waiting for the dang smackdown reply to this comment. You posted a secondary source (typically these get redirected to the primary source for any story), and used the editorialized title from the original journalist as your post title. Pretty commonplace on HN to correct these things so we can discuss the facts, not the reductive analysis of what someone writes about the primary source.
  - ugwigr 5y ago
    as I suggested, admins should feel free to delete my post and even ban me from posting - but fundamentally changing what I posted is wrong.
    - s1artibartfast 5y ago
      A redirected tag would be transparent and address both concerns
      - ugwigr 5y ago
        exactly
  - jacquesm 5y ago
    OP has a stake in the company whose link was posted, so it goes a bit deeper than that. That particular source had already been flagged as problematic taking the number of 'dead' links into account. https://news.ycombinator.com/from?site=businessofbusiness.com https://news.ycombinator.com/from?site=businessofbusiness.co... and https://twitter.com/thebizofbiz/status/1450491847739068420 https://twitter.com/thebizofbiz/status/1450491847739068420 Where they make a lot of hay on being #1 with a story on HN.
wnevets 5y ago
I just assumed this is how business was done at that level. For example in the health insurance industry "Producers" receive all shorts of benefits from carriers to push their plans onto clients.
numair 5y ago
If this is all illegal, the stories I was told by early Facebook employees about how Chamath made his money are more confusing than ever.
- Kranar 5y ago
  Can you go into some details or point me to some sources?
  - myaltacct415 5y ago
    He talks about it in interviews. While he was at Facebook, he started an investment fund outside of work. Now I do not want to get sued for mischaracterizing what he did. You will have to listen to those interviews yourself.
    - Kranar 5y ago
      I am aware of the investment fund he started both while he was at Facebook and after it. Neither of them were done in secret and in fact Facebook was an investor in it. Furthermore the companies that the funds invested in had no business dealings with Facebook. You can see the list of companies it invested in as it's public info.
- ram_rar 5y ago
  Can you elaborate?
- TheMagicHorsey 5y ago
  I don't know Chamath, but his presence online makes me think he is shady af. His whole TSLA "selling my shares while telling everyone else not to sell" scheme alone gets him a black mark in my book. Then all the SPAC stuff he did makes it even more unwholesome.
  - bloodyplonker22 5y ago
    Chamath is about as shady as a typical shady salesperson, but I would not say he's nearly as shady as a Trevor Milton.
Mizza 5y ago
Lots of comments here about how sentences are harsher for harming corporations and the extremely rich rather than common people. (See this case, Theranos, etc.) Is it possible that Netflix is _funding_ (or providing substantial material support to) the prosecution of this case, a bit like we've seen in Chevron v Donziger?
- splistud 5y ago
  As a shareholder of Netflix, I was directly harmed. I am most assuredly a common person.
  - Mizza 5y ago
    Fair point.
invisible 5y ago
Someone else mentioned politics, but I think it's really apt to draw some lines since these are federal crimes. Politicians and government agents will work toward getting legislation or contracts through and then "retire" to work privately for the same companies. This is probably not legal (i.e. bribery), but it's basically impossible to prove the crime. On a similar note, politicians can ask for contributions as part of lobbying efforts that go directly to their campaigns. That might not go right into their pocket (which somehow make it legal), but it certainly makes continuing their career easier. I don't think either is particularly morally just, but the similarities are pretty stark. The government (and public) end up losing and becoming the victim just like Netflix was the victim of these actions.
1cvmask 5y ago
We met him at tech conference in SV almost a decade ago. He passed on our info of saas pass to a "competitor" onelogin (which got acquired recently). Turns out they were already using onelogin. No idea if he had shares in onelogin at the time. Seprately there was a Google Apps (later rebranded to G Suite and now Google Workspace) conference at Fort Mason around 2013 or 2014ish. At that event a Google employee Clay Bavor said they have an internal saying for product rollouts and new features. It was WWMKD. What would Mike Kail do? I guess don't do what Mike Kail would do.
hikerclimber1 5y ago
What about former ceo of Wells Fargo? He’s now an advisor though he was barred from the industry.
perfecthjrjth 5y ago
This is very common in many non-FAANG companies. The way these guys do it is to set up a third party staffing company, say X, owned by relatives and friends, then buy services (usually contractors) through this third party company. Usually, large companies have some vendor management tool. Here, the hiring manager picks candidates that come from X. When I was working at AT&T in New Jersey, my manager always hired contractors from one third party company, which is owned by the wives of his brother (then another ATT employee) and other ATT employee. Eventually, many managers colluded with this particular third party company so much so that other third party staffing companies couldn't place any people. So, these staffing companies complained to the Ethics department. ATT Legal started investigation, and fired my manager, his brother (another employee), another guy. They couldn't do much further due to these reasons. (a) the staffing company is owned by the wives of the two employees (b) the staffing company is NOT the direct vendor of ATT. The primary vendor is another entity, who takes $1 per hour per candidate. This kind of fraud is so common in this industry.
deathhand 5y ago
Ctrl + F "Biden", no results. That's so sad! It's the same thing Hunter did, and Hillary has been accused of. I like the morality that is seen in this thread but can we take it a bit further? FDA is mentioned a few times. What about the FTC? Ajit and net neutrality? It's everywhere!
toephu2 5y ago
Is this the person Netflix refers to in its infamous culture memo? "On rare occasions, freedom is abused. We had one senior employee who organized kickbacks on IT contracts for example. But those are the exceptions, and we avoid over-correcting. Just because a few people abuse freedom doesn’t mean that our employees are not worthy of great trust." https://jobs.netflix.com/culture https://jobs.netflix.com/culture
oars 5y ago
Why weren't these companies charged as well? They are paying bribes to an executive to use their products and services. If you were caught paying bribes to a (corrupt) government official, wouldn't you be breaking the law?
- borski 5y ago
  It's about knowledge, and depends on how it was presented to the companies. If the originator of the bribe was Kail, and if it was not presented as a quid-pro-quo, the companies may not have known better and would have assumed that he is disclosing the relationship appropriately to his company. The startups would have to disclose it within their own company, but they weren't playing both sides and were not effectively 'stealing' from their own company or from Netflix; Kail, on the other hand, was taking money directly from the pile Netflix was owed, and not disclosing it.
pixel_tracing 5y ago
So I wonder how people close to or within vicinity of this person at Netflix are feeling? Anyone from Netflix care to chime in?
trhway 5y ago
> Kail then urged his Netflix employees to find a use for the product, despite their objections and preference for a competing product that Netflix was already paying for. There should be a special aggravating attachment for such abuse of employees :)
jijji 5y ago
various reports mention he was sentenced on October 19th, 2021... Anyone know what happened today when he was sentenced?
dhosek 5y ago
Didn't he have to do the annoying anti-corruption training that every single job I've had for the last decade has required?
hn_throwaway_99 5y ago
This article is a bit old (back in May), I'm curious what the latest is. One thing I find extremely strange is that, I looked this guy up online, and his Twitter feed is just so, well, "tech mundane". He seems to tweet nearly daily, e.g. yesterday he tweeted "Love the new Macbook Pro features/options, but to armchair #cloud, I'd limit the local storage option and improve the performance/availablity/resiliency of #iCloud" (which to be honest seems like a rather dumb tweet to me but that's besides the point). I mean, I don't expect the dude to go into hiding or anything, and to each their own, but if I were facing significant prison time, and I knew I was a pretty big story in the tech world because I was guilty of serious corruption, the last thing I would be doing is making random tech tweets.
- ng12 5y ago
  I would assume you're not the type to post buzzword filled nonsense in the first place. I often think that the people who fill my LinkedIn with posts like that are generally a little detached from reality.
malwarebytess 5y ago
Surprised this is as illegal as it appears to be based on this result. I see very similar all over the place. Maybe I should be reporting this? lol
debarshri 5y ago
I have never been involved with enterprise sales per say. Is this common practice in the industry? I mean, all the products mentioned in the PACER are fairly popular products. Also,what are the other alternative ways a new enterprise tech startup break into the industry.
fastball 5y ago
Between this and that couple that tried to sell nuclear submarine secrets I feel like people are engaging in criminal activity for so little (relative) gain. Per the article it seems like his total take was $500k. As VP of IT Operations at Netflix he must've been making at least that much per year. Seems crazy to me to take on that level of risk for not that much upside (if you're a well-paid tech worker).

487 points by ugwigr 5y ago

Can someone explain why this is prosecuted as a crime rather than left as a matter for civil lawsuits? The only actual victim here seems to be Netflix, and they can afford to file their own civil suits.

novaRom 5y ago

How many of their unethical practices actually waiting to be revealed? They impudently promote tobacco smoking to the youth, how much they receive from tobacco companies, anyone knows?

ncmncm 5y ago

See, he should have been an HR executive, instead. HR execs are expected to pull this stuff as a matter of routine. The other CxOs know that if they prosecute their HR director, the next one will be just the same, or it will be hard to hire one. If your HR director doesn't, why would they be in HR?

reilly3000 5y ago

Upon reading: “he stole the opportunity to work with an industry pioneer from honest, hardworking, Silicon Valley companies.” …I had to double-check this was coming from justice.gov, not a satire site or PR blog. That isn’t to say that there aren’t honest and/or hardworking SV companies, or that they weren’t wronged. It’s just never a phase I’ve seen before.

notJim 5y ago

Does anyone know how the actual conversation for something like this goes? I just can't imagine having the chutzpah to ask for a bribe. Is there some kind of euphemistic lingo people use to make it clear they want a bribe without saying the words?

rsj_hn 5y ago
First, to demand a bribe only happens when you are in a position of authority to grant what someone wants, and then you offer them some terms to get what they want in an easier way via a side-payment. So the person being bribed is (usually) not stealing from the person paying the bribe. They are stealing from whoever put them in that position of trust. So for a company, they are ripping off the shareholders if they choose a vendor not based on how competitive the vendor is, but based on a side payment. The person paying the bribe receives a benefit. But things get tricky when the bribe-taker is employed by the government and the bribe-payer is also a taxpayer. But still, if you want the ticket to be waived or the construction plan approved, you're happy to pay the bribe. For example in communist countries healthcare was terrible, but if you could pay a bribe, then your loved one would get better treatment -- for example their beds would be cleaned more regularly. The doctor would pay more attention to them, etc. So the family of the loved ones would be the ones to approach the doctors with incentives, hoping this would be enough to get better treatment. That's one extreme example. Here in capitalist Miami, we went to the beach and a local hotel had beach chairs and umbrellas that could be rented by the day. It was free for guests of the hotel, but $60 for someone not in the hotel. But we were told that if we paid the guy in cash, for merely $40 we could get the chair and umbrella for the day. Just a small little side-payment to help grease the wheels. We wanted the chair, and could save $20. It was the Hotel that lost out on $60. But long term, what happens is that the Hotel sees there is a long line of people wanting to hand out beach chairs, and the salaries for those adjust down, and perhaps some money needs to change hands with whoever appoints the umbrella dispenser. Then later on, some money might change hands to get to be person who appoints the person that dispenses the umbrellas. So over time, those economic rents dissipate as people realize "hey, I am a gatekeeper to something valuable, I can take a cut for myself." That process continues until there is no surplus value left that anyone is in charge of dispensing. That means small side-payments are made everywhere, from dealing with the police to getting a decent room in a hotel, to a table in a restaurant and eventually to even getting some meat from the butcher. In such a society, it's basically impossible to be honest, even if you wanted to, because the endemic bribery is a stable equilibrium. People have no idea how lucky they are to live in a society that values law and order, and how impossible it is to reform the corrupt society once corruption sets in and becomes expected as opposed to newsworthy. These casuals dismissals and mocking of people who have an innate desire to follow rules and act with integrity is really foolish once you consider people die trying to enter law-abiding societies, as it's really hard for most people to have opportunities in life when everything is dominanted by side-payments or political dealmaking rather than who can provide the best service for the lowest price.

csmythe15 5y ago

In case anyone is wondering, his sentencing (which was supposed to be Oct. 19) was pushed back to Nov. 15 at the last minute. I posted the court document on my twitter. https://twitter.com/ChristieSmythe/status/1451208869724753927?s=20 https://twitter.com/ChristieSmythe/status/145120886972475392...

csmythe15 5y ago

Hey, I'm the author of the article -- just wanted to point out that what made this story interesting to me is the implication that this kind of conduct could be very widespread. Prosecutors definitely hinted at that. If anyone knows of any similar stories, I'd be very interested in hearing them. christie.smythe@businessofbusiness.com

earthscienceman 5y ago
Some feedback from an outsider: IMO you do a poor job clearly outlining the transgressions and the legal issues at play. You bounce around phrases like "pay-to-play"but as someone not inside the startup world, I didn't get to the end of your article and understand exactly what he did that was illegal/immoral and the context for how it's harmful to startups. In other words, I know he is accused of doing something wrong but that's as deep as my understanding goes.
- autarch 5y ago
  The first sentence of the second paragraph says: "There was just one catch to landing that deal: It had to hire the streaming company’s vice president of IT operations, Michael Kail, as a consultant and an advisor, and pay him with fees and stock options." That seems pretty clear to me.
  - earthscienceman 5y ago
    It seems very unclear to me. I don't understand why that's illegal or wrong. Someone was hired and paid using fees and stock options? Seems fine to me. I don't understand corporate structure enough to understand why that's problematic... “leveraged his status as a leader of the IT community in Silicon Valley to subvert the trust of Netflix and others to profit at their expense” How did he leverage it in a way that was illegal? I'm not questioning that he did it, I literally don't understand. The diversity of responses here highlights what's confusing. People are saying hiring him at all was the problem? Other responses say that hiring him without Netflix knowing is the problem? It's hard for me to understand the specific transgression.

whymauri 5y ago

>In his own memorandum to the court, requesting that he be sentenced to a year of house arrest, Kail, 49, described himself as a “global power leader, top dev ops influencer and a thought leader.” So very humble of him.

catabyte 5y ago
First off, he didn't describe himself that way; his lawyer did. That's pretty standard stuff in a sentencing memorandum. Secondly, have you read the entire 53 page memorandum? I recommend everyone do so before rushing to judgement. https://www.courtlistener.com/docket/6769891/269/united-states-v-kail/ https://www.courtlistener.com/docket/6769891/269/united-stat...
rkalla 5y ago
He also has a church and is a life coach on Only Fans... you know, real classy person. :smh-forever:
- SavantIdiot 5y ago
  Well, you gotta admit he does a lot of work. I'm too wiped after my 8-5 to even work on fun stuff, so I'm kinda impressed how people find the time to do all this.
  - scns 5y ago
    Cocaine?
junon 5y ago
Sounds like Andrew Lee (of Freenode fame).
- slothtrop 5y ago
  ah yes, the crown prince
geodel 5y ago

jpollock 5y ago

That happened to a startup I was part of back in the late 90's. We gave out substantial stock grants to senior managers at customers.

joshstrange 5y ago

> There was just one catch to landing that deal: It had to hire the streaming company’s vice president of IT operations, Michael Kail, as a consultant and an advisor, and pay him with fees and stock options. I completely get how a startup would take this deal, however gross it is, but what I don't understand is how the exec got away with it from Netflix's side. And the fact this wasn't just 1 but 8 other startups he did this to/with as well. I can't tell from the article if Netflix was aware or unaware of this "Agreement" and if they weren't aware... how? Did no one ever mention "Oh yeah, we hired Kail like you asked/required us to"?

luckydata 5y ago
HR and rules are for the little people. VPs can do pretty much whatever they want for a LOOOONG time at large tech companies before any consequence catches up with them.
- jshen 5y ago
  This isn’t true at the big company I’m at. I’ve seen several VPs fired in the 10 years I’ve been here.
  - luckydata 5y ago
    That doesn't make anything I said less valid. You just experienced the losers of the internal game of thrones, the question is "fired why?" and "how long did it take?"
    - jshen 5y ago
      For inappropriate behavior, and fired very quickly
- menomatter 5y ago
  Big pharma CTO mandated the use of a certain software while everyone knew they were coming from the company and sits on their board. I'm certain the kickbacks are still happening but in different forms: job, advisory role ...so on and so forth.

kcsavvy 5y ago

I have heard of many startups bringing early customers onto their advisory board - it seems like a relatively common practice. I am curious what makes this fraud? The timing? Or the fact that the Netflix VP did not disclose this to His employer?

prasadjoglekar 5y ago
Kali didn't go on to the advisory board on behalf of Netflix - that would be perfectly rational. Instead, the startup had to do 2 deals: One with Kali directly for "advice", and then a second with Netflix that Kali, in his capacity as a VP there, would sign. Besides being unethical; this is now a clear conflict of interest. Netflix (and shareholders of Netflix by extension) may have signed up for a crappy product from the startup only because startup had a side deal with Kali.
lobocinza 5y ago
I'm not knowledgeable at all in this matter but the issues here are clear at least to me. Let's forget the conflict of interests he would face when working for both companies. He was charged with bribery, the issue here is that hiring him as a paid consultant was put as a condition for the contract approval. A deal which would benefit exclusively him and not his employer. Quite literally the companies were paying to receive lucrative contracts.

tweedledee 5y ago

This is so common it’s hard not to do. Not doing it definitely stunted my startup but it’s a lifestyle company and I don’t mind building slower. Edit: I should add that while I was working at a FAANG (before doing a startup) the team I was on would constantly be blocked from building X only for a VP to buy a company that said they did X but didn’t. Because we still needed X we would buy a new company each year. We could tell the VP was setting them up to sell to us. We would joke about leaving to do a start up for the VP to not only make more money but so we could finally have a working X in the company. Edit2: With my current start-up it's not uncommon that we are instructed to sell to a customer via a nominated 3rd party. We don't know for sure, but we strongly suspect, that the 3rd party markup is how the executives are skimming off extra money. At least it keeps us out of it.

deleted 5y ago
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jollybean 5y ago
M&A stupidity is not the same as fraud though. M&A is hard. It's not unreasonable for execs to tell the team not to do X because they're buying it, and then to screw it up. It's also normal for companies to want to buy via a dealer because they don't want to deal with your little startups legal issues, compliance, regulatory, billing. They just want to deal with small tier of vendors. In fact, that's kind of a startup idea: AppStore for SaaS because most corps don't want to deal with your little vendor BS. Everyone would be happy to pay an extra 10% just to have everything easy and clear.
- tweedledee 5y ago
  I'm privy to more details than I am giving out. I've been in SV for over 15 years and I have seen a lot in that time. I'm aware of what is normal. There is normal purchasing intermediaries and then there are purpose built bribe vehicles. We're not talking 10% it's more like 100% to 1000%.
  - jollybean 5y ago

cpb 5y ago

I guess some people just don't get quality onboarding content from compliance.

elliekelly 5y ago
I checked your profile hoping maybe you had a quality onboarding compliance content startup. Maybe one day...
- cpb 5y ago
  Aww thanks! The one thing that sticks after all those clicks: don't accept deal sweeteners outside of the papered contract! Easy to say when no one's offering, I guess.

iammisc 5y ago

So after reading the article, I'm still not sure of the crime, or the motivations (from netflix's perspective at least). Can someone help me?

ksdale 5y ago
He worked for Netflix, he was responsible for finding a vendor, and he basically chose a vendor based on who would pay him, personally, to let them be the vendor for Netflix. He didn't choose based on who would be the best vendor for Netflix, even though that's what Netflix was paying him to do. Netflix presumably would not have wanted him to do this if they had known what he was doing.
- iammisc 5y ago
  Oh I see... so this is just bribery. And 'Netflix' the organization didn't know basically.
  - ksdale 5y ago
    Exactly.
Kranar 5y ago
So many people are confused about this, but yes the crime is that the exec defrauded Netflix. Netflix is the main victim here. The article just did such a bad job of getting this point across.

germandiago 5y ago

I do not understand this. I mean, politicians do this all the time and do not go to jail (Spain). I do not mean people offer themselves for briving. But did anyone ever think what would happen if politicians did not have much power to regulate? Companies would not be able to lobby. That means there would not be nearly as much incentive to brive as there is today. Once a regulator is in the middle, the incentive for corruption is there. I do not think people use Netflix because of the corrupt business of this guy. They use it because it is entertaining or find it useful. The same way people will keep studying Picasso (I hate his art, but anyways) because they consider it art, and he was a misogynist. But his art is his art, the same way Netflix is entertaining for some people.

paulpauper 5y ago
There is less political corruption in the US than people think. Everything is so scrutinized these days, especially compared to the rest of the world. White House Chief of Staff John H. Sununu's travel expenses scandal was a big deal at the time, and this was in 1992 (before social media) and the amount of $ was pretty small. I think insider trading is possible concern though, although that too has gotten considerable scrutiny in the media.
- HatchedLake721 5y ago
  I know it's a complicated topic, but lobbying can be considered as corruption. E.g. a group with socioeconomic power is corrupting a law in order to serve their own interests. And US is very well known for its lobbying that people are trying to limit.
  - germandiago 5y ago
    I agree with this 100% Lobbying is only possible when someone can do influence favors to others. Full stop.
  - jollybean 5y ago
    Lobbying does not imply that the politician is receiving any benefit, in fact, there's a lot of rules in place for that. So, the disproportionate power that corps. may have is an issue of equality, but that's not this kind of corruption, at least not directly.

jopsen 5y ago

Why? Is the VP compensation package at Netflix really that bad?

geodel 5y ago
He was just a poor millionaire in billionaires' world.
mikestew 5y ago
Because even the salary/bonus of a VP at Netflix is never really enough for some folks. And, as sibling comment eludes to, there's always one more ladder rung above you. No, of course you don't get it. Yes, of course you'd live just fine on that salary with tons of money left over. So would I...until I become a VP at Netflix. But it's the bigger question of whether a person of such morals has VP material written all over them, or if the position causes one's formerly-solid morals to slip a bit (or a lot).
aluminussoma 5y ago
Because of greed. For most humans, what you have is never enough. A few years ago, Netflix had a reputation of paying very well to lower level senior employees (think L5 and L6), but not as competitively for higher level employees (L7+).

tptacek 5y ago

The DOJ press release is clearer than this article is: https://www.justice.gov/usao-ndca/pr/former-netflix-executive-convicted-receiving-bribes-and-kickbacks-companies-contracting https://www.justice.gov/usao-ndca/pr/former-netflix-executiv... Some fun details: Kail did his criming through a shell LLC he set up called "Unix Mercenary". He took between 10-15% of the total billings for each of the companies he hooked up with this scheme. None of those companies were charged (more's the pity). They got him on mail fraud, wire fraud, honest services fraud, and money laundering. The victim of the fraud was, of course, Netflix itself. Additional fun facts from PACER: He's seeking to exclude his shares in Sumo Logic and Netskope from forfeiture, arguing that they were largely the result of his own hard work, which takes some serious chutzpah. All of this apparently happened back in 2014 (the conviction is recent). If you're wondering what Netflix thought of all this, Kail apparently left Netflix for a job at Yahoo, from which he was fired after Netflix found out about his scheme and told Yahoo. Kail's sentencing memorandum is a fun read (again: chutzpah). For instance, this gem: Further, though Mr. Kail complained of problems with Sumologic (as one would see with any new startup), the product itself was “useful,” according to Ashi Sheth. (R.T. Vol. 8, p. 1670-71). As described below, at the time, Sumologic saved Netflix from paying for a far more expensive and inferior product called Splunk.

spenczar5 5y ago
Thanks, this is indeed a better source. A lot of people here are saying this is incredibly common which is frankly pretty surprising to me. Does it really happen through shell LLCs? I am definitely aware of execs prioritizing startups they've invested in, which is... not a great look. But this seems to be a different thing. Kail wasn't an investor. He explicitly drafted agreements that paid him a fraction of the money flowing from Netflix. This seems almost like embezzlement to me (not a lawyer! just a guy using words he has heard!): > Two days before Unix Mercenary was registered, Kail signed a Sales Representative Agreement to receive payments from Netenrich, Inc. amounting to 12% of the billings from Netenrich, Inc. to Netflix for its contract providing staffing and IT services to Netflix. Later in 2012, Kail began to receive 15% of all billing payments that VistaraIT, LLC, a wholly owned company of Netenrich, received from Netflix. From 2012 to 2014, Netenrich, Inc. paid Unix Mercenary approximately $269,986, and VistaraIT, LLC paid Unix Mercenary approximately $177,863. The payments stopped in mid-2014, after Kail left Netflix.

cabcabcab 5y ago

This is so incredibly common and is actually taught as tactic at many accelerators. You can form "customer advisory boards" which basically pay small percentages of common to early users to use the product. Like, seriously, more than half of the companies funded by YC do this. I think this is the norm more than the outlier.

mabbo 5y ago
> Like, seriously, more than half of the companies funded by YC do this. I think this is the norm more than the outlier. Then charge them all. That will put a halt to the practice pretty quickly.
- AlwaysRock 5y ago
  Until YC funds a company that specializes in making shell company^2 to make sure your C suite side deals are undetectable.
kami8845 5y ago
In those instances, do the managers at BiggerCorp who initiate the deal get the equity or the company?
- nhumrich 5y ago
  Usually, the manager.
ludocode 5y ago
No, you misunderstand. If the stock and advisory role were given to Netflix as part of the deal, it would have been fine. That's not what happened here. The benefits went to the executive directly. He asked for personal bribes to sign contracts on behalf of Netflix. He enriched himself at the expense of his employer. This is illegal.
- jollybean 5y ago
  It's the individual advisor, not the company, that gets the fee. 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.

runako 5y ago

So this guy traded his reputation and possibly his freedom for some small kickbacks? When his other option was stay at Netflix as a VP? When RSUs were around $9 (current stock price: $635)? I wonder how much money he threw away assuming he had stayed 5-6 years instead. $5m? $10m?

deleted 5y ago
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bloodyplonker22 5y ago
You're exactly right. He would have made a ton more money by just staying and working at Netflix and collecting stock awards at his level. However, these kinds of shady scummy people can never do this type of long-term thinking. They're always out there to suck a company dry in the short term and then it's onto the next one. You've probably seen this behavior before in the sales department.

paulpauper 5y ago

The shady-sounding plot was described by the government during a criminal trial earlier this year in San Jose federal court. Kail was found guilty of more than two dozen fraud and money laundering counts. At his sentencing Oct. 19, prosecutors will ask that he get a stiff punishment of seven years in prison as well as be ordered to pay fines, restitution, and forfeit a $3.3 million home in Los Gatos, California. That seems pretty stiff. goes to show how while collar crimes are not punished more leniently and how being rich does not shield one from justice, hardly.

capableweb 5y ago
One case doesn't prove anything. There are thousands of cases showing that white collar crimes are in fact punished less than other types of crimes.
colpabar 5y ago
> goes to show how while collar crimes are not punished more leniently No, it goes to show that the only white collar crimes that are stiffly punished are those against other rich people.
ludocode 5y ago
He hasn't been sentenced yet. That's just what the prosecution is asking for. The defense is asking for house arrest. The judge might still let him off with a slap on the wrist.

omarhaneef 5y ago

One item seems to have caused a lot of confusion in the comments so I will take a stab at clarifying: It is perfectly legal for Netflix to ask for options or any other consideration in exchange for the contract. Companies do this sort of thing frequently. They know that merely signing a large contract with a large firm will increase the value of the contractor. It is not legal for someone working for Netflix to ask for shares in their own personal capacity as individuals. That is what runs afoul of the law.

deleted 5y ago
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nowherebeen 5y ago
> It is not legal for someone working for Netflix to ask for shares in their own personal capacity as individuals. Yup, that's called a kickback, which is illegal.
JumpCrisscross 5y ago
> It is not legal for someone working for Netflix to ask for shares in their own personal capacity as individuals It can be, I think. If Netflix were properly informed of and signed off on the arrangement, it would just be an elaborate compensation mechanism. It would be a lot of paperwork. And they wouldn't approve that.
- tempestn 5y ago
  Yes, and of course they'd then be taxed on that compensation as well.
ryanmcbride 5y ago
thanks for putting it so plainly this cleared up all my questions
menomatter 5y ago
What if you are a majority shareholder for a company? Say mark Zuckerberg asking for shares in companies providing service to Facebook? Is that legal? I'm guessing if it's part of the deal then it's legal.

Phillip98798 5y ago

Well, I'll be losing sleep hoping Netflix can make it through this tough time. Seriously, is there one person alive who believes the guy should get seven years in prison? Fire him, do your character assassination thing, but prison time? Why are our tax dollars being used to defend a multi-billion dollar corporation? Let Netflix run its own company. Change compensation structure or something to reduce corruption. Douche or not, this is not behavior worthy of jail time.

xyzzyz 5y ago
There are in fact plenty of people who believe that people shouldn’t be able to get away with white collar crime to the tune of millions of dollars with a slap on the wrist, when petty criminals get much worse sentences for more minor trespasses.
- Phillip98798 5y ago
  Sure, there's Bernie Madoff stuff, and then there's this. Are you comfortable with big corporations and government hegemony muscling employees into compliance? I'm not. The guy should undoubtedly be sued, but it feels wrong to create an equivalency here with violent offenders.
  - xyzzyz 5y ago
    This guy defrauded the company to the tune of millions of dollars. I am perfectly comfortable with big corporations and governments muscling people into compliance, where thing to comply with is “not stealing from the company”. Imagine you run a business, and your employee just steals one of the company vehicles. Do you think you should have any recourse beyond firing them? I mean, it’s only a few tens of thousands of dollars worth of loss to you, so if you don’t want the government to go after the guy that stole millions from Netflix, why expect the government to help you recover some paltry car? It’s not violent offense after all, just property. As it happens, fraud is a crime, and government prosecutes crime to deter it. This is perfectly reasonable, and how things have always worked.

sat1 5y ago

Eye-opening.

spoonjim 5y ago

And the Purdue execs will pay a fine. Victimize people, not corporations, if you want to go scot free.

Phillip98798 5y ago
Exactly. Seeing people here go to bat for a company like Netflix is eye-opening. It is way too easy to consolidate power as a major US corporation today.

elliekelly 5y ago

This case is particularly interesting because he was convicted by a jury of the somewhat controversial charge of honest services fraud[1] in addition to the more common criminal fraud charges. Jeffrey Skilling (of Enron fame) was convicted under the same law (also among other charges) and successfully appealed to the Supreme Court where his convicted was reversed and his sentence was subsequently reduced. Skilling v. United States[2] and Black v. United States[3] (Conrad Black, the Canadian media mogul) significantly narrowed the scope of the crime. The Court came eversoclose to finding the law unconstitutionally vague but instead limited its applicability to situations where a fiduciary duty exists and there is evidence of bribery or a kickback scheme. Since Skilling the charge has most often been used for holders of political office, like Rod Blagojevich[4] but prosecutors couldn’t even get the charge to stick there. (Trump pardoned both Black and Blagojevich before leaving office.) More recently the charges have been brought against participants in the “Varsity Blues” college admissions scandal. The Supreme Court definitely left the door open for this law to be ruled unconstitutional so I’m curious whether any of the very wealthy and newly convicted-at-trial defendants will pursue the matter. Edit: Reading the DOJ press release and the way it’s worded I’m not so sure whether Kail was convicted of honest services fraud. It seems there was one count for which the jury did not return a guilty a verdict and I’d bet it was this one. [1]https://en.m.wikipedia.org/wiki/Honest_services_fraud https://en.m.wikipedia.org/wiki/Honest_services_fraud [2]https://en.m.wikipedia.org/wiki/Skilling_v._United_States https://en.m.wikipedia.org/wiki/Skilling_v._United_States [3]https://en.m.wikipedia.org/wiki/Black_v._United_States https://en.m.wikipedia.org/wiki/Black_v._United_States [4]https://en.m.wikipedia.org/wiki/Rod_Blagojevich_corruption_charges https://en.m.wikipedia.org/wiki/Rod_Blagojevich_corruption_c...

renewiltord 5y ago

Oh, just run of the mill bribery. It's a classic government bureaucrat trick done at a private firm. Seems unnecessary. Netflix VPs are well compensated, but there is no boundary for greed.

tomjen3 5y ago
Isn't it widely known that the trick for the government is to do what the defense contractor wants when in office and then get a nice job with the after? Since nothing is signed, there is no way to actually prove it is bribery.
adrr 5y ago
It’s also common place in the agency(marketing,creative) world. Execs won’t give your agency work unless you kickback money to them.

jnwatson 5y ago

The weird aspect of the whole thing is that if the exec were a corporation, it would have been legal.

elliekelly 5y ago
Well you can’t exactly defraud yourself, can you?
computermagic 5y ago
This was exactly what I was thinking. Shouldn't the real point to this be we need to make this illegal across the board. It doesn't seem like it would have suddenly made more sense if Netflix got the kickback.
- H8crilA 5y ago
  How would Netflix get a kickback paid from money from Netflix?
JumpCrisscross 5y ago
> if the exec were a corporation, it would have been legal No. It would not. "Kail approved contracts to purchase IT products and services from smaller outside vendor companies and authorized their payment." This is a commonly outsourced function. If I hire a company to manage my IT procurement and learn they're getting undisclosed kickbacks, they'd be breaking the same laws Kail did.
- s1artibartfast 5y ago
  It depends on the fine points of if the company is managing procurement or selling 3rd party services to fit a need. If the latter, it is a markup, not a kickback

ugwigr 5y ago

the HN admin changed the link I posted. this is unethical - You are fundamentally changing what I posted. As a product manager here is a better solution - A.) Add a clear indicator that admin changed the link to redirect B.) Delete my link and post yours. Shawdow changing what users post is wrong.

pacoWebConsult 5y ago
Waiting for the dang smackdown reply to this comment. You posted a secondary source (typically these get redirected to the primary source for any story), and used the editorialized title from the original journalist as your post title. Pretty commonplace on HN to correct these things so we can discuss the facts, not the reductive analysis of what someone writes about the primary source.
- ugwigr 5y ago
  as I suggested, admins should feel free to delete my post and even ban me from posting - but fundamentally changing what I posted is wrong.
  - s1artibartfast 5y ago
    A redirected tag would be transparent and address both concerns
    - ugwigr 5y ago
      exactly
- jacquesm 5y ago
  OP has a stake in the company whose link was posted, so it goes a bit deeper than that. That particular source had already been flagged as problematic taking the number of 'dead' links into account. https://news.ycombinator.com/from?site=businessofbusiness.com https://news.ycombinator.com/from?site=businessofbusiness.co... and https://twitter.com/thebizofbiz/status/1450491847739068420 https://twitter.com/thebizofbiz/status/1450491847739068420 Where they make a lot of hay on being #1 with a story on HN.

wnevets 5y ago

I just assumed this is how business was done at that level. For example in the health insurance industry "Producers" receive all shorts of benefits from carriers to push their plans onto clients.

numair 5y ago

If this is all illegal, the stories I was told by early Facebook employees about how Chamath made his money are more confusing than ever.

Kranar 5y ago
Can you go into some details or point me to some sources?
- myaltacct415 5y ago
  He talks about it in interviews. While he was at Facebook, he started an investment fund outside of work. Now I do not want to get sued for mischaracterizing what he did. You will have to listen to those interviews yourself.
  - Kranar 5y ago
    I am aware of the investment fund he started both while he was at Facebook and after it. Neither of them were done in secret and in fact Facebook was an investor in it. Furthermore the companies that the funds invested in had no business dealings with Facebook. You can see the list of companies it invested in as it's public info.
ram_rar 5y ago
Can you elaborate?
TheMagicHorsey 5y ago
I don't know Chamath, but his presence online makes me think he is shady af. His whole TSLA "selling my shares while telling everyone else not to sell" scheme alone gets him a black mark in my book. Then all the SPAC stuff he did makes it even more unwholesome.
- bloodyplonker22 5y ago
  Chamath is about as shady as a typical shady salesperson, but I would not say he's nearly as shady as a Trevor Milton.

Mizza 5y ago

Lots of comments here about how sentences are harsher for harming corporations and the extremely rich rather than common people. (See this case, Theranos, etc.) Is it possible that Netflix is _funding_ (or providing substantial material support to) the prosecution of this case, a bit like we've seen in Chevron v Donziger?

splistud 5y ago
As a shareholder of Netflix, I was directly harmed. I am most assuredly a common person.
- Mizza 5y ago
  Fair point.

invisible 5y ago

Someone else mentioned politics, but I think it's really apt to draw some lines since these are federal crimes. Politicians and government agents will work toward getting legislation or contracts through and then "retire" to work privately for the same companies. This is probably not legal (i.e. bribery), but it's basically impossible to prove the crime. On a similar note, politicians can ask for contributions as part of lobbying efforts that go directly to their campaigns. That might not go right into their pocket (which somehow make it legal), but it certainly makes continuing their career easier. I don't think either is particularly morally just, but the similarities are pretty stark. The government (and public) end up losing and becoming the victim just like Netflix was the victim of these actions.

1cvmask 5y ago

We met him at tech conference in SV almost a decade ago. He passed on our info of saas pass to a "competitor" onelogin (which got acquired recently). Turns out they were already using onelogin. No idea if he had shares in onelogin at the time. Seprately there was a Google Apps (later rebranded to G Suite and now Google Workspace) conference at Fort Mason around 2013 or 2014ish. At that event a Google employee Clay Bavor said they have an internal saying for product rollouts and new features. It was WWMKD. What would Mike Kail do? I guess don't do what Mike Kail would do.

hikerclimber1 5y ago

What about former ceo of Wells Fargo? He’s now an advisor though he was barred from the industry.

perfecthjrjth 5y ago

This is very common in many non-FAANG companies. The way these guys do it is to set up a third party staffing company, say X, owned by relatives and friends, then buy services (usually contractors) through this third party company. Usually, large companies have some vendor management tool. Here, the hiring manager picks candidates that come from X. When I was working at AT&T in New Jersey, my manager always hired contractors from one third party company, which is owned by the wives of his brother (then another ATT employee) and other ATT employee. Eventually, many managers colluded with this particular third party company so much so that other third party staffing companies couldn't place any people. So, these staffing companies complained to the Ethics department. ATT Legal started investigation, and fired my manager, his brother (another employee), another guy. They couldn't do much further due to these reasons. (a) the staffing company is owned by the wives of the two employees (b) the staffing company is NOT the direct vendor of ATT. The primary vendor is another entity, who takes $1 per hour per candidate. This kind of fraud is so common in this industry.

deathhand 5y ago

Ctrl + F "Biden", no results. That's so sad! It's the same thing Hunter did, and Hillary has been accused of. I like the morality that is seen in this thread but can we take it a bit further? FDA is mentioned a few times. What about the FTC? Ajit and net neutrality? It's everywhere!

toephu2 5y ago

Is this the person Netflix refers to in its infamous culture memo? "On rare occasions, freedom is abused. We had one senior employee who organized kickbacks on IT contracts for example. But those are the exceptions, and we avoid over-correcting. Just because a few people abuse freedom doesn’t mean that our employees are not worthy of great trust." https://jobs.netflix.com/culture https://jobs.netflix.com/culture

oars 5y ago

Why weren't these companies charged as well? They are paying bribes to an executive to use their products and services. If you were caught paying bribes to a (corrupt) government official, wouldn't you be breaking the law?

borski 5y ago
It's about knowledge, and depends on how it was presented to the companies. If the originator of the bribe was Kail, and if it was not presented as a quid-pro-quo, the companies may not have known better and would have assumed that he is disclosing the relationship appropriately to his company. The startups would have to disclose it within their own company, but they weren't playing both sides and were not effectively 'stealing' from their own company or from Netflix; Kail, on the other hand, was taking money directly from the pile Netflix was owed, and not disclosing it.

pixel_tracing 5y ago

So I wonder how people close to or within vicinity of this person at Netflix are feeling? Anyone from Netflix care to chime in?

trhway 5y ago

> Kail then urged his Netflix employees to find a use for the product, despite their objections and preference for a competing product that Netflix was already paying for. There should be a special aggravating attachment for such abuse of employees :)

jijji 5y ago

various reports mention he was sentenced on October 19th, 2021... Anyone know what happened today when he was sentenced?

dhosek 5y ago

Didn't he have to do the annoying anti-corruption training that every single job I've had for the last decade has required?

hn_throwaway_99 5y ago

This article is a bit old (back in May), I'm curious what the latest is. One thing I find extremely strange is that, I looked this guy up online, and his Twitter feed is just so, well, "tech mundane". He seems to tweet nearly daily, e.g. yesterday he tweeted "Love the new Macbook Pro features/options, but to armchair #cloud, I'd limit the local storage option and improve the performance/availablity/resiliency of #iCloud" (which to be honest seems like a rather dumb tweet to me but that's besides the point). I mean, I don't expect the dude to go into hiding or anything, and to each their own, but if I were facing significant prison time, and I knew I was a pretty big story in the tech world because I was guilty of serious corruption, the last thing I would be doing is making random tech tweets.

ng12 5y ago
I would assume you're not the type to post buzzword filled nonsense in the first place. I often think that the people who fill my LinkedIn with posts like that are generally a little detached from reality.

malwarebytess 5y ago

Surprised this is as illegal as it appears to be based on this result. I see very similar all over the place. Maybe I should be reporting this? lol

debarshri 5y ago

I have never been involved with enterprise sales per say. Is this common practice in the industry? I mean, all the products mentioned in the PACER are fairly popular products. Also,what are the other alternative ways a new enterprise tech startup break into the industry.

fastball 5y ago

Between this and that couple that tried to sell nuclear submarine secrets I feel like people are engaging in criminal activity for so little (relative) gain. Per the article it seems like his total take was $500k. As VP of IT Operations at Netflix he must've been making at least that much per year. Seems crazy to me to take on that level of risk for not that much upside (if you're a well-paid tech worker).