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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

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.
    - tptacek 5y ago
      You can't "hire" Netflix's VP of IT to stay at Netflix and approve all your purchase orders.
    - ghaff 5y ago
      It's a kickback because there's a clear conflict of interest just as if he were given a week on a tropical island as a quid pro quo even if that quid pro quo only took place in a nudge-nudge wink-week sort of way (which it certainly didn't in this case).
    - SamoyedFurFluff 5y ago
      I think this is less the fault of the reporter and more an audience that is unfamiliar with the notion of a kickback scheme and why it’s illegal. Might I recommend reading up on what a kickback is?
    - groby_b 5y ago
      "I will only sign this contract on behalf of my company if you give money to me personally" is not in any way ambiguous in terms of morality. If you don't understand why that's wrong, I strongly suggest maybe taking a few philosophy or ethics classes. In short: He was supposed to be acting on behalf of his employer - that's what being an exec means. He instead used the resources of his employer (not his to use, except on behalf of the employer) to dangle a lucrative deal in front of a much smaller company - which, at this point, is akin to exercising quite a bit of force, because these deals can be make-or-break especially for small places. He then made that deal contingent on enriching himself personally. That's about as crooked as you can get without inflicting physical harm.
      - ghaff 5y ago
        I'd add that this is an example of why many companies have those eye-rolling annual ethics mini-video classes that they make people take. Because I guess it sometimes does need to be said.
      - poizan42 5y ago
        I don't think anybody is confused about the morality of "I will only sign this contract on behalf of my company if you give money to me personally". The problem is that this is never mentioned in the article. In fact at no point does the article say that the agreement was with the VP and not okayed by the decision makers at Netflix. It seems pretty clear to me why people are confused.
  - hardtke 5y ago
    It is pretty standard practice to submit any consulting/advisory contracts to HR at your full time employer before you sign the deal. They can verify there is no conflict of interest. You also generally need to declare these relationships when you start a new job. This article is not clear if these procedures were followed. I'm guessing that these deals were secretive, hence the crime.
- tptacek 5y ago
  The article describes an absolutely standard kickback scheme. If you're an employee of a company and arrange to take kickbacks from vendors without the approval of your employer, you're defrauding your employer.
  - philipkiely 5y ago
    Gotcha. So, legally speaking, the victim of the crime here is Netflix, and if the exec had performed the same activities with the express permission of someone within Netflix with the authority to authorize such things (IDK, board of directors?) it would not have been illegal? Is there additional/secondary fraud against the vendors as well, or is the fraud strictly against the employer in this situation? (Edit: Board of Director approval is totally hypothetical, I understand that no BoD would ever actually condone such a thing.) (Edit: Thanks for the clarification, everyone!)
    - earthscienceman 5y ago
      This is exactly why I'm confused. I would also like this clarified.
      - ghaff 5y ago
        I can't imagine any BoD would be cool with an executive responsible for signing deals getting essentially paid for signing those deals given what a clear conflict of interest that would be. And the BoD itself would probably be found to be failing their fiduciary responsibility under those circumstances.
        spenczar5 5y ago
        I could imagine some slippier cases. A lot of successful startup executives have a bunch of money and invest it in startups. They (of course) pick ones that they think will do a good job in their space. It isn't that crazy to imagine them recommending using a startup they've invested in, and it's also possible to imagine them making a convincing case to a board that the startup is the best option available. They still can profit massively from that, though, so it's still kind of messy territory.
- prasadjoglekar 5y ago
  It's in the second paragraph. There was just one catch to landing that deal: It (the startup hoping to do business with Netflix) had to hire the streaming company’s vice president of IT operations, Michael Kail, as a consultant and an advisor, and pay him with fees and stock options. That's "pay-to-play"; you don't hire me as an "advisor", you don't get the Netflix contract.
veltas 5y ago
When it's a commonly committed crime but only certain people get prosecuted, it reaks of high-level corruption. Sounds like this exec stepped on the wrong toes.
- jacquesm 5y ago
  No, it's just that prosecuting such cases takes a lot of time and effort. Besides that this guy seems to be hell bent on making things worse for himself, he should have probably folded earlier on rather than to keep pushing. Not that I mind. And 'commonly' doesn't translate into 'every exec does it', but it does happen, in my experience about 2 to 3 percent of the businesses out there have such a thing going on. That's only in my backyard, it is very well possible that different localities or professions would have a multiple or a fraction of that, and it is possible that we're not looking hard enough and that the numbers are much higher.
anonymous4828 5y ago
Doesn't this sort of thing happen in government all the time?
- ghaff 5y ago
  I'm not saying people don't get away with it but the US government is actually stricter than many/most companies about gifts/perks from organizations that the government is doing business with.
- prasadjoglekar 5y ago
  It's just as illegal there if you're a government employee. If you're an elected official, general principle still applies but rules are a bit different. See https://www.nytimes.com/2015/12/01/nyregion/sheldon-silver-guilty-corruption-trial.html https://www.nytimes.com/2015/12/01/nyregion/sheldon-silver-g...
- vxNsr 5y ago
  Yes, but there are controls in place to limit it, many large corps have similar controls the problems usually arise when you get unicorns which grow faster than they can build processes to account for stuff like this. I’m sure now Netflix will work on the issue, possibly this case started bec they began working on preventing stuff like it.
- namdnay 5y ago
  there's a long road from "I'll buy from you but don't forget that I retire in 5 years' time, I hope there's a cushy job waiting for me" to "I'll buy from you, here's my bank account, make me a consultant wink wink"
  - wombatpm 5y ago
    Sole source contracts happen all of the time. Where it becomes murky is if the contracting officer ends up retiring his government job and takes a highly paid job with vendor.
- kvathupo 5y ago
  This does remind me of Deloitte winning a contract for building a website using technology only Deloitte could use [1]. Surprise, surprise: the website sucked. [1] - https://news.ycombinator.com/item?id=25975636 https://news.ycombinator.com/item?id=25975636
tyingq 5y ago
I've definitely seen a fair amount of brazen stuff like this over several decades in IT. One path that's pretty interesting to follow is announcements about new board members at software providers. Often, you can see their prior (or even current) job, and press releases about them selecting that software some short(ish) time before.
- outworlder 5y ago
  > Often, you can see their prior (or even current) job, and press releases about them selecting that software some short(ish) time before. That may or may not be a problem, depending on policies and how it was handled. Generally, you need to disclose any conflicts of interest. Then, its up to your company on what will be done next. You are probably going be removed from the actual decision-making process (regardless if you are ultimately going to be the one closing the deal - after your peers approved the decision). If everything was disclosed and there was no kickbacks, it might have been ok (although the press release may overstate the role they played in the selection). If not, you may be in hot water with your company and even the justice system.
numbsafari 5y ago
The amount of "I don't get why this is wrong?" going on in this thread would seem to support the prosecutors' view that this is a widespread practice. Long ago, before Dotcom went Dotbomb, I worked for a firm where the CIO was being paid kickbacks by our hardware reseller. He was terminated for other reasons and, shortly after he left, our head of network ops got a call from the distributor asking where they should send the bonus check that was due to him. They clearly thought that with the CIO gone, the head of network ops would be down the with the deal. Unfortunately for them, and fortunately for him, he was absolutely not down with the deal and reported the whole thing up the chain. We were overpaying for hardware and the previous CIO had been splitting the difference with the distributor. If it's unclear to anyone on this thread why that is both illegal and immoral... perhaps you are in the wrong business?
- cabcabcab 5y ago
  Every single early stage company I know does this.
- dboreham 5y ago
  I think some people may be confused because in the case the the dude was some biz dev type, involved with Netflix _investing_ in the startup, then this arrangement (him being on their board, an advisor, have stock) is quite common. The difference is that here he was the IT director, and Netflix was a customer not an investor, and the arrangement wasn't disclosed.
- ksdale 5y ago
  When I was in law school, I felt patronized by the amount of time we spent talking about conflicts of interest because it seemed so obvious to me. In retrospect, having read so many of the disbarment announcements in the bar association newsletter, it's clear that a great many people do not understand what a conflict of interest is.
  - eganist 5y ago
    s/understand/care
cabcabcab 5y ago
This is super common in the Valley. This isn't the exception it's the norm. Every single angel investor I have ever pitched asked for/suggested this. If this is illegal 99% of the Valley is committing fraud.
- tedivm 5y ago
  There's a huge difference between angel investors taking a share of the company and acting as an advisor and what happened here. When you talk to these angel investors, do they offer you contracts for your new company at their existing companies? Like if you sell product X as part of your new company, are they saying they'll make sure the companies they're involved with buy product X if you give them shares of the company and cash kickbacks? If not then your comparison doesn't hold.
- csmythe15 5y ago
  That's more of what I'm looking to substantiate...thank you.
  - tweedledee 5y ago
    There is also the role of the VCs who facilitate much of this. They use VPs in big companies to offload crappy purpose built startups for huge profits then get their friends to offer the VP sweetheart deals and or future employment. AFAIK the arms-length / chinese walls keep it legal in appearance. Basically any big tech company with lots of money and terrible management is prone to this.
    - rexreed 5y ago
      This is also common in government contracting. When you say "offload" crappy startups, do you mean getting the company acquired by that company or purchase the startups products?
      - tweedledee 5y ago
        Acquisitions. Say a big company lacks in category, an exec from that company can let a VC know that they would like to buy a company in that category and are willing to pay a certain amount. The VC then goes about bringing the company into existence. Do a song and dance about how it's a real company. Buy a bunch of positive press. Cram it full of new grads. Then before it can collapse under its own weight offload it.
jacquesm 5y ago
If you are aware of such stories I'd caution against sharing the details with people online without first ascertaining your own legal position before passing this information on.
- deleted 5y ago
  [deleted]
atarian 5y ago
I thought that was very interesting too. Especially when you pointed out that tweet from Alexis.
mewse-hn 5y ago
Small criticism but your article wasn't direct about where this exec crossed the line from corporate nepotism to criminal fraud and money-laundering. The press release from the DoJ details how he structured his kickbacks without netflix's knowledge and set up a shell company to do so -- even lying directly to netflix leadership: "When an inquiry from the Netflix CEO ensued, Kail falsely denied that he was formally working with Platfora." Criticisms aside, thank you for helping to shine a light on corporate malfeasance.

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.
  - tptacek 5y ago
    You can't "hire" Netflix's VP of IT to stay at Netflix and approve all your purchase orders.
  - ghaff 5y ago
    It's a kickback because there's a clear conflict of interest just as if he were given a week on a tropical island as a quid pro quo even if that quid pro quo only took place in a nudge-nudge wink-week sort of way (which it certainly didn't in this case).
  - SamoyedFurFluff 5y ago
    I think this is less the fault of the reporter and more an audience that is unfamiliar with the notion of a kickback scheme and why it’s illegal. Might I recommend reading up on what a kickback is?
  - groby_b 5y ago
    "I will only sign this contract on behalf of my company if you give money to me personally" is not in any way ambiguous in terms of morality. If you don't understand why that's wrong, I strongly suggest maybe taking a few philosophy or ethics classes. In short: He was supposed to be acting on behalf of his employer - that's what being an exec means. He instead used the resources of his employer (not his to use, except on behalf of the employer) to dangle a lucrative deal in front of a much smaller company - which, at this point, is akin to exercising quite a bit of force, because these deals can be make-or-break especially for small places. He then made that deal contingent on enriching himself personally. That's about as crooked as you can get without inflicting physical harm.
    - ghaff 5y ago
      I'd add that this is an example of why many companies have those eye-rolling annual ethics mini-video classes that they make people take. Because I guess it sometimes does need to be said.
    - poizan42 5y ago
      I don't think anybody is confused about the morality of "I will only sign this contract on behalf of my company if you give money to me personally". The problem is that this is never mentioned in the article. In fact at no point does the article say that the agreement was with the VP and not okayed by the decision makers at Netflix. It seems pretty clear to me why people are confused.
- hardtke 5y ago
  It is pretty standard practice to submit any consulting/advisory contracts to HR at your full time employer before you sign the deal. They can verify there is no conflict of interest. You also generally need to declare these relationships when you start a new job. This article is not clear if these procedures were followed. I'm guessing that these deals were secretive, hence the crime.
tptacek 5y ago
The article describes an absolutely standard kickback scheme. If you're an employee of a company and arrange to take kickbacks from vendors without the approval of your employer, you're defrauding your employer.
- philipkiely 5y ago
  Gotcha. So, legally speaking, the victim of the crime here is Netflix, and if the exec had performed the same activities with the express permission of someone within Netflix with the authority to authorize such things (IDK, board of directors?) it would not have been illegal? Is there additional/secondary fraud against the vendors as well, or is the fraud strictly against the employer in this situation? (Edit: Board of Director approval is totally hypothetical, I understand that no BoD would ever actually condone such a thing.) (Edit: Thanks for the clarification, everyone!)
  - earthscienceman 5y ago
    This is exactly why I'm confused. I would also like this clarified.
    - ghaff 5y ago
      I can't imagine any BoD would be cool with an executive responsible for signing deals getting essentially paid for signing those deals given what a clear conflict of interest that would be. And the BoD itself would probably be found to be failing their fiduciary responsibility under those circumstances.
      - spenczar5 5y ago
        I could imagine some slippier cases. A lot of successful startup executives have a bunch of money and invest it in startups. They (of course) pick ones that they think will do a good job in their space. It isn't that crazy to imagine them recommending using a startup they've invested in, and it's also possible to imagine them making a convincing case to a board that the startup is the best option available. They still can profit massively from that, though, so it's still kind of messy territory.
prasadjoglekar 5y ago
It's in the second paragraph. There was just one catch to landing that deal: It (the startup hoping to do business with Netflix) had to hire the streaming company’s vice president of IT operations, Michael Kail, as a consultant and an advisor, and pay him with fees and stock options. That's "pay-to-play"; you don't hire me as an "advisor", you don't get the Netflix contract.

veltas 5y ago

When it's a commonly committed crime but only certain people get prosecuted, it reaks of high-level corruption. Sounds like this exec stepped on the wrong toes.

jacquesm 5y ago
No, it's just that prosecuting such cases takes a lot of time and effort. Besides that this guy seems to be hell bent on making things worse for himself, he should have probably folded earlier on rather than to keep pushing. Not that I mind. And 'commonly' doesn't translate into 'every exec does it', but it does happen, in my experience about 2 to 3 percent of the businesses out there have such a thing going on. That's only in my backyard, it is very well possible that different localities or professions would have a multiple or a fraction of that, and it is possible that we're not looking hard enough and that the numbers are much higher.

anonymous4828 5y ago

Doesn't this sort of thing happen in government all the time?

ghaff 5y ago
I'm not saying people don't get away with it but the US government is actually stricter than many/most companies about gifts/perks from organizations that the government is doing business with.
prasadjoglekar 5y ago
It's just as illegal there if you're a government employee. If you're an elected official, general principle still applies but rules are a bit different. See https://www.nytimes.com/2015/12/01/nyregion/sheldon-silver-guilty-corruption-trial.html https://www.nytimes.com/2015/12/01/nyregion/sheldon-silver-g...
vxNsr 5y ago
Yes, but there are controls in place to limit it, many large corps have similar controls the problems usually arise when you get unicorns which grow faster than they can build processes to account for stuff like this. I’m sure now Netflix will work on the issue, possibly this case started bec they began working on preventing stuff like it.
namdnay 5y ago
there's a long road from "I'll buy from you but don't forget that I retire in 5 years' time, I hope there's a cushy job waiting for me" to "I'll buy from you, here's my bank account, make me a consultant wink wink"
- wombatpm 5y ago
  Sole source contracts happen all of the time. Where it becomes murky is if the contracting officer ends up retiring his government job and takes a highly paid job with vendor.
kvathupo 5y ago
This does remind me of Deloitte winning a contract for building a website using technology only Deloitte could use [1]. Surprise, surprise: the website sucked. [1] - https://news.ycombinator.com/item?id=25975636 https://news.ycombinator.com/item?id=25975636

tyingq 5y ago

I've definitely seen a fair amount of brazen stuff like this over several decades in IT. One path that's pretty interesting to follow is announcements about new board members at software providers. Often, you can see their prior (or even current) job, and press releases about them selecting that software some short(ish) time before.

outworlder 5y ago
> Often, you can see their prior (or even current) job, and press releases about them selecting that software some short(ish) time before. That may or may not be a problem, depending on policies and how it was handled. Generally, you need to disclose any conflicts of interest. Then, its up to your company on what will be done next. You are probably going be removed from the actual decision-making process (regardless if you are ultimately going to be the one closing the deal - after your peers approved the decision). If everything was disclosed and there was no kickbacks, it might have been ok (although the press release may overstate the role they played in the selection). If not, you may be in hot water with your company and even the justice system.

numbsafari 5y ago

The amount of "I don't get why this is wrong?" going on in this thread would seem to support the prosecutors' view that this is a widespread practice. Long ago, before Dotcom went Dotbomb, I worked for a firm where the CIO was being paid kickbacks by our hardware reseller. He was terminated for other reasons and, shortly after he left, our head of network ops got a call from the distributor asking where they should send the bonus check that was due to him. They clearly thought that with the CIO gone, the head of network ops would be down the with the deal. Unfortunately for them, and fortunately for him, he was absolutely not down with the deal and reported the whole thing up the chain. We were overpaying for hardware and the previous CIO had been splitting the difference with the distributor. If it's unclear to anyone on this thread why that is both illegal and immoral... perhaps you are in the wrong business?

cabcabcab 5y ago
Every single early stage company I know does this.
dboreham 5y ago
I think some people may be confused because in the case the the dude was some biz dev type, involved with Netflix _investing_ in the startup, then this arrangement (him being on their board, an advisor, have stock) is quite common. The difference is that here he was the IT director, and Netflix was a customer not an investor, and the arrangement wasn't disclosed.
ksdale 5y ago
When I was in law school, I felt patronized by the amount of time we spent talking about conflicts of interest because it seemed so obvious to me. In retrospect, having read so many of the disbarment announcements in the bar association newsletter, it's clear that a great many people do not understand what a conflict of interest is.
- eganist 5y ago
  s/understand/care

cabcabcab 5y ago

This is super common in the Valley. This isn't the exception it's the norm. Every single angel investor I have ever pitched asked for/suggested this. If this is illegal 99% of the Valley is committing fraud.

tedivm 5y ago
There's a huge difference between angel investors taking a share of the company and acting as an advisor and what happened here. When you talk to these angel investors, do they offer you contracts for your new company at their existing companies? Like if you sell product X as part of your new company, are they saying they'll make sure the companies they're involved with buy product X if you give them shares of the company and cash kickbacks? If not then your comparison doesn't hold.
csmythe15 5y ago
That's more of what I'm looking to substantiate...thank you.
- tweedledee 5y ago
  There is also the role of the VCs who facilitate much of this. They use VPs in big companies to offload crappy purpose built startups for huge profits then get their friends to offer the VP sweetheart deals and or future employment. AFAIK the arms-length / chinese walls keep it legal in appearance. Basically any big tech company with lots of money and terrible management is prone to this.
  - rexreed 5y ago
    This is also common in government contracting. When you say "offload" crappy startups, do you mean getting the company acquired by that company or purchase the startups products?
    - tweedledee 5y ago
      Acquisitions. Say a big company lacks in category, an exec from that company can let a VC know that they would like to buy a company in that category and are willing to pay a certain amount. The VC then goes about bringing the company into existence. Do a song and dance about how it's a real company. Buy a bunch of positive press. Cram it full of new grads. Then before it can collapse under its own weight offload it.

jacquesm 5y ago

If you are aware of such stories I'd caution against sharing the details with people online without first ascertaining your own legal position before passing this information on.

deleted 5y ago
[deleted]

atarian 5y ago

I thought that was very interesting too. Especially when you pointed out that tweet from Alexis.

mewse-hn 5y ago

Small criticism but your article wasn't direct about where this exec crossed the line from corporate nepotism to criminal fraud and money-laundering. The press release from the DoJ details how he structured his kickbacks without netflix's knowledge and set up a shell company to do so -- even lying directly to netflix leadership: "When an inquiry from the Netflix CEO ensued, Kail falsely denied that he was formally working with Platfora." Criticisms aside, thank you for helping to shine a light on corporate malfeasance.