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Former Netflix executive convicted of receiving bribes from contractors

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Re: Former Netflix executive convicted of receiving bribes from contractors

#331

Post by jjeaff »

jacquesm wrote: post #99
spenczar5 wrote: post #62

Earlier quoted context omitted.

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 mone…

We always check the corporate registries to see if any of the legal entities the execs of a company are related to are making substantial turnover from either the company we are looking at, or a subsidiary. In 200+ DDs this has happened a handful of times. So I would not say it is a common thing but it definitely does happen, and often enough that we feel the need to at least try to establish if it is the case during…

That of course wouldn't have found this particular type of conflict unless you are able to look into the companies that your vendors are dealing with.

Re: Former Netflix executive convicted of receiving bribes from contractors

#332

Post by mbesto »

jacquesm wrote: post #281
rand846633 wrote: post #276

Earlier quoted context omitted.

> Happy to answer any questions. Assuming the receiver uses a proper offshore construct to accept the payment, this would go by unnoticed by your DD? But most interesting: What is your best guess - Your partner says you find “a hand full” from a few hundred - how many of these cases do you miss because the recipients use a not easy traceable proxy entity to collect the payment? Do you try to uncover such hidden actio…

> how many of these cases do you miss because the recipients use a not easy traceable proxy entity to collect the payment? That's the 'million dollar question', and in some cases substantially more than one million. I think the reason a good number of these people get caught is (1) things like the Panama papers and other leaks like that have made it harder to do this, and have also brought the not insubstantial resou…

> It's typically quite a surprise when we start asking about the activities of companies that the other party believes are well hidden.

Also, if you do tech DD - most techies are happy to share details that unknowingly might expose because they tend to be less business savvy. CEO/CFO's on the other hand...

Re: Former Netflix executive convicted of receiving bribes from contractors

#333

Post by mbesto »

jjeaff wrote: post #330
mulmen wrote: post #329

Earlier quoted context omitted.

> An undisclosed conflict of interest is always a problem. Can you help me understand why this is? If a known conflict of interest may or may not be a problem for the downside party why does that change if the conflict is unknown? I can see how it can become a problem, and how the downside party is at a disadvantage but I’m not understanding why this is always a problem.

The act of not disclosing a conflict of interest is a problem in and of itself. A conflict of interest is not necessarily a problem as long as the conflict is disclosed so that dealings around that conflict can be scrutinized. But if you never disclose it, then problem or not, no one will know.

Also, this is the classic "it depends" in consulting.

Example where this went bad:

- "Acme Co." has an offshore/outsourced dev group in India called "Offshore Co.". Offshore does all of their software development, maintenance, infrastructure, etc.

- CTO who is employed by Acme wholly owns Offshore Co.

- PE Group ("PEG") buys Acme Co. and takes a controlling interest

- PEG decides Acme should do something strategic.

- CTO disagrees with strategic direction

- CTO operates Offshore Co and decides to hold the company hostage and directs his resources to stop maintaining the code, infrastructure, etc. anymore unless they do what the CTO says

PEG/Acme could simply stop paying Offshore/CTO but since they don't know how the code works, etc. they basically don't have a choice.

Re: Former Netflix executive convicted of receiving bribes from contractors

#334

Post by borski »

numair wrote: post #160
tptacek wrote: post #91

Earlier quoted context omitted.

I think it's probably pretty common, because I've worked jobs where clients have floated the idea (it was gross, we turned them down). Kail's own sentencing memorandum points out that OpenDNS rewarded a different Netflix employee with stock options. Also, presumably, super illegal.

I can’t find the OpenDNS citation — could you post a link? I would be super disappointed to find out that the founder of OpenDNS was involved in this sort of behavior.

IANAL, but: One can be both an advisor to a company and their company can be a customer of it. That is not, in itself, illegal.

It is illegal when they are tied together as a quid pro quo, and further, when it is undisclosed. In every case any company I ran has ever done this, we fully expected the other party to disclose the conflict of interest to their company before becoming an advisor. Of course we have no way of confirming this, but this is also why none of the startups themselves were charged here.

Re: Former Netflix executive convicted of receiving bribes from contractors

#335

Post by borski »

taurath wrote: post #294
tptacek wrote: post #43

The DOJ press release is clearer than this article is: 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 se…

It’s incredible to me that the one being bribed gets a conviction but the corporation doing the bribing gets absolutely no punishment, other than people reading on here knowing Sumo and Netskope have questionable business practices and we’re willing to wire a percentage of netflix’s fees to a shell Corp. Or maybe he was just that good about hiding it, IE only soliciting via the business entity which then took a “comm…

It is entirely possible the 'briber' did not know. Companies, particularly startups, tend to assume that the other party will 'do the right thing' and quite literally may not know any better. Ignorance isn't a defense, but assuming that the other party will properly disclose the conflict of interest is not an unfair assumption; that Kail didn't is, frankly, the main problem here, at least with regard to shares.

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

Re: Former Netflix executive convicted of receiving bribes from contractors

#336

Post by notJim »

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?

Re: Former Netflix executive convicted of receiving bribes from contractors

#337

Post by grantc »

mc32 wrote: post #76
tptacek wrote: post #43

The DOJ press release is clearer than this article is: 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 se…

So all the Sox compliance in the world did nothing to prevent this fraud?

Very little in SOX scope is going to detect transactions outside of the company such as these. SOX is primarily about having effective mechanisms to assure that the financial information you report is accurate and complete, and then those mechanisms are inspected internally and audited externally. SOX is about what happens inside a company and with a companies resources -- you might have different means of preventing an employee from exfiltrating the company's money, and those are SOX-scoped.

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

Re: Former Netflix executive convicted of receiving bribes from contractors

#339

Post by borski »

oars wrote: post #322

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?

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.

Re: Former Netflix executive convicted of receiving bribes from contractors

#340

Post by jollybean »

tweedledee wrote: post #29

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 co…

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.

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