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.

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!)

The vendors effectively helped defraud Netflix. If Kail initiated the scheme, demanding kickbacks for deals to move forward (as seems likely to be the case given the number of vendors involved) they're unlikely to face consequences, but they're morally culpable regardless.

It is not unlawful to offer incentives to the company itself in order for them to make a deal. In fact, that's effectively how most deals close (the incentive is usually simply monetary and takes the form of a discount). The problem here is that Kail abused his position as an agent of Netflix to profit at their expense.

What seems especially common are indirect incentives such as dinners, drinks, vacations, and other entertainment perks.

Dinner and drinks are ok as long as they are not excessive and in line with the expected return for the company, say two people discussing business over lunch or dinner, with a maximum of $x / head. Fairly typical companies will have very explicit rules about what is and is not permitted to the point of spelling out exactly how much you are allowed to spend on a business relationship and the reverse: what to do when/if you are offered an invitation to join for dinner and who is to bear the expense.

Vacations are typically forbidden and would immediately be seen as a bribe. This has led to all kinds of things that are practically vacations but officially are business (such as: conferences in sunny resorts, conferences that take three weeks and so on). Other 'entertainment' can come in many different forms and if not disclosed can get both parties in hot water.

On the whole, pay your own way, do not accept anything that might be construed as a bribe afterwards (so no discount on that shiny item from the company you are deciding to do business with, or not), no gifts over a very low dollar value and in case of doubt clear with legal/linemanager/accountant, transparency is key here, just a failure to disclose can turn an otherwise innocent thing into a potential bribe.

It's really not all that hard to keep your nose clean.

Walmart procurement has very strict rules where if they accept any incentives i.e. dinner, drinks, vacation, entertainment, etc are grounds for immediate termination.

This is exactly why I'm confused. I would also like this clarified.

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.

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.

That's not a grey area at all. If you are a director and you are pushing your board to drive business to a company you have a significant stake in, you MUST disclose that.

A grey area would be more like whether you should offer to leave the meeting while they discuss the proposal.

Yep, I agree. I was responding to the comment from ghaff that they "can't imagine any BoD would be cool" with a deal getting signed in a clear conflict of interest. I can imagine a board going along with it.

Of course, the conflict definitely needs to be disclosed!

Oh I agree. I was really talking about the kickback case as in here. There are other types of conflicts which happen and may be fine so long as the person in question isn't making the decision on their own and, as you say, has disclosed it.

I don't really disagree. Just because there's a potential conflict of interest doesn't mean there's corruption. And the further you get from large companies with internal audit teams and established procurement practices the fewer controls there are the murkier things can get.

Per the peer comment, if you don't disclose the conflict, and let the BoD decide what to do in light of that conflict, then you're into the realm of looking like you're hiding something.

It's the principal/agent problem. If the director is an agent of the shareholders then conflict of interest IS corruption unless you have some sort of safeguard to stop it affecting your behaviour.

What are the disclosure laws if an exec has a stake in a public or private company, and there is an actual or potential vendor relationship with that company?

Are there even laws for this, or is it more about company policies set by the BoD?

Usually disclose and recuse. You’re conflicted, so you shouldn’t make the decision or be involved in making the decision, but if it’s the best vendor for the company the company isn’t prohibited from using their services. Most large companies will have a policy for declaring and managing that type of conflict.

In addition to generic criminal laws against fraud and bribery there’s also honest services fraud (which I’ve mentioned elsewhere in this thread) which boils down to depriving someone to whom you owe a duty of the right to your honest services.

But the article doesn't say that he was taking "kickbacks", but that he was hired as a "consultant". Is that illegal?

"We'd like to do business with Netflix, hmmm whom should we hire as a consultant, maybe someone at Netflix, surely knows a lot about the kinds of companies that do business with Netflix."

Edit: I agree it's immoral just like how FDA leaders approving drugs then getting hired by the drug industry is immoral, but IIRC the problem is that that's just circumstantial evidence... it's hard to prove that what they did was illegal.

His jobs at Netflix is to get the best deal for Netflix, not to get the deal that nets him the most money from the vendor. The vendor paying him is increasing the costs to the vendor, therefore presumably increasing the costs they will pass on to Netflix.

The problem there is the money comes first. In the case of former regulators, by the time they are hired by the drug company they're no longer a regulator. It's not clear the drug company has anything to gain from hiring them. Yes it's grubby, but it's hard to prove anything. If the money comes up front, that's easy to prove.

Yes, it obviously is illegal. He was just convicted of fraud.

If they're hiring as a consultant the procurement officer at Netflix that decides to grant them the contract (and Netflix doesn't know about/approve this arrangement), that seems _very_ transparently to be a kickback to me.

> it's hard to prove that what they did was illegal.

Sure, it's a lot of work. That's why we spend money on prosecutors. But they literally _just_ proved that in a way that convinced 12 people "beyond a reasonable doubt", so it's certainly not impossible.

It just seems weird to be asking: "is the described scheme illegal?" in an article describing a conviction for the described behavior, unless you're questioning the validity of the judicial process in this case (which itself is a fine thing to do)

The words you are looking for are 'conflict of interest'. If you are acting on behalf of a corporation and you have such a conflict of interest you are required to disclose it.

Maybe, instead of hiring a single person, you should hire Netflix itself. Netflix itself surely knows a lot about the kinds of companies that do business with Netflix.

Let Netflix worry about compensating the people who are doing the work.

Eh. "you're defrauding your employer." - that gets into an opinion. There isn't a law for that. Like the FEDS tend to do -- they got real creative with "mail fraud" and "wire fraud". I was surprised to not see "racketeering" for the FEDS bs trifecta. Their money laundering charge I would say is 100% bs: creating an LLC isn't laundering -- but who cares! the jury wont understand anything.

Its definitely against standard contractual terms (i.e conflicts of interest terms) and here they would all probably come under fraud in the inducement; i.e Kail induced Netflix to enter into contractual terms based on misrepresentations of what Netflix was gaining when it signed the contract (leaving out his personal gain which absolutely would be a material benefit that netflix itself could have gained had it known those terms existed).

The fact that this even needs explaining is pretty sad.

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.

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.

You can't "hire" Netflix's VP of IT to stay at Netflix and approve all your purchase orders.

"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.

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.

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.

It is right in the subhed?

"Michael Kail will be sentenced Oct. 19 in San Jose for taking stock, cash and gifts from tech firms trying to do business with the streaming service."

If nothing else, the "gifts" part makes it clear its personal.

He was playing both sides of the deal : acting for Netflix in selecting a vendor, while simultaneously acting as a paid consultant to the vendor.

Conflict of interest. Netflix is defrauded because they could have selected a lower cost vendor, or developed the service in-house.

The way I see it:

- I work in purchasing approval position for company A

- Company B would like to do business with Company A

- If I say "B, I can get you deal with my employer A, but you need to give me extra money" - this is against every business conduct guideline / contract / terms of employment in every company I worked for, and against law in many jurisdictions.

In case that somehow slipped / you missed it: person was SIMULTANEOUSLY employed by A, while being given money by B to approve things on behalf of A. That's simple kickback / bribery.

It wasn't a morally-dubious but frequently-legal case of "revolving door" where a person does this sequentially. They were approving deals as exec for netflix, and earning money to approve those deals by small companies, at the same time.

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?

He was working at Netflix. He ensured that the deals between Netflix and the startups would be greenlit, as long as the startups handed him some cash/stock under the table. It’s classic bribery. The article is a bit confusing by only mentioning the implementation of the bribe (“consulting”), but it’s just bribery.

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).

How is it not crystal clear to you what the conflict of interest is here?

When someone hires you to do a job, they hire you to make decisions that are in the best interest of the company. If you are getting paid bribes from suppliers when you buy their services for the company, how can you be trusted to be objective?

I'm curious, what geography do you work in? European country, India, China, USA, Canada? My curiosity is because this seems self evident to me, but it may be cultural thing, and I'm curious to know your cultural background.

Michael Kail worked for Netflix as VP of IT ops.

Netskope wanted Netflix to be a customer.

Netflix (or, more specifically, whoever they talked to at Netflix) said "Sure, we will buy your product, but you have to pay Michael Kail."

Nine other companies were told the same thing by Netflix.

The question here is whether Netflix paid Netskope because that was genuinely the right thing for Netflix, or whether Netflix paid Netskope because Michael Kail, who had the authority to make purchases using Netflix's money, personally benefited from the deal. It's a conflict of interest.

Maybe a simpler example, and possibly easier to understand: Suppose Michael Kail, in the evenings after he got home from Netflix, started a company called Kailcorp that provided IT services. Then when he got back to the office, he said, "We should sign a deal with Kailcorp and pay them lots of money." Is it clear why this would be illegal / why he would be profiting at Netflix's expense? (Genuine question - maybe it's not.)

If so, then the only distinction here is that Kail didn't start the company himself, he subverted ten other companies (with real products) into the same thing.

The movie The Informant! illustrates how this kind of thing might happen.

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.

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.