Netflix’s former vice president of IT operations was convicted of taking bribes from technology vendors in exchange for awarding them contracts with Netflix, the US Department of Justice announced Friday. The former Netflix VP’s illegal scheme forced colleagues to use a variety of products, including one that suffered from “severe” performance problems and another that Netflix employees objected to because they preferred a different product the company was already paying for, the DOJ said.
Michael Kail, the ex-Netflix executive, was convicted by a federal jury of wire fraud, mail fraud, and money laundering. He used his position at Netflix to approve contracts for vendors that gave him bribes and kickbacks, the DOJ announcement said:
As Netflix’s Vice President of IT Operations, Kail approved the contracts to purchase IT products and services from smaller outside vendor companies and authorized their payments. The evidence demonstrated that Kail accepted bribes in ‘kickbacks’ from nine tech companies providing products or services to Netflix. In exchange, Kail approved millions of dollars in contracts for goods and services to be provided to Netflix. Kail ultimately received over $500,000 and stock options from these outside companies. He used his kickback payments to pay personal expenses and to buy a home in Los Gatos, California, in the name of a family trust.
“Michael Kail wielded immense power to approve valuable Netflix contracts with small tech vendors, and he rigged that process to unlock a stream of cash and stock kickbacks to himself,” acting US Attorney Stephanie Hinds said.
Guilty on 28 counts
Kail was VP of IT operations at Netflix from November 1, 2011, until August 2014, when he switched to a job at Yahoo. Netflix sued Kail in a California superior court in Santa Clara County in November 2014 but dropped the case a year later.
Kail was indicted in 2018 on 19 counts of wire fraud, three counts of mail fraud, and seven counts of money laundering. Kail was found guilty on 28 of the 29 counts, with the jury finding him not guilty of one count of wire fraud. The jury also found that Kail’s Los Gatos home, purchased with laundered money, can be forfeited to the government. The case was held in US District Court for the Northern District of California.
“Kail faces a maximum sentence of twenty years in prison and a fine of $250,000, or twice his gross gain or twice the gross loss to Netflix, whichever is greater, for each count of a wire or mail fraud conviction, and ten years in prison and a fine of $250,000 for each count of a money laundering conviction,” the DOJ said. A sentencing hearing is scheduled for September 14, 2021.
Kail set up a corporation to receive bribes from Netflix contractors, the DOJ said.
“To facilitate kickback payments, the evidence at trial showed that Kail created and controlled a limited liability corporation called Unix Mercenary, LLC,” the DOJ said. “Established on February 7, 2012, Unix Mercenary had no employees and no business location. Kail was the sole signatory to its bank accounts.”
Two days before registering that company, “Kail signed a Sales Representative Agreement to receive cash payments from Netenrich, Inc. amounting to 12 percent of the billings from Netenrich to Netflix for its contract providing staffing and IT services to Netflix,” the DOJ announcement said. “Later in 2012, Kail began to receive 15 percent of all billing payments that VistaraIT, LLC, a wholly owned company of Netenrich, received from Netflix. From 2012 to 2014, Netenrich paid Unix Mercenary approximately $269,986, and VistaraIT paid Unix Mercenary approximately $177,863. The payments stopped in mid-2014, when Kail left Netflix.”
“Severe” performance problems
Kail also had kickback agreements with the vendors Platfora, Sumo Logic, Netskope, Maginatics, ElasticBox, and Numerify, the DOJ said. For example, Kail “became an advisor and received options for shares in the company Sumo Logic” in June 2012 and then “authorized and signed on behalf of Netflix a vendor agreement between Netflix and Sumo Logic,” the DOJ said, adding:
The agreement led to over $300,000 in payments by Netflix, approved by Kail, to Sumo Logic. Kail then approved a further $800,000 two-year contract with Sumo Logic, despite his IT team feedback about the product underperforming. Kail acknowledged the problem in an email to Sumo Logic, saying “[i]t is becoming increasingly difficult for me to champion Sumo internally and then continue to have severe performance issues.”
With Platfora, “Kail signed on behalf of Netflix a multi-stage $250,000 per year contract” and 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,” the DOJ said. “When an inquiry from the Netflix CEO ensued, Kail falsely denied that he was formally working with Platfora. Kail resigned from his advisory position at Platfora the next week.” Kail had “signed an ‘advisory’ agreement with Platfora that provided him with the right to purchase up to 75,000 options, approximately .25 percent of the company.”
Kail also struck a deal to become an advisor to Maginatics, allowing him to purchase up to 30,000 shares. He initially authorized the purchase of “a small amount of storage from Maginatics” on behalf of Netflix, “then increased Netflix’s purchase of storage from Maginatics by tenfold” and “made approximately $120,000 when Maginatics was sold the next year to EMC,” the DOJ said. Kail also struck deals to receive “$5,000 per month consulting for Netskope” and stock options from Netskope, ElasticBox, and Numerify.
“The evidence further showed that many Netflix IT employees involved with testing the products did not know that many of the startups’ software was being paid for by Netflix, assuming it instead to be unpaid ‘pilots’ of the untested software, which was routine,” the DOJ said.
Netflix eliminated VP of IT operations role
After Kail left Netflix, The Wall Street Journal reported that the streaming company decided not to hire another VP of IT operations and that “[m]any of Mr. Kail’s former responsibilities have been given to another employee.”
“Mike’s departure allowed us to combine data center and streaming operations under one executive who serves in a very similar capacity,” a Netflix spokesperson said at the time.
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