The way Michael Kail sees it, he did nothing to hurt Netflix. The streaming service’s former vice president of IT operation hired startups to serve as vendors for the company. He also took as much as $500,000 in payments, as well as stock options worth millions, from the same small businesses.
But those dealings are now costing him dearly. In May, he was convicted by a federal jury in San Jose, California of 28 counts of fraud and money laundering charges for those arrangements, which were described by prosecutors as bribes. On Tuesday, he was sentenced to 2.5 years in prison, ordered to pay a $50,000 fine, and ordered to forfeit an additional $700,000.
Kail, 52, has maintained his innocence and has claimed he did nothing outside of the norm for Silicon Valley. A veteran tech executive, he spent three years as VP for IT at Netflix from October 2011 to August 2014, as well as nearly a year as a chief information officer for Yahoo from August 2014 to June 2015. He continues to act as an advisor for several startups, according to his Linkedin bio.
“Mr. Kail raised numerous points in his sentencing memorandum about why there was no net loss to Netflix,” his defense attorney Julia Jayne told us after his sentencing hearing on Tuesday.
“Mr. Kail raised numerous points in his sentencing memorandum about why there was no net loss to Netflix,” his defense attorney Julia Jayne told us.
“A hindsight view into startup technology 10 years later doesn't accurately reflect a given product's usefulness or value at the time,” she said, adding that Kail plans to appeal his conviction and sentence. “Mr. Kail maintains that every vendor at issue brought value to Netflix and helped propel Netflix's success as a technology company," and was rigorously vetted by the company.
Jayne continued: "We are disappointed overall because the sentence is 2.5 years too many for an innocent person to spend in prison. We believe the jury absolutely got it wrong and misunderstood the relationships between Mr. Kail and the vendors. Though he was an advisor to a number of startups, his role was public and open and he never engaged in a single quid pro quo."
The case has stirred controversy and raised questions among people involved in technology startups. Some observers have wondered whether Kail was a remarkably bad actor, or if he’s right — and his actions were just par for the course.
In October, users of Hacker News, a social news website run by startup incubator Y Combinator, erupted into a flurry of comments about Kail. One user suggested that the conduct Kail was convicted of is “probably pretty common.”
“I’ve worked jobs where clients have floated the idea (it was gross, we turned them down),” the user said.
Another wondered: “Is there any gray here?” The user pointed out that perhaps a startup involved in a similar situation might purchase a “fancy dinner at a Michelin restaurant” for the executive in question or “buy you a vacation in Hawaii to talk things ‘over.’”
“Seems like if you aren’t taking cash — things can get gray real fast.”
“Seems like if you aren’t taking cash — things can get gray real fast,” one Hacker News user mused.
Yet according to federal prosecutors, Kail’s conduct was fairly black-and-white (and not at all “gray”). Netflix also appeared to see the situation as a clear-cut conflict of interest. Before the former executive was indicted in 2018 over the bribery scheme, he was sued by Netflix in 2014 over substantially the same allegations.
In its lawsuit, Netflix said it uncovered emails between Kail and employees at vendors Vistara IT and NetEnrich that referenced off-the-books payment arrangements. The company learned that the vendors struck deals with Kail to pay him 12 to 15 percent of what they received from Netflix for their services. The vendors paid Kail’s private consulting company, Unix Mercenary LLC.
The streaming company’s suit against Kail was dismissed in December 2015 after it was referred to a mediator, according to online court records.
Prosecutors said they found evidence that Kail had struck pay-to-play deals with nine companies total while at Netflix, including Vistara and NetEnrich as well as Netskope, Docurated, Numerify, Platfora, ElasticBox, Maginatics and Sumo Logic. All told, the stock options he received as part of the arrangements are worth about $3.5 million, the government alleged.
The startups are not accused of wrongdoing. Bribery schemes can be a minefield of liability, however, for both the person offering a kickback and the recipient.
In one respect, the government seemed to side with Kail: Prosecutors told the court that his conduct was not at all unique. Similar schemes are “almost certainly “ common among high-level tech professionals, prosecutors said in legal filings.
“The startups that paid to play, and possibly many others, believed this was how Netflix did business,” they said.