Michael Kail, the former Vice President of IT Operations at Netflix, was sentenced Dec. 14 to 30 months in federal prison for his convictions for wire fraud, mail fraud and money laundering.
Acting United States Attorney Stephanie M. Hinds, Federal Bureau of Investigation Craig D. Fair, and IRS-Criminal Investigation Special Agent in Charge Mark H. Pearson said in a joint statement that Kail, of Los Gatos, was also ordered to forfeit $700,000, pay a $50,000 fine, and serve a three term of supervision upon release from prison. The sentence was handed down by the United States District Judge Beth Labson Freeman.
Kail was indicted April 26, 2018, and charged with nineteen counts of wire fraud, three counts of mail fraud and seven counts of money laundering.
On April 30, 2021, after a three-week trial, a jury returned guilty verdicts on 28 of the 29 counts charged. The jury also made findings to support the forfeiture of property Kail had purchased with the proceeds of his fraud.
“Bribery and kickbacks are pernicious crimes that stifle Silicon Valley’s culture of competitive innovation,” said Hinds in a statement. “Michael Kail used his highly compensated Netflix position to siphon cash and valuable stock options from his tech vendors, the same vendors whose Netflix contracts he signed and whose technologies he pushed his teams to use. Such crimes come with a cost, as reflected by the prison sentence that Kail will now serve.”
The indictment said Kail chose which IT contracts were awarded by Netflix according to how he was able to bribe those companies to provide him with financial compensation, said Fair. "Kail not only defrauded Netflix, but he also allowed for a ‘pay-to-play’ scheme, which he concocted, to take precedence over the free and fair competitive business environment that drives our economy."
“[His] greed to enrich himself cost Netflix and its shareholders money and property by agreeing to contracts for goods and services beyond what the company needed or would have paid for,” said Pearson. “Kail abused a position of trust and facilitated a scheme that benefited himself. IRS-Criminal Investigation is committed to uncovering these heinous acts of greed and prosecute such malevolent crimes.”
Kail, 52, was employed at Netflix as the Vice President in charge of IT Operations from 2011 until July 2014. Netflix policies prohibited conflicts of interest by its employees by its Code of Ethics and its “Culture Deck,” which required the disclosure of actual or apparent conflicts of interest and the reporting of gifts from entities seeking to sell products or services to the company.
Kail, as Netflix’s Vice President of IT Operations, approved the contracts to purchase IT products and services from smaller outside vendor companies and authorized payments to them, prosecutors said. Evidence produced at trial proved that Kail solicited and received bribes and ‘kickbacks’ from nine tech companies providing products or services to Netflix. In exchange, Kail approved millions of dollars in contracts for goods and services provided by them to Netflix. Kail received over $500,000 and stock options from the outside companies. He used his kickback payments in multiple ways, including to pay his personal expenses and to buy a home in Los Gatos, California.
Kail facilitated the payments, the evidence at trial showed, by creating and controlling a limited liability corporation called Unix Mercenary, LLC. The LLC was created on February 7, 2012, and it had no employees and no business location. Kail was the sole signatory to its accounts.
Two days before Unix Mercenary was registered with the California Secretary of State, Kail signed a Sales Representative Agreement to receive cash payments from Netenrich, Inc., amounting to 12% of any billings from Netenrich to Netflix for staffing and IT services. Later in 2012, Kail’s Unix Mercenary began to receive 15% 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.
These payments stopped in late 2014, after Kail left Netflix.
Evidence at trial showed that several more companies paid Kail. Neither Netenrich, Vistara, nor any of the other companies were charged with criminal conduct. Only Kail was charged with devising the criminal scheme that defrauded Netflix.
In 2013, the trial evidence showed, Platfora, Inc. sought to do business with Netflix. In June 2013 – at a time Kail was seeking to buy his expensive Los Gatos residence – he met with Platfora employees and signed an evaluation agreement for Netflix engineers to test Platfora’s product, a data analytics software program. On July 13, 2013, Kail met with Platfora’s CEO for drinks and later thanked him in an email saying, “I look forward to helping you in both a Netflix and Advisory capacity.” Two days later, Kail signed an “advisory” agreement with Platfora that provided him with the right to purchase up to 75,000 options, approximately .25% of the company. Shortly thereafter, Kail provided Platfora with Netflix’s internal information about Platfora’s competitors’ prices. In September 2013, while he was a compensated “advisor” to Platfora, Kail signed, on behalf of Netflix, a multi-stage $250,000 per year contract with Platfora. Internally, Kail urged his Netflix employees to use the product, despite their satisfaction with a competing product for which Netflix was already paying. 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 following week.
Additional evidence showed that Kail received payments or compensation from other companies doing business with Netflix. In June 2012, he became an “advisor” to and received options for shares from the company Sumo Logic, Inc. The next month, Kail authorized and signed, on behalf of Netflix, a vendor agreement between Netflix and Sumo Logic. 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.
Similarly, trial evidence showed Kail received $5,000 per month consulting for Netskope, Inc., and also received options to purchase 106,000 shares of Netskope stock options. Kail authorized Netflix to enter a $112,500 contract with Netskope just weeks before Kail resigned from Netflix. Kail also purchased, on behalf of Netflix, a small amount of storage from Maginatics, Inc., and then became an “advisor” to Maginatics, allowing him to purchase up to 30,000 shares. Kail thereafter increased Netflix’s purchase of storage from Maginatics by tenfold. Kail made approximately $120,000 when Maginatics was sold the next year. Kail also was promised stock options in the company ElasticBox, Inc., and thereafter signed a June 2013 Netflix order for a $600,000, 3-year subscription to ElasticBox’s cloud services. Later that year, he signed an additional $850,000 contract for more cloud services. Kail also accepted an “advisor” position with Numerify, Inc. in February 2014 that provided him an early option to purchase 36,000 shares. Three months later Kail, on behalf of Netflix, signed an $85,000 subscription agreement for Numerify’s software. Also in February 2014, Kail signed a $120,000 contract with Docurated, Inc., which had previously compensated him with two rounds of options, some of which Kail had already exercised.
The evidence at trial further showed that Netflix IT employees involved with testing some of these products did not know that many of the startups’ software was being paid for by Netflix; rather, they assumed many of the products were unpaid “pilots” of untested software, a routine practice in the tech industry. The employees further did not know that Kail was being paid by the companies.
United States District Judge Beth Labson Freeman ordered Kail to surrender on March 8, 2022, to begin serving his prison sentence.
