
Why I Did Not Go To Jail - bfe
http://www.bhorowitz.com/why_i_did_not_go_to_jail
======
cperciva
_First, when we started the company, Marc and I agreed that the company’s
General Counsel would always report directly to me. This is different than in
many technology companies where the General Counsel reports to the Chief
Financial Officer._

This needs to be in bold 72-point font. Corporate behaviour aligns with
corporate structure, and if the General Counsel is subordinate to the Chief
Financial Officer, complying with the law will inevitably be secondary to
making money.

If you want to avoid jail time, you should either have General Counsel
reporting to the CEO or General Counsel / Chief Legal Officer appointed by and
reporting to the board.

~~~
jey
What's the supposed rationale for the General Counsel reporting to the CFO in
the first place? Isn't a General Counsel supposed to be "general" and not only
concerned with financial issues?

~~~
metaphorm
that rationale is that obeying the law is a financial decision rather than a
moral decision. if the (money) price of breaking the law is less than the
profit made by breaking the law, then the CFO will decide to do it.

this is THE classic example of corporate sociopathy. unfortunately its still
the way a lot of companies do business.

~~~
Spooky23
It's not that simple. Running around thinking that CFO = evil sociopath is
ridiculous. It's about motivation and accountability.

The story in the article is a great example, I don't think the CFO thought
that she was breaking the law. It was a practice that she had engaged in
previously, it was vetted by a big-5 accounting firm, and benefited the
employees. The CFO was widely respected in the industry -- this wasn't some
flimflam person or sociopath.

When your attorney works for someone else, that other party becomes the
client. If you, as a CEO (or an individual) are ultimately accountable for the
outcome of your decisions, you want the attorney working for YOU, so that you
get unfiltered information to drive decisions.

~~~
metaphorm
my comment was a response to the question "why do some companies have the GC
report to the CFO?". it was not about the company in the originally linked
article, which obviously does not use this structure (and for good reason).

regarding that CFO from the linked article though, the federal prosecutor
seemed to believe she was a criminal, and proved it enough that a jury agreed
also and she eventually served jail time. we're not mind readers so we don't
know how she felt about her actions, but honestly, it kinda looks to me like
she really was a low level sociopath. just because she was surrounded by
people who reinforced and validated her behavior doesn't mean she was acting
morally.

~~~
skj
I think this is a misuse of the word 'sociopath'. There are lots of things
that are not strictly legal that we do all the time. Some of them result in in
jail sentences (eg. possession of marijuana can hardly be called sociopathic).

~~~
metaphorm
I was not using sociopath as a synonym with "broke a law, any law". I was
sociopath to mean "engaged in behavior that caused some level of harm to
society". A low-level sociopath does something that causes a low level of harm
to society. Accounting Fraud is a form of low level sociopathy, in my opinion.

------
smsm42
What I take from this story is that the financial law is so complex and
unapproachable one can not reliably navigate it without landing in jail, even
being a seasoned professional. The author's council could have given him "yes"
answer as easily as "no" answer - many other lawyers obviously did since 200
companies got "yes" answers from their councils. And he'd never known anything
was wrong. Basically, one can become a criminal not only without knowing he's
doing anything wrong, but even without a theoretical way of finding it out -
unless you survey all the lawyers you can find, you can not know if a yes from
your lawyer would land you in jail or not, and you have no chance of
understanding the law even if you spend years studying it - ultimately, the
only thing that matters is the word of the enforcers on how they understand
it.

It's like living in the same apartment with alcoholic gorilla prone to random
outbursts of violence. One day it eats too much of fermented fruit and you're
toast. And you have no way of knowing when it happens. Maybe you'll get lucky
and you'll be out that day. Maybe you won't.

If I had code that is that bad and unpredictable and nobody knew if it would
work or not except by seeking an opinion of a soothsayer which nobody can
validate until it's too late, and it would be prone to random catastrophic
failures which nobody can predict or find out why they happened, even seasoned
professionals, I'd say not even refactor it. Just bury it and start from the
design up again and redo the whole thing. That's pretty much the financial
code we have now, as far as I can see. Good thing I have to deal just with
segfaults and buffer overruns...

~~~
ganeumann
There's a big difference between going to your general counsel and asking "Is
this legal?" and going to your accountants and saying "Find me a way to make
this legal enough." I think the options-backdating was an example of the
latter.

~~~
smsm42
In the case described in the story, I don't see any signs of the former. The
CFO proposes certain practice, it is not obviously illegal (like not paying
taxes or stealing office supplies from competitors at night), hundreds of
companies do it, hundreds of lawyers approve it. If the CEO asks the council
if it's OK and the council says yes, like hundreds others did, he goes to
jail. If he's lucky and the council says no, he gets to write a book "how I
almost went to jail but my super-smarts saved me". In both cases I don't see
how this situation is good.

~~~
deong
I'm not sure that conclusion is warranted. Here's what we know:

1\. Loads of companies were doing it. 2\. When this company wanted to do it,
their counsel said it was illegal, so they didn't.

Given those facts, we can't say that the other 200 companies were simply
flummoxed by a too-complex regulatory framework. They may just have well had
their own meetings and said, "This looks fishy, but everyone else is doing it,
and we get more money." Or maybe they did no due diligence at all, and just
did it anyway. Once caught, obviously many people would claim an honest
misunderstanding, whether or not there was one.

Frankly, I'm skeptical of the whole, "the jail sentences were handed out
arbitrarily" angle. It seems the opposite of arbitrary -- the person who
instituted an illegal policy in multiple companies was punished. The law may
be complex, but when you're making C-level salaries, I'm sorry but you're
expected to figure out if you're committing a crime or not.

~~~
smsm42
I'm not saying it was arbitrary from regulator's side. I am saying it would be
arbitrary for you because you won't know if you're in the wrong or not.

>>> but when you're making C-level salaries, I'm sorry but you're expected to
figure out if you're committing a crime or not.

I'm not sure how it has anything to do with the salary. I'm sure whichever
lawyers OKed this practice - and I would find it very hard to believe hundreds
of companies would just decide to wing it without asking a lawyer - I'm sure
they were paid enough. They just thought it'd be OK, but they were wrong. How
the salary helps to deal with that? Unless you're claiming the salary is just
compensation for the possibility of being jailed for something you have no
idea you were doing wrong. In which case I'd prefer a system with more
transparent laws and lower CEO salaries.

~~~
deong
The "arbitrary" I was referring to was from the article -- a direct quote from
Horowitz.

I'm saying that if knowing things like the legal requirements for running a
company isn't expected to be part of your job, then you should pay someone a
hell of a lot less to do the job than most executives are paid. If you just
want someone to wing it, give me a call -- I'll work for probably 10% of the
salary.

It's not that the salary is compensation for the possibility of going to jail.
It's that compensation correlates with responsibility. If you hire a
programmer for $250,000 a year, you damn well expect him or her to be better,
more responsible, and more independent than one you're paying $50,000 a year.
If not, then what are you paying 5x as much for? So if I hire a CFO at say,
$3.5 million a year plus stock options and all the other perks (that's
Google's CFO compensation at the moment), what am I paying for if I can't
assume that they won't have bothered to figure out the accounting laws?

Also, you're assuming that companies would be innocent, unknowing participants
here. That's an assumption that, very often, turns out to be false when we
have occasion to check. I don't think all those valley companies thought they
were allowed to enter into those wage-dampening agreements, but they still did
it. I don't think that was an honest mistake or misunderstanding of the law. I
don't think Enron, Tyco, Global Crossing, AIG, and a million other examples
thought they were shining beacons of moral virtue victimized by a complicated
legal system either. People, and by extension corporations, will quite often
break or at least flirt with breaking the law in exchange for money. You're
asking me to just take your word for it -- sort of a "well _obviously_ we
didn't mean to do anything wrong" defense. It isn't obvious.

~~~
smsm42
That's what I am saying - responsibility is in finding what is right to do and
doing the best you can in the situation. But what if the situation is such
that there's literally no way of knowing what is right and what is not? If the
law is so impenetrable that basically asking a lawyer is akin to going to an
psychic - he gives you the answer, charges a lot of money, but you have no
idea where it came from, is it true and if you can rely on it or not. How you
can be a responsible CEO if you have to rely on psychics to do your jobs?

>>> what am I paying for if I can't assume that they won't have bothered to
figure out the accounting laws?

Again, that's what I am talking about - I think it would be much better if the
laws were such that you don't have to hire 3.5 mln/year CFO and _still_ not be
sure if that all won't end up in trouble.

>>> . I don't think all those valley companies thought they were allowed to
enter into those wage-dampening agreements, but they still did it.

That is entirely different topic, but I see you presume you have the right to
tell companies how they should pay the workers. I have no idea where that came
from to you, and if you do, you're the part of the problem. That is exactly
the reason why these laws are so bad and convoluted - because everybody wants
to pull a bit of it to their side and carve a little loophole in the law to
add a bit more power to himself. I want to be paid more (no matter I'm already
paid well into six figures and am in one of the best paid professions in the
world) - so I want a law that tells the companies to pay me more. Then the
company comes and makes their private law that makes a loophole for them so
they don't have to. And then you come and carve another little loophole for
yourself. And pretty soon you need a 3.5mln/year professional to figure out
what your employees should be paid, and you still get sued for millions
because apparently some bureaucrat disagrees.

~~~
deong
True, I presume to tell employers that they are responsible for following the
law.

I think you're exaggerating the complexity of the legal system to attempt to
support a point that doesn't warrant support. In the article, Horowitz took
the proposal to his company's legal counsel, and quite quickly, counsel came
back with, "this proposal is illegal". It's not impossible to determine that
-- it was actually determined correctly in the real world.

On the wage agreement issue, here's a quote from the recent Pando Daily
article ([http://pando.com/2014/01/23/the-techtopus-how-silicon-
valley...](http://pando.com/2014/01/23/the-techtopus-how-silicon-valleys-most-
celebrated-ceos-conspired-to-drive-down-100000-tech-engineers-wages/))
regarding Eric Schmidt:

"Later that year, Schmidt instructed his Sr VP for Business Operation Shona
Brown to keep the pact a secret and only share information “verbally, since I
don’t want to create a paper trail over which we can be sued later?"

This isn't a case of a company honestly trying to follow the law and being
victimized. Schmidt knew that he was opening Google up to legal action, and he
did it anyway because it saved him huge amounts of money.

If these companies think the laws are bad, it's not like large corporations
have no political power. They're free to buy as many votes as they always do
and get them changed. Until that happens, they can suck it up and abide by the
anti-trust laws in force in the country they've chosen to incorporate in.

~~~
smsm42
It was determined in this particular case. But in many other cases, it was
not, and this scheme was approved, for example, by PWC.

>>> This isn't a case of a company honestly trying to follow the law

First of all, this is not the case that we were discussing - it has very
little to do with financial law. Secondly, in current climate, where companies
can be sued for basically anything, given they have enough money to be
attractive targets, of course that makes executives to try and minimize the
exposure. Even though company is supposed to be able to choose their worker's
pay as they please, obviously it is not so - the populist politicians want to
mess with it to get themselves elected. And thus a savvy executive would
certainly not want to make it too easy for them. It turns into an adversarial
game, and the results are not good for anyone.

>>> If these companies think the laws are bad, it's not like large
corporations have no political power. They're free to buy as many votes as
they always do and get them changed.

That's what they are doing. That's where the regulatory capture comes from. As
a result, the law becomes more and more complex, as each company and each
interest group carves a loophole in the law for themselves and pours millions
into buying off politicians. As a result, we get completely corrupt
politicians, the law that is trying to serve a thousand of special interests
and no longer has any connection to what was the original purpose of the law -
to protect people's rights, huge barriers of entry to the competition,
billions spent on political squabbles instead of doing something productive
(think about how many people one could feed and clothe for the cost of one
election campaign) and ultimately the consumers and taxpayers paying for all
this baloney. And you response essentially is - if you don't like how we do it
in America, GTFO? Is this really the best you can do?

------
staunch
or "How I Hired a White Collar Criminal And Avoided Jail"

 _" On May 31, 2007, the Commission charged Abrams and three other former
senior Mercury officers with perpetrating a fraudulent and deceptive scheme
from 1997 to 2005 to award themselves and other Mercury employees undisclosed,
secret compensation by backdating stock option grants and failing to record
hundreds of millions of dollars of compensation expense. The Commission's
complaint alleges that during this period certain of these executives,
including Abrams, backdated stock option exercises, made fraudulent
disclosures concerning Mercury's "backlog" of sales revenues to manage its
reported earnings, and structured fraudulent loans for option exercises by
overseas employees to avoid recording expenses."_ \--
[http://www.sec.gov/litigation/litreleases/2009/lr20964.htm](http://www.sec.gov/litigation/litreleases/2009/lr20964.htm)

 _" Federal prosecutors obtained an indictment against Abrams in 2008 for
income tax evasion and aiding in the preparation of false tax returns."_ \--
[http://www.reuters.com/article/2010/09/09/mercury-plea-
idUSN...](http://www.reuters.com/article/2010/09/09/mercury-plea-
idUSN0920738920100909)

Calling these "mistakes" is highly disingenuous.

~~~
woodchuck64
[http://www.law360.com/articles/229277/ex-mercury-cfo-
gets-4-...](http://www.law360.com/articles/229277/ex-mercury-cfo-
gets-4-months-for-tax-evasion)

"Noting that criminal tax evasion cases are relatively rare, prosecutors
called Abrams' crime "a disturbingly familiar case of a wealthy defendant
manipulating a system to gain more money."

------
gohrt
This looks one of those cases that could have gone like this:

"Someone proposed an idea that was perhaps technically legal, but obviously
failed the sniff test of ethics and spirit of the law. I reminded her of what
I repeatedly tell our staff at welcome/training meetings: At this company, we
do what is right, for our employees, our customers, our investors, and the
public. We don't mislead one to help another. We don't waste time splitting
hairs about whether something smells bad or is totally rotten. If we're not
proud enough of an action to want to see it on the cover of the New York
Times, we just don't do it."

~~~
ecuzzillo
There are a lot of things that I think are morally completely correct that I
still wouldn't necessarily be the happiest to see on the NYT.

~~~
garric
Unless you give an example that includes your rationale, we're not able to
judge one way or the other.

------
bfe
Just as it's hard to tell if someone's a good coder without yourself being a
good coder, it's hard to tell if an attorney or financial expert is giving you
good advice without seeking for yourself a basic understanding of the legal or
financial issues. A good attorney or financial expert will help you understand
the issues enough for yourself to see why their evaluation makes sense. It's
not good enough to just completely outsource responsibility to someone else.

Always do and trust own analysis (with an attorney or expert you trust when
needed) instead of falling for the lure of "it's fine with these other experts
so it should be fine for us." That's a recipe for a herd mentality random walk
through and across the gray areas of the matter.

~~~
memracom
One red flag in this case is that the CFO referred to PwC, a major accounting
firm that her former company paid for some advice, as a reason why everything
was OK. This amounts to "trust me" because you have no access to the terms
under which PwC was retained by the other company and no idea who actually
examined the options accounting or under what circumstances. Shady dealing is
often obscured by appeals to a higher power.

If you run into this in your own company you should be suspicious and try to
get the company to hire an independent expert to review the situation, which
is exactly what Ben did. For an expert to be truly independent they need to be
retained by someone outside the group under suspicion.

Suspicion is not a bad thing as long as you deal with it promptly. Dealing
with it clarifies the situation and removes the suspicion, one way or another.

~~~
chubot
Not to be cynical, but isn't this why "consulting firms" exist? Part of their
job is to just some "reputable" outside justification for something someone
internally wants to do anyway. It's to cover their ass.

When there are mass layoffs, they hire "consultants". Because nobody inside
wants to really take responsibility for the decision. It's better politically
to have it come from some "outside objective analysis" (of course there is not
such thing, and outsiders are often the worst people to make such decisions.)

~~~
memracom
The way you describe it they are the worst sort of consultants. I once worked
on a project that a big 5 consulting firm was charging 1.7 million to deliver.
After 6 months, a tech savvy guy convinced the CEO to hire me for 3 months to
sort everything out. I came in, had systems up and running partially (but
delivering useful results) in 2 weeks. Then I spent the rest of the 3 months
delivering every deliverable that the big 5 firm was behind on. The customer
refused to pay the big 5 firm's bills and took them to court to recover money
already paid out. The big 5 firm settled out of court by returning all money
previously paid plus 90,000 for my bill. It was one of those secret
settlements which is why I am fuzzy on the details, but when I mentioned it to
other people in the software development business, the stories poured out.

Note how Ben Horowitz did not just farm out the decisions to a prestigious
consulting firm but gave it to a guy that he knew and who he had carefully
checked out in order to know that he was trustworthy.

~~~
cgio
I once went into a project where the runtime for a complex financial
calculation (as complex as it can be) was 8 to 10 hers. In 2 weeks it was 37
seconds and working perfectly. When the CFO took me for dinner, I told him
that 90% of the work was the old implementation, which set the right concepts,
and I merely did an optimisation. Many times, the first take is not optimal,
but I always try to appreciate the input I get even from suboptimal
implementations.

~~~
triplesec
I hope you charged accordingly!

~~~
cgio
My employers sure did.

------
dctoedt
1\. Backdating stock options per se is not what's the legal problem -- it's
that failing to account correctly for the resulting compensation charges
("comp charges") can result in materially-false filings with the SEC.

2\. It's a different problem as far as the internal politics are concerned.
When a company properly records such comp charges in its financial statements,
can depress a company's financial results and with it the stock price. Hence,
there's an incentive to avoid recording such charges if at all possible.

3\. Now consider the interest groups / constituencies and their incentives:

\+ Employees, sometimes vociferously, want the lowest strike prices they can
get for their stock options -- that can be especially true for executives who
have big grants -- and they want the stock price to be as high as possible
(hence they're not wild about recording comp charges).

\+ Board members would like to keep employees happy, especially executives,
and of course themselves and their fellow board members, if they can. Issuing
options with an in-the-money strike price can often appear to be a cost-free
way of promoting general happiness.

\+ On the other hand, the constituencies that have a strong interest in strict
legal compliance -- mainly the law and finance departments -- are often weaker
politically than the ones who want the low strike price and the high stock
price.

As a result, there can be a lot of subtle pressure on a CFO. Employees and
even senior executives can say, "look, doing this in-the-money option grant,
_without_ recording a comp charge, is OK with our audit firm and with our
outside counsel --- what's _your_ problem? Why shouldn't we rely on them?"

(The unstated subtext being, _they 're the experts, not you, and we like their
answer better than yours._)

Finally, let's not forget that outside accounting- and law firms are motivated
to keep their clients happy, to be perceived as team players, and ultimately
to get hired for repeat business. They definitely have incentives to tell
clients what they want to hear if they can possibly do so. Stir in the fact
that when these professionals can come up with "creative" ways to make their
clients happy, they gain in reputation with other potential clients and with
their professional peers.

All this means that the company's senior executives and its compensation and
audit committees need to be willing and able to stand up to the pressures the
other way. That's been made easier by the news reports of people going to jail
and being permanently barred from serving as officers or directors of public
companies.

~~~
grandalf
_Backdating stock options per se is not what 's the legal problem -- it's that
failing to account correctly for the resulting compensation charges ("comp
charges") can result in materially-false filings with the SEC._

This is the key point.

------
rayiner
Accounting compliance is serious business, for the simple reason that when
irregularities cause a company to restate its books and tens of millions of
dollars just vanish, it can be very difficult to tell the difference between
honest mistake and purposeful manipulation.

That said, there is a bit more to the story than revealed in the article. From
what I can tell, the criminal charges and jail time was for income tax evasion
in connection with the backdating of stock options:
[http://www.law360.com/articles/229277/ex-mercury-cfo-
gets-4-...](http://www.law360.com/articles/229277/ex-mercury-cfo-
gets-4-months-for-tax-evasion). Specifically, the process of her backdating
her options resulted in her filing tax returns understating her income:
[http://www.justice.gov/usao/can/news/2010/2010_09_16_abrams....](http://www.justice.gov/usao/can/news/2010/2010_09_16_abrams.guiltyplea.press.pdf).

~~~
CamperBob2
True, and I don't understand why he wouldn't have brought that up. When he
wrote

    
    
       "The SEC issued Michelle a Wells notice, a letter 
       stating that it planned to recommend enforcement action 
       against her personally. It was not an indictment, but it 
       was a formal investigation, and it would be very 
       distracting. I had to ask her to step down."
    

... he made it sound like he threw an innocent (as in "until proven guilty")
and valued employee under the bus at the first sign of trouble. The way he
recounts the story, it doesn't sound like he had a good reason to do that at
the time. He went out of his way to make Abrams sound like a victim, even at
his own expense, when that apparently wasn't the case at all.

~~~
ganeumann
I don't think there's any way Ben could have known that she claimed on her
personal tax return an exercise date for her options that was not the actual
exercise date. I doubt the Feds knew that when they issued the Wells notice.
Her ex-company probably didn't know. At the time of the Wells notice, she was
probably the only person who knew she had lied on her tax return.

And, though it sounds silly after the whole stock option backdating brouhaha,
many people did not seem to think that these practices were illegal at the
time. Even Steve Jobs was accused of it (though never charged.) United Health
Group, KB Home, Brocade, and Monster Worldwide all had executives who were
found to have broken the law on backdating. It's possible these executives did
not think the practice was illegal (maybe because their accountants had told
them it wasn't) and likely they thought that it was a law not enforced
(because it had not been enforced until the WSJ brought the practice to light
in 2006.)

~~~
lmm
"Even" the guy who stole from his business partner and supposed friend? The
fact that Jobs was doing something isn't much argument that it was legal or
right.

------
arasmussen
I really enjoyed reading this story. Now imagine being in this situation if
you don't have a Jordan: you've got this super reputable head of finance who
implemented this great option granting process at another huge company (PwC in
this case) that was approved by their accounting team, how do you figure out
if the process is legit? Where do you find people like Jordan?

~~~
heartbreak
The accounting practice was not implemented at PwC. Mercury Interactive, then
a client of PwC, is the "huge company" in question. PwC simply approved of it.

------
SDGT
So the moral of the story is don't buy into accounting gimmicks that you don't
/can't understand.

If it looks like a duck, swims like a duck, and quacks like a duck, then it
probably is a duck.

On another note:

Holy shit Terry is back with a new account.

I've missed you Terry!

------
jamesaguilar
Just curious. Suppose you did your due diligence, asked your general counsel,
and they said, "It's within the law, go for it." Then, acting on their advice,
you did the same thing this person did. Would you go to jail for the same
amount of time in both cases?

E: Name removed to protect the accused, although it's thin protection indeed
considering her name is disclosed elsewhere in this thread.

~~~
rayiner
Almost always, something like this just results in a civil investigation and
monetary penalties if the SEC concludes you did something not-kosher. The
criminal indictment for "Michelle" was for tax evasion linked to the back
dating: [http://ww2.cfo.com/accounting-tax/2008/04/mercury-
interactiv...](http://ww2.cfo.com/accounting-tax/2008/04/mercury-interactive-
ex-cfo-is-indicted). In general, tax crimes require a high standard of
"willful" violation in which the defendant purposefully violates a known legal
obligation. A violation based on a good faith reliance on a reasonable (or
sometimes even unreasonable) interpretation of the tax law will not meet the
standard:
[http://en.wikipedia.org/wiki/Cheek_v._United_States](http://en.wikipedia.org/wiki/Cheek_v._United_States).

~~~
jamesaguilar
Fascinating. Based on what everyone is saying, it seems like it is relatively
much more difficult to wind up in jail if you are trying to do the right
thing.

~~~
triplesec
...if you're a white collar, white well-off person, that it. Important caveat,
even if not strictly relevant in this context.

------
etjossem
A relevant litigation release:

[http://www.sec.gov/litigation/litreleases/2009/lr20964.htm](http://www.sec.gov/litigation/litreleases/2009/lr20964.htm)

And a description of the practice in question:

[http://en.wikipedia.org/wiki/Options_backdating](http://en.wikipedia.org/wiki/Options_backdating)

~~~
robotcookies
From reading the first release, it sounds like the penalties imposed was for
more than just the stock options thing described by Horowitz. It also
describes fraudulent disclosures about backlog of sales and structuring
fraudulent loans. So it's not necessarily the case that Horowitz would have
had to serve jail time if he had gone along with his cfo's proposal (although
he would likely have had to pay back his gains and possibly fines).

When I first read the blog, it certainly sounded like the SEC being overly
harsh over a mistake made by a good CFO. But reading the release makes me
think there was more to it than that. It's possible this is the reason why
that excerpt wasn't published in his book.

~~~
rmrfrmrf
Well, it also goes to show that public perception and reputation of a person
can be largely at odds with reality. I like Horowitz's story, too, because it
shows that even though people can do illegal things, it's very easy to do so
with the best of intentions. Given the widespread nature of options backdating
at the time, Michelle may have even been under the impression that her
proposal was one of the "tricks of the trade," so to speak.

------
aaronbrethorst
'Why I did not go to jail, but if I had, I would have served 1/20th of the
sentence of some poor guy who got caught with 5 grams of crack.'

[http://www.pbs.org/wgbh/pages/frontline/shows/snitch/primer/](http://www.pbs.org/wgbh/pages/frontline/shows/snitch/primer/)

------
timmclean
> Why I did not go to jail

Summary: I ran an accounting decision that worried me past my excellent
lawyer.

This makes me wonder, as someone with little legal experience, how can we find
lawyers who are truly great at what they do?

~~~
enjo
This, more than anything else, is why every entrepreneur needs a great mentor.

~~~
timmclean
Turtles all the way down -- how do you know if a mentor is a great one?

~~~
hudibras
I think you could re-write your summary as: I ran an accounting decision that
worried me past my lawyer.

There might be a bit of hagiography of the GC in the original story based on
what Ben now knows could have happened. For all we know, the illegality of the
scheme could have been glaringly obvious to any lawyer.

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kyleblarson
This might be a naive viewpoint, but I don't see how this could be viewed as
legal. If I as a retail investor in equity or equity options in a company was
approached by my broker and asked what day in the past I would like to use for
my cost basis calculation, that would sound pretty fishy. Why should it be
different for inside holders?

~~~
gohrt
Vanguard.com does that (but you get 2 or 3 choices that are all generally
accepted, not "pick a date")

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anonbanker
Stay away from mirroring PWC policies unless all your executive officers have
a degree in commerce, finance, and law. Because you'll need all three to get
out of the fraud charges you'll be slapped with.

The reader is invited to do some research into what companies PWC has done
accounting for.

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danbmil99
What boils my blood is this woman going to jail for doing something that was
accepted practice and approved by PwC, where seemingly no criminal intent
existed.

Laws that are that opaque, where interpretation and enforcement can change at
the whim of regulators and their bosses, are not morally justifiable. IIRC
Steve Jobs did the same thing at Apple and they (predictably) got a slap on
the wrist.

When this was going on I was running a small public co. and our counsel
(outside but on BOD) was dead-set against any options dating shenanigans,
despite what others were doing, so I guess I agree with OP's main point --
that having the right reporting structure can save your ass.

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VladRussian2
"In my reference checking, at least a dozen investors told me that they made
far more money when the numbers disappointed than when the company
outperformed, because they trusted Michelle when she said that things were not
worse than they appeared and bought on the dips."

anybody sees any wrong here? Beside private hush-hush, there seems to be the
same pattern - like with backdating of options - of optimizing interests of
some selected "closer than arm reach" group at the expense of general
shareholder population of that company.

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memracom
That was an _excellent_ article. One of the best that I have read recently
about company management. Of course to get the full impact you need to do a
lot of reading between the lines, but Ben does us the favor of leaving some
broad hints. This really does have the flavor of a manager skillfully
navigating the business through shark-infested waters, and IMHO, that is
exactly the job of senior management. Including CTOs. While a CTO may not have
direct responsibility for legal and accounting issues, they need to be fully
aware of what their colleagues are up to, because, as Ben pointed out, another
executive might be subverting the law in pursuit of some number. If that is
happening and the CTO does not notice it and call their colleagues on that
type of behavior then the CTO is complicit and will at minimum get fired, and
could even go to jail.

Taking public money in any form, comes with obligations to play fair, and
however much you may disagree with the laws or the people who made those laws,
they are the current standard for whether or not someone is playing fair.

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Nicholas_C
I found more info on the CFO here:
[http://www.sec.gov/litigation/litreleases/2009/lr20964.htm](http://www.sec.gov/litigation/litreleases/2009/lr20964.htm)

>Abrams [the CFO in Ben's article] Also to be Barred from Serving as an
Officer and Director of a Public Company

I wonder what people who get caught up in these sort of things do afterwards?

~~~
Aloha
Probably consultancy, there is always a need for executive consultants.

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outworlder
The weirdest thing here is that, mistakes or not, these law violations gives
someone jail time.

Come on! At most, it caused monetary damages. The proper way to make it right
is to apply monetary penalties (eg. fines). What's the reasoning behind
locking up someone for that? It is not like the general public is being
physically harmed, so 'Michelle' should not have to be physically restricted.

Besides, depending on the amount, a fine can set someone back for way more
than 3 months. The cost-benefic analysis will make her thing twice next time.

~~~
pessimizer
>The proper way to make it right is to apply monetary penalties (eg. fines).

What's the reasoning behind that? In-kind punishment? If somebody runs over a
family with a car, should their family be run over by a car? If someone rapes,
should they be punished with rape?

I get it if the law is supposed to be a game.

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jrockway
TL;DR: author sought legal advice before doing something he thought was
illegal. Turned out to be illegal. Didn't get in trouble because he didn't do
it.

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acchow
Much of the reasoning behind not prosecuting wall street (post MBS meltdown)
has been the lack of malicious intent.

But here, we see SV hanged for "mistakes". Wtf?

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bhartzer
"Once the SEC decided that most technology company stock option procedures
were not as desired, the jail sentences were handed out arbitrarily."

really?

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EvanAnderson
I'm not sure why Ben used a false name for the CFO. One quick search got me
her real name, and more details about her eventual indictment.

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emhart
As this was intended for his book, I assume he wanted to extend her some
common courtesy. He makes it clear that she was well liked and, in his
opinion, had made mistakes, not committed fraud intentionally. Despite the
matter being very public, I think it's reasonable, even kind, not to mention
her actual name in this context in his book.

~~~
joezydeco
Also eliminates any libel lawsuits if the subject decides what occurred wasn't
100% as-described in the book.

~~~
pbhjpbhj
I'd be surprised if using a pseudonym for someone made you immune to libelling
them.

Made up example:

"I once met a president of the USA, he was called Carrick O'Barmy [name
changed to protect the innocent] he was snorting crack of a toilet seat at the
time" ... doesn't look like it would if printed as a truth, but was really a
lie, mean I would get off scott-free unless the context was clearly parody (or
as here labelled as a fiction).

IANAL of course, nor even a USA citizen.

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maratd
Unrelated to the story, there is a dead comment on this thread.

It looks like it was written by a racist bot? What? Why is somebody paying
money to do this?

~~~
benched
It's not a bot, but an individual. If you're interested in some back story:

[http://www.youtube.com/user/losethos](http://www.youtube.com/user/losethos)

[http://www.templeos.org/](http://www.templeos.org/)

~~~
mjn
More detailed backstory:
[http://9ol.es/LoseThos.html](http://9ol.es/LoseThos.html)

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watwut
"Michelle had no intention of breaking any laws and no idea that she’d broken
any laws. [...] Once the SEC decided that most technology company stock option
procedures were not as desired, the jail sentences were handed out
arbitrarily. "

I find this quite disturbing. Especially the second part.

~~~
notahacker
According to the numerous people in this thread who have made observations on
who "Michelle", it's also probably quite untrue. Especially the first part.

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Uhhrrr
>The whole thing was a case of the old saying: “When the paddy wagon pulls up
to the house of ill repute, it doesn’t matter what you are doing. Everybody
goes to jail.”

I've never heard this saying, and Google comes up with nothing. Maybe this is
a paraphrase of one of those raps Ben likes?

~~~
justinludwig
I've heard variations of this before -- try googling just for "when the paddy
wagon pulls up".

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mathattack
For the curious...

[http://www.bizjournals.com/sanjose/stories/2006/07/03/daily1...](http://www.bizjournals.com/sanjose/stories/2006/07/03/daily17.html)

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ars
Did you hire her back after she finished her jail term?

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cowsandmilk
(a) opsware was acquired by HP before she ever went to jail.

(b) opsware was publicly traded. part of her punishment was not being allowed
to serve as an officer at a publicly traded company.

~~~
dclara
Is she going to be hired by other companies as CFO after?

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grifpete
Ben's blogs are the most hard hitting concentrated value of any I ever read on
management. Another great piece.

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pseingatl
Just use outside counsel. It's more expensive, but it solves the problems of
internal structure.

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alexeisadeski3
This is an illustration of why _mens rea_ should be required in all criminal
complaints.

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kumarski
I wonder what happened to Michelle.

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mohamedzahid
I am so pumped for this book to come out.

