silicon valley

“Death by HR” – High Tech Threatened by Social Justice Activists

Fantasy Gains from Inclusion (Intel Corporation)

Fantasy Gains from Inclusion (Intel Corporation)

But pressure to hire more minorities and women in tech has existed at least since Jesse Jackson’s first run at it in 1999.[1] Why is resistance crumbling almost twenty years later?

First, today’s high tech is more software than hardware, with a new generation of executives more willing to appease the activists. Most people in the industry want to be sure women and minorities are fairly treated and feel welcomed, and the networked activists can quickly trash your public image if you cross them. So appeasing donations and lip service are the most common responses by today’s execs.

Another new factor is the hardcore third-wave feminists and “critical race theory”-trained products of academia that are making activism their life’s work. Many college students are adopting the victim culture and identities as protectors of the weak—women, plus transgender and all the other flavors of other. These newer, mostly upper-class-academic activists are besieging the older engineer-dominated companies as well as the new software giants. The culture wars, where activists infiltrate one cultural area after another then try to demonize and expel any conservatives that remain, have reached the gates of high tech.

“Gamergate” was a skirmish in the culture war; computer gaming companies with corrupt relationships to game-reviewing magazines and sites came under fire from gamers, and a full-scale battle between social justice activists and gamers who wanted their games built for fun and not political correctness began. There were well-publicized nasty trolling tactics on all sides (though the activists had more friends in the media to promote their story), and at one point the gamergaters persuaded many advertisers to cancel ads in the offending publications. Intel cancelled some of their ad support, then was subjected to activist attacks. To defuse the issue, Intel pledged $300 million to activist groups.[2] Shortly thereafter, Intel cancelled its sponsorship of the (merit-based) Science Talent Search and cut budgets in research and administration by… $300 million.[3]

Online swarming now results in censorship of speech disagreeing with these activists. One article was withdrawn by Forbes online after activist swarming because it denied that diversity in high tech was a problem. This was an instance of kafkatrapping, a mechanism for repressing all contrary thought by labelling anyone who speaks it as racist, sexist, or homophobic — your denial of base motives for disagreement with the activist point of view means you are what you deny, and your speech is hate speech to be suppressed.[4] Badthink must be stamped out so that Goodthink will prevail. The article in question was so extreme:

Repeat after me: there is no “diversity crisis” in Silicon Valley. None. In fact, there is no crisis at all in Silicon Valley. Silicon Valley is doing absolutely gangbusters. Apple has $200 billion in cash reserves and equivalents—and a market valuation of about $630 billion. Amazing. Facebook now garners a billion daily users. This is a nearly unfathomable number. Google is worth nearly $450 billion and has $70 billion in cash on hand.

This is not a crisis. Silicon Valley is swimming in money and in success. Uber is valued at around $50 billion. Companies like Airbnb are remaking travel and lodging. Intel is moving forward into the global Internet of Things market. South Korea’s Samsung just opened a giant R&D facility in the heart of Silicon Valley. Google and Facebook are working to connect the entire world. Netflix is re-making how we consume entertainment.

Silicon Valley is home to the next phase of the global auto industry. Fintech and biotech are transforming banking and medicine. The success of Silicon Valley is not due to diversity—or to any bias. Rather, to brilliance, hard work, risk taking, big ideas and money.

Want to be part of this? Great! Follow the example of the millions who came before you. Their parents made school a priority. They took math and science classes, and did their homework every night. They practiced ACT tests over and over. They enrolled in good schools… They took computer programming, engineering, chemistry—hard subjects that demand hard work. They then left their home, their family, their community, and moved to Silicon Valley. They worked hard, staying late night after night. They didn’t blog, they didn’t let their skills go stale, they didn’t blame others when not everything worked out exactly as hoped….

From all over the world, from Brazil and Canada, Nigeria, Pakistan, Russia, Norway, Egypt, fellow humans come to Silicon Valley to work, create, succeed. And they do. Silicon Valley is extremely diverse.

Of course, the iPhone wasn’t created because of diversity. Nor was Google. Nor Facebook, nor the computer chip, nor the touchscreen. They were created because a small band of super-smart people who worked very hard to create something better than existed before….

Silicon Valley doesn’t just create greatness, it’s probably the most open, welcoming, meritocratic-based region on the planet. Anecdotal evidence strongly suggests that disproportionately more Chinese, Indians, and LGBQT succeed in Silicon Valley than just about any place in America. Guess what? Everyone earned their job because of their big brains and ability to contribute.

Is that you? Then come here! It’s an amazingly inclusive place.

But be sure to bring your computer science degree, your engineering degree, your proven set of accomplishments. Be sure you are prepared to sacrifice “fun” for long hours and hard work. Offer proof of how well you did in school, in math, in physics. These matter dearly as they are fundamental to what makes Silicon Valley succeed.

Silicon Valley is not perfect. It’s certainly no utopia. But if you aren’t able to make it here, it’s almost certainly not because of any bias. Rather, on your refusal to put in the hard work in the hard classes, and to accept all the failures that happen before you achieve any amazing success….[5]

The coiner of the term kafkatrapping, Eric S. Raymond, was a pioneer in open-source development, where widely-dispersed programmers working together build a software project which is free to use, change, or incorporate into larger systems. One of the earliest and most famous of such projects was Linux, an open-source version of Unix originated by Linus Torvalds. Open-source projects have been infiltrated by online activists and “codes of conduct” that let them expel less politically-sensitive participants have been added. Linus himself was threatened by the activists.[6]

Another example of the activist entryists’ pressure tactics from Raymond’s blog (emphasis added):

The hacker culture, and STEM in general, are under ideological attack. Recently I blogged a safety warning that according to a source I consider reliable, a “women in tech” pressure group has made multiple efforts to set Linus Torvalds up for a sexual assault accusation. I interpreted this as an attempt to beat the hacker culture into political pliability, and advised anyone in a leadership position to beware of similar attempts.

Now comes Roberto Rosario of the Django Software Foundation. Django is a web development framework that is a flourishing and well-respected part of the ecology around the of the Python language. On October 29th 2015 he reported that someone posting as ‘djangoconcardiff’ opened an issue against pull request #176 on ‘awesome-django’, addressing it to Rosario. This was the first paragraph.

Hi, great project!! I have one observation and a suggestion. I noticed that you have rejected some pull requests to add some good django libraries and that the people submitting thsoe pull requests are POCs (People of Colour). As a suggestion I recommend adopting the Contributor Code of Conduct ( to ensure everyone’s contributions are accepted regarless [sic] of their sex, sexual orientation, skin color, religion, height, place of origin, etc. etc. etc. As a white straight male and lead of this trending repository, your adoption of this Code of Conduct will send a loud and clear message that inclusion is a primary objective of the Django community and of the software development community in general. D.

The slippery, Newspeak-like quality of djangoconcardiff’s “suggestion” makes it hard to pin down from the text itself whether he/she is merely stumping for inclusiveness or insinuating that rejection of pull requests by “persons of color” is itself evidence of racism and thoughtcrime.

But, if you think you’re reading that ‘djangoconcardiff’ considers acceptance of pull requests putatively from “persons of color” to be politically mandatory, a look at the Contributor Covenant he/she advocates will do nothing to dissuade you. Paragraph 2 denounces the “pervasive cult of meritocracy”. [Update: The explicit language has since been removed. The intention rather obviously remains]

It is clear that djangoconcardiff and the author of the Covenant (self-described transgender feminist Coraline Ada Ehmke) want to replace the “cult of meritocracy” with something else. And equally clear that what they want to replace it with is racial and sexual identity politics.

Rosario tagged his Twitter report “Social Justice in action!” He knows who these people are: SJWs, “Social Justice Warriors”. And, unless you have been living under a rock, so do you. These are the people – the political and doctrinal tendency, united if in no other way by an elaborate shared jargon and a seething hatred of [the]“white straight male”, who recently hounded Nobel laureate Tim Hunt out of his job with a fraudulent accusation of sexist remarks.

I’m not going to analyze SJW ideology here except to point out, again, why the hacker culture must consider anyone who holds it an enemy. This is because we must be a cult of meritocracy. We must constantly demand merit – performance, intelligence, dedication, and technical excellence – of ourselves and each other.

Now that the Internet—the hacker culture’s creation!—is everywhere, and civilization is increasingly software-dependent, we have a duty, the duty I wrote about in Holding Up The Sky. The invisible gears have to turn. The shared software infrastructure of civilization has to work, or economies will seize up and people will die. And for large sections of that infrastructure, it’s on us—us!—to keep it working. Because nobody else is going to step up.

We dare not give less than our best. If we fall away from meritocracy—if we allow the SJWs to remake us as they wish, into a hell-pit of competitive grievance-mongering and political favoritism for the designated victim group of the week—we will betray not only what is best in our own traditions but the entire civilization that we serve.

This isn’t about women in tech, or minorities in tech, or gays in tech. The hacker culture’s norm about inclusion is clear: anybody who can pull the freight is welcome, and twitching about things like skin color or shape of genitalia or what thing you like to stick into what thing is beyond wrong into silly. This is about whether we will allow “diversity” issues to be used as wedges to fracture our community, degrade the quality of our work, and draw us away from our duty.

When hackers fail our own standards of meritocracy, as we sometimes do, it’s up to us to fix it from within our own tradition: judge by the work alone, you are what you do, shut up and show us the code. A movement whose favored tools include the rage mob, the dox, and faked incidents of bigotry is not morally competent to judge us or instruct us.

I have been participating in and running open-source projects for a quarter-century. In all that time I never had to know or care whether my fellow contributors were white, black, male, female, straight, gay, or from the planet Mars, only whether their code was good. The SJWs want to make me care; they want to make all of us obsess about this, to the point of having quotas and struggle sessions and what amounts to political officers threatening us if we are insufficiently “diverse”.

Think I’m exaggerating? Read the whole djangoconcardiff thread. What’s there is totalitarianism in miniature: ideology is everything, merit counts for nothing against the suppression of thoughtcrime, and politics is conducted by naked intimidation against any who refuse to conform. Near the end of the conversation djangoconcardiff threatens to denounce Rosario to the board of the Django Software Foundation in the confused, illiterate, vicious idiom of an orc or a stormtrooper.

It has been suggested that djangoconcardiff might be a troll emulating an SJW, and we should thus take him less seriously. The problem with this idea is that no SJW disclaimed him–more generally, that “Social Justice” has reached a sort of Poe’s Law singularity at which the behavior of trolls and true believers becomes indistinguishable even to each other, and has the same emergent effects.

In the future, the hacker whose community standing the SJWs threaten could be you. The SJWs talk ‘diversity’ but like all totalitarians they measure success only by total ideological surrender – repeating their duckspeak, denouncing others for insufficient political correctness, loving Big Brother. Not being a straight white male won’t save you either – Roberto Rosario is an Afro-Hispanic Puerto Rican.

We must cast these would-be totalitarians out–refuse to admit them on any level except by evaluating on pure technical merit whatever code patches they submit. We must refuse to let them judge us, and learn to recognize their thought-stopping jargon and kafkatraps as a clue that there is no point in arguing with them and the only sane course is to disengage. We can’t fix what’s broken about the SJWs; we can, and must, refuse to let them break us.[7]

Raymond’s post is the distilled essence of commitment to engineering excellence and equal opportunity. His opponents are the people trying to tear down standards and replace them with identity politics, tribalists who don’t understand how to make the pie but want to get pieces for their friends.

Victim culture identity politics is a US-centric movement promoting narrower and narrower minorities as victims. The earlier Jesse Jackson-style affirmative action movement was supposed to get blacks and women into higher-paying, powerful positions in tech — but most tech companies are worldwide in scope and hiring, and it makes little sense for them to represent local population distributions. Silicon Valley is much more top-heavy with Asians than with white males:

[Most articles on tech diversity say] the biggest tech companies in Silicon Valley are overwhelmingly white and male. While blacks and Latinos comprise 28 percent of the US workforce, they make up just 6 percent of Twitter’s total US workforce and six percent of Facebook employees.

Of course this is just a lie. Very few people would say a workforce that is 50 to 60 percent white, true of both Google and Microsoft, is “overwhelmingly white.” In fact, it’s less non-Hispanic white than the US labor force as a whole. I’ve linked to statistics in this very piece. They take about 10 seconds of browsing search queries to understand this.

But you don’t need to know statistics. Eat at a Google cafeteria. Or walk around the streets of Cupertino. There is no way that one can characterize Silicon Valley as overwhelmingly white with a straight face. Silicon Valley is quite diverse. The diversity just happens to represent the half of the human race with origins in the swath of territory between India and then east and north up to Korea.

The diversity problem isn’t about lack of diversity. It is about the right kind of diversity for a particular socio-political narrative. That’s fine, but I really wish there wasn’t this tendency to lie about the major obstacle here: people of Asian origin are 5% of the American work force, but north of 30% in much of the Valley. If you want more underrepresented minorities hiring fewer of these people would certainly help. In particular the inflow of numerous international talent coming from India and China could be staunched by changes to immigration law.

But these are international companies. Though they genuflect to diversity in the American sense (blacks and Latinos), ultimately they’ll engage in nominal symbolic tokenism while they continue on with business, with an increasingly ethnically Asian workforce and and increasingly Asian economic focus. Meanwhile, the press will continue to present a false caricature of a white workforce because that’s a lot more of a palatable bogeyman than Asian Americans and international tech migrants, and the liberal reading public seems to prefer the false narrative to engaging with reality.[8]

Money and power are being created by disciplined, organized hard work in one of the few US-based growth industries left, the connected computers that make up the Internet and allow cellphone apps to do the world’s business. Political parasites are trying very hard to gain entry and position themselves to feed from the resources others generated. While it may seem harmless to throw activists a bone—and Silicon Valley really does want more excellent minorities and women!—feeding the activists only lets them gather more allies to return to demand more. And when they gain power, all of us lose.

[1] “Jesse’s New Target: Silicon Valley,” by Roger O Crockett, Bloomberg, July 11, 1999.
[2] “Intel pledges $300 million to improve diversity in tech,” by Andrew Cunningham, January 6, 2015.
[3] “Intel plans job cuts across the company, internal memo says,” by Mike Rogoway, The Oregonian, June 4, 2015.
[4] “Kafkatrapping,” by Eric Raymond, Armed and Dangerous, July 18, 2010. ““Your refusal to acknowledge that you are guilty of {sin, racism, sexism, homophobia, oppression…} confirms that you are guilty of {sin, racism, sexism, homophobia, oppression…}.”
[5] “There Is No Diversity Crisis in Tech,” by Brian Hall, censored at Forbes online but republished by, October 7, 2015.
[6] “From kafkatrap to honeytrap,” by Eric Raymond, Armed and Dangerous, November 3, 2015.
[7] “Why Hackers Must Eject the SJWs,” by Eric S. Raymond, Armed and Dangerous, November 13, 2015.
[8] “Silicon Valley Has an Asian-people Problem,” by Razib Khan, The Unz Review, February 6, 2016.

Death by HR: How Affirmative Action Cripples Organizations

[From Death by HR: How Affirmative Action Cripples Organizations,  available now in Kindle and trade paperback.]

The first review is in: by Elmer T. Jones, author of The Employment Game. 

Corporate HR Scrambles to Halt Publication of “Death by HR”

Nobody gets a job through HR. The purpose of HR is to protect their parent organization against lawsuits for running afoul of the government’s diversity extortion bureaus. HR kills companies by blanketing industry with onerous gender and race labor compliance rules and forcing companies to hire useless HR staff to process the associated paperwork… a tour de force… carefully explains to CEOs how HR poisons their companies and what steps they may take to marginalize this threat… It is time to turn the tide against this madness, and Death by HR is an important research tool… All CEOs should read this book. If you are a mere worker drone but care about your company, you should forward an anonymous copy to him.


More reading on other topics:

The Great Progressive Stagnation vs. Dynamism
Death by HR: How Affirmative Action is Crippling America
Death by HR: The End of Merit in Civil Service
Corrupt Feedback Loops: Public Employee Unions
Death by HR: History and Practice of Affirmative Action and the EEOC
Civil Service: Woodrow Wilson’s Progressive Dream
Bootleggers and Baptists
Corrupt Feedback Loops: Justice Dept. Extortion
Corrupt Feedback Loops, Goldman Sachs: More Justice Dept. Extortion
Death by HR: The Birth and Evolution of the HR Department
Death by HR: The Simple Model of Project Labor

On Affirmative Action and Social Policy:

Affirmative Action: Chinese, Indian-Origin Citizens in Malaysia Oppressed
Affirmative Action: Caste Reservation in India
Diversity Hires: Pressure on High Tech<a
Title IX Totalitarianism is Gender-Neutral
Public Schools in Poor Districts: For Control Not Education
Real-Life “Hunger Games”: Soft Oppression Destroys the Poor
The Social Decay of Black Neighborhoods (And Yours!)
Child Welfare Ideas: Every Child Gets a Government Guardian!
“Income Inequality” Propaganda is Just Disguised Materialism

myCFO: Corruption in Financial Services: Inevitable?

myCFO logo

myCFO logo

[from 2007] Some great dirt in yesterday’s WSJ about a company I used to be associated with, myCFO, which was founded during the dotcom bubble to service the financial needs of the booming numbers of IPO-based multimillionaires here in Silicon Valley.

There was nothing wrong with the basic idea: instead of allowing the investment banking and white-shoe firms like Goldman Sachs and Morgan Stanley that took their companies public to grab the followon business of investing their fortunes, these folks would set up a technology-oriented, unbiased practice which would function as a family office for the them.

I had been functioning as a family office for one such IPO multimillionaire for several years when the straight-arrow accountant we used, Kevin McAuliffe at Ernst&Young, became a founding director at myCFO. It appeared they were going to build an excellent management platform which would relieve me of the tedious backoffice business of keeping detailed portfolio records in my expensive portfolio management system (Axys) and generate all the necessary custom reports for me, so I brought my clients over to myCFO, which was making all the right noises. Technically I was a client of theirs and so paid them for certain services — as were my clients. But in practice, we were supposed to be partners in serving my clients.

At first all seemed to go well, and all my records were successfully transferred to myCFO’s Axys-based (temporarily, they said) accounting system. But very little happened in rolling out the web-based management platform, and after a year of promises without results I started to get annoyed. Then myCFO began to interfere with the relationship with my clients, pushing on them investment packages I deemed unwise and trying to go around me to persuade them to do things. This was not the way the relationship was supposed to work, and it was clear that despite their claim to be neutral presenters of investment products, the same incentives to market packages for high fees were starting to make themselves felt. I started to have to spend time inoculating my clients against these marketing pressures. Eventually the strain of this contributed to my deciding to close up shop and retire, since I no longer needed the money. My other reasonable alternative was to restructure myself into a hedge fund, but I didn’t really feel the motivation to undertake another startup-equivalent effort.

Here’s an excerpt from an email I wrote to the new investment services manager there as the company began to fall apart in late 2002:

I have been preoccupied with end-of-year tax strategizing and portfolio cleanup. The personal portfolio’s first stage was done two weeks ago, second stage (required by wash-sale rules) scheduled for Dec. 10th or so. The result is about $400K captured losses for future use, plus a more manageable portfolio.

The CRT part of the process was thrown into some turmoil because I was given bad information about the taxation of CRT gains and losses, and never received a copy of the CRT’s current tax account status as requested in mid-year. Capturing tax losses (beyond what’s needed to cover any short-term gains) in the CRT is useful only to a small extent which only appears under some scenarios, so there is no need to swap one position for another just for that reason; the reason to consolidate is more for sake of management ease. The earlier work done on this has to be redone with these new considerations, so wholesale exchanges are probably not worth the cost. I would suggest that people in meetings refrain from making off-the-top-of-their-head strategy pronouncements about tax-complex entities in future.

I don’t know what’s going to be left of myCFO under the new dispensation, though I will be happy to advise **** and **** on service choices. In my view the company totally failed in its original premise, which was application of web technology to remove all the “sticky” factors which made service of wealthy family needs difficult. It was my unwise idea to take a chance on myCFO, and I take responsibility for the inconvenience to [my clients]. At least it’s clear that they did not suffer financially, but it is far from clear that myCFO’s advisory practice is the best choice going forward, and I suggest [my clients] treat as a sales effort any meeting such as you describe where I am not there to note distortions and unproved assertions. And in this field, distortions and unproved assertions are standard practice. myCFO is not the same organization now, and it remains to be seen whether it has conflicts of interest in advisory services similar to standard brokerages now that it is controlled by the Bank of Montreal. It is widely expected that the bank purchased myCFO for the profits to be had in asset management, and if so the activities of IAS in future should be viewed with great suspicion. Goodwill once sold has a way of being milked.

Well, it turns out that myCFO fell for the temptation to sell bad tax shelters to its less scrupulous clients. The straight-arrow tax guy I worked with, Kevin McAuliffe, has a 120-page deposition he gave about the topic posted at the WSJ website yesterday. It makes for interesting reading – no matter how much he tried to warn others that these fee-heavy shelters were bad news for both clients and the company, he was ignored as the firm rushed to beef up its revenues for the expected IPO. Kevin left shortly before I did as the bad actors drove out the good.

[Ed. note: the story link has rotted, so I include the text below.] John Doerr, Silicon Valley VC legend, comes off looking like an ass.


Fling With Tax Shelters Haunts Silicon Valley
Funded by Tech Barons, MyCFO Inc. Sold Deal The IRS Later Nullified
March 6, 2007; Page A1

John Doerr is the dean of Silicon Valley venture capitalists, one who helped launch tech icons like Google and Sun Microsystems. A billionaire, he works with rock star Bono to fight poverty in Africa and with others to increase aid for education and medical research.

Mr. Doerr is less well known for one investment that didn’t pan out. Called myCFO Inc., the firm set out to provide rich people a full menu of financial services, from wealth management to estate planning. It succeeded with only one: tax shelters that helped clients shield hundreds of millions of dollars from taxes. Less than two years after myCFO began selling them in 2000, the Internal Revenue Service said they were bogus.

MyCFO ceased independent operations five years ago, but it still casts a shadow. A bank that underwrote some of its tax deals has admitted that they were shams. Former clients, hit with back-tax bills, are fighting the IRS. Two ex-clients have alleged that myCFO’s tax deals were fraudulent.

Two lawyers who worked with myCFO are under tax-fraud indictment for their work on similar tax shelters. The Manhattan U.S. attorney’s office, which has charged more than a dozen people in connection with tax shelters, said in a court filing last April that it had “an ongoing criminal investigation” involving “various former employees of myCFO.”

The financial backers and board members of myCFO were Silicon Valley royalty. They included James H. Clark, co-founder of Netscape Communications and Silicon Graphics; John Chambers of Cisco Systems Inc.; Thomas Jermoluk, former chairman of Excite@Home; and former Netscape boss James Barksdale. The firm’s outside legal counsel was Larry Sonsini, lawyer to Silicon Valley’s stars.

The firm was Mr. Clark’s idea. Mr. Doerr led its financing and took a leading role on the board. In typical Silicon Valley fashion, board members were closely involved with strategy and operations, according to company documents and legal papers reviewed by The Wall Street Journal. The documents show that directors pushed ahead with the tax-shelter business despite signs that all wasn’t right with the product.

Mr. Doerr praised the head of the firm’s tax-strategies group in a 2001 email for “not only delivering on your original [business] plan, but going beyond to make up the revenue shortfall from the recurring business.” MyCFO “has my full support, and the full support of [my] partners” at Kleiner Perkins Caufield & Byers, the venture-capital firm that financed myCFO, he added.

MyCFO’s story shows how the sudden wealth spawned by the technology boom had hidden impacts that still echo in Silicon Valley. “There were 30-year-old clients making hundreds of millions of dollars — it was intoxicating,” says James Phillips, myCFO’s former chief investment officer. “The accountants and CPAs wanted their share, too.”

At the time, tax shelters were a lively business. Dozens of national law and accounting firms sold these strategies — Byzantine transactions that often involved foreign currencies and offshore middlemen. MyCFO selected a few tax shelters and refined them for a clientele dripping in capital gains.

Some of California’s leading industrialists were customers. Ray Irani, chief executive of Occidental Petroleum Corp., did a tax deal through myCFO, company records show. So did Ariba Inc. co-founder Boris Putanec and Val Vaden, co-founder of financier Benchmark Capital.

Mr. Jermoluk, the former Excite@Home chairman, was both a founding financier of myCFO and a shelter customer. For fees of about $2.4 million, he acquired ostensible losses to offset as much as $50 million of taxable income, according to company documents and a deposition by his former accountant, Kevin McAuliffe.

Mr. Jermoluk declined to be interviewed about myCFO, as did Messrs. Doerr and Chambers. Messrs. Clark and Barksdale didn’t respond to email and phone requests for interviews. A lawyer for the former directors told a tax client last October that they “categorically denied…misconduct or malfeasance of any sort.” The lawyer, David York, predicted myCFO’s main tax package ultimately “will survive a substantive tax law analysis” in court.

A spokeswoman for Mr. Sonsini said his law firm did basic legal work for myCFO that didn’t include reviewing its tax offerings. Messrs. Vaden and Putanec declined to comment, while Occidental said Dr. Irani wouldn’t comment “on what is clearly a personal matter.”

MyCFO’s main tax shelter, sold to 17 clients, was called Cards, for Custom Adjustable Rate Debt Structure. Each involved an ostensible 30-year bank loan to a foreign party for $50 million to $100 million. MyCFO’s client then assumed the loan and, after some complex swapping of collateral, claimed a loss for tax purposes of nearly the full amount of the loan. Others besides myCFO also marketed Cards.

The IRS in March 2002 ruled Cards invalid. Largely as a result, myCFO sold its name and client list and liquidated its tax business.

The IRS said Cards failed a basic test of legitimacy: It lacked any real economic purpose other than to lower taxes. The agency added that clients were never really at risk for the supposed $50 million or more in loans.

Most myCFO shelter clients are challenging the IRS’s action, in federal court in San Jose. But two broke ranks and alleged the shelters were fraudulent, in civil racketeering suits they filed against big banks that underwrote their Cards deals. They claim they were misled to believe the shelter’s loan structure was actually a viable credit facility. (See adjoining article7.)

From the start, there were internal warnings. Mr. McAuliffe, a former Ernst & Young tax partner who was one of myCFO’s first hires, said that when the firm was just gearing up in 1999, some of its accountants wanted to shun tax “elimination” deals. He warned Mr. Jermoluk and Chief Executive Art Shaw that myCFO was relying too heavily on tax shelters for revenue, Mr. McAuliffe said in a 2005 deposition for a tax client’s lawsuit in San Francisco Superior Court. But he said the founders were talking about an initial public offering, and his warnings went unheeded amid IPO “fever.” Mr. Shaw, CEO of advertising firm Netblue Inc., didn’t return calls seeking comment.

MyCFO had obtained the Cards strategy from a San Francisco investment boutique called Chenery Associates, which also provided it to others. Chenery had done a Cards deal for an aircraft-leasing company, which registered it with the IRS as a tax shelter. The IRS requires corporations to register such tax-driven deals. Its rules for when individuals must register a deal they’re using as a shelter are less strict.

MyCFO officials said their clients would never accept a transaction they had to register as a tax shelter, Chenery Associates owner Roy Hahn later testified in a deposition for San Francisco Superior Court. A lawyer for Chenery removed the obstacle. He wrote an analysis saying that Cards wasn’t a tax shelter under relevant IRS rules.

The lawyer, Graham Taylor, then at LeBoeuf, Lamb, Greene & MacRae, wore multiple hats. He also represented myCFO in refining the tax strategy, court documents show. And when myCFO signed up Cards clients, it arranged for them to hire Mr. Taylor as their lawyer. For fees of roughly $85,000 per client, he supplied many of them with letters saying that if the IRS found their deductions invalid, they shouldn’t owe penalties because they had relied on “an opinion from reputable counsel.”

That counsel, it turned out, was a co-inventor of Cards, Raymond J. Ruble, then at law firm Brown & Wood. The law firm got $250,000 each time a client used Cards. Chenery paid this out of its share of the tax client’s fee.

Chenery also agreed to pay 20% of its own fee into a Ruble family trust, according to court records and Mr. Hahn’s testimony.

MyCFO directors had several briefings about tax shelters, minutes of board meetings show. One in mid-2000 led to a marketing delay while the firm’s general counsel reviewed the matter. Three months later, the IRS, in connection with a similar shelter, warned that “an artificial loss lacking economic substance is not allowable.” Within weeks, myCFO decided to go ahead with marketing Cards.

It quickly signed up 10 clients for fees totaling $16 million. As those deals were closing in late 2000, Mr. Ruble from Brown & Wood emailed myCFO an article in which a prominent tax analyst called Cards a blatant tax dodge. Mr. Ruble said the analyst had “totally missed the boat on business purpose,” which he said lay in financing opportunities.

As the tech bubble deflated, myCFO imposed layoffs and spending cuts, but not on the tax-strategies group. MyCFO’s growing reliance on tax shelters for revenue was discussed at a board meeting in August 2001. At that meeting, the board’s compensation committee, Messrs. Doerr and Clark, approved stock options for 94 employees — giving a third of them to the firm’s top two tax strategists.

One director asked if myCFO would have an obligation to refund clients’ fees if the tax deals were unwound. “It was basically, ‘Gosh, is this kosher?’ ” says someone who was there. “Then they read the attorneys’ comfort letters and everyone shut up.”

Mr. Doerr was a booster for the firm’s tax strategists. In response to Mr. Doerr’s 2001 email lauding the tax team for its performance — which he sent on Sept. 11, 31 minutes before the first plane struck the World Trade Center — the tax team’s leader reported landing $4.5 million more in fees. Five days after 9/11, Mr. Doerr replied: “This is AWESOME news, particularly during a week marred by national tragedy…. Please keep me posted.”

But some of myCFO’s accountants and client-service people were in revolt, according to Mr. McAuliffe’s deposition. In late 2001, he and several colleagues refused to sign shelter clients’ tax returns until myCFO agreed to indemnify them for any personal liability. One client was claiming a tax loss greater than his net worth. “It was only a matter of time until the IRS came down pretty hard,” Mr. McAuliffe testified.

In January 2002, the IRS offered a broad tax-shelter amnesty: It would waive penalties for any taxpayer who owned up to using a questionable shelter.

MyCFO staffers disagreed over what to tell clients about this and whether to discourage them from taking the amnesty. Ultimately, the firm sent out what General Counsel Steve Debenham, in an email about a draft to a colleague, called “a CYA letter,” for “cover your a — .” It said the IRS appeared to be focusing on the packages offered by major accounting firms, which “may be less credibly supported by a substantive economic justification….”

Mr. McAuliffe mocked that distinction in an email to colleagues. “Same law firms, similar or same promoters, same tax effect,” he said, wondering if myCFO was “smoking our own dope again?”

He also dismissed the idea that myCFO’s clients were penalty-proof for relying on reputable counsel. “You bought your opinion. You bought your comfort-level letter,” he said later in his deposition. Mr. Debenham and Mr. McAuliffe both declined to be interviewed.

Two months later, the IRS ruled that Cards was an improper shelter. MyCFO’s board discussed the ruling by phone. MyCFO by this time was little more than a tax-shelter brokerage, according to documents prepared for the meeting. If it closed its shelter business, it would forgo $10 million in revenue in the next three months and be in the red.

Instead of closing the tax business, myCFO tried to revive it by hiring a veteran of KPMG, an accounting firm that was especially active in selling tax shelters. The employee, Randall Bickham, brought a pipeline of tax deals worth a projected $7 million in fees.

The board also explored selling the company. MyCFO documents show Deutsche Bank AG, which had worked with myCFO on several Cards deals, expressed interest in acquiring the firm for $200 million to $300 million, but backed away, citing potential tax-shelter liability. Bank of Montreal agreed to buy myCFO for $90 million but it, too, backed out over the same concern, myCFO documents show. In October 2002 Bank of Montreal finally purchased just myCFO’s name, client list and some other assets. It paid $30 million, about a third of the sums the Kleiner Perkins founders and others had put in. Bank of Montreal now has a private-banking unit called Harris myCFO Inc., which declined to comment.

Directors assigned the rest of myCFO to a liquidator. They gave Mr. Bickham, the former KPMG man, a $1.4 million contract, paid in advance, to maintain files and assist clients in “controversy issues” with the IRS.

In 2005, Mr. Bickham was among those charged by the Manhattan U.S. attorney with tax evasion and conspiracy to defraud the IRS. The charges relate to work he did while at KPMG. He has pleaded not guilty and declined to comment.

Also charged was Mr. Ruble, the Cards co-inventor. He was cited for tax-shelter work he did for others, mostly KPMG. Mr. Ruble’s law firm had fired him, after discovering the deal he had with Chenery to funnel 20% of Chenery’s fees into a Ruble family trust.

By that time, Mr. Ruble was at Sidley Austin, which had absorbed Brown & Wood. Sidley Austin and KPMG both faced civil litigation over tax shelters, which they settled last year for $179 million, including legal fees.

Mr. Taylor — the lawyer who helped myCFO refine the shelters and assisted its shelter clients — was indicted in a tax-shelter matter in Utah. Both he and Mr. Ruble have pleaded not guilty, and both declined to comment.

Federal prosecutors also investigated a German bank that helped arrange some of myCFO’s tax shelters. In a deferred-prosecution deal reached last year, the bank, Bayerische Hypo-und Vereinsbank AG, or HVB, agreed to a $30 million penalty and admitted that the Cards deal contained “fraudulent and illegal elements.”

The bank’s confession didn’t mention myCFO. But it said “all parties involved” knew the Cards credit facility wasn’t a legitimate long-term loan and would be unwound in about a year to generate “the phony tax benefits sought.” Said HVB, in a Statement of Admitted Facts: “The transactions were prearranged by the promoters… and had no purpose other than generating tax benefits for the clients involved.”

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