The stair­wells are con­dom­free rooms will soon be re­named after in­spi­ra­tional en­trepreneur­s. Kegs have been re­placed with cold­brew cof­fee.

Acks knew there was a prob­lem

Bloomberg Businessweek (North America) - - Focus On/ Energy -

Sas soon as he walked into the Jes­sika Pava room, named after an X-wing pi­lot who fought against the First Or­der in the bat­tle of Starkiller Base. Five lawyers, in­clud­ing a few he’d never met, sat grimly in or­ange swivel chairs. It was late af­ter­noon on Jan. 25, and they’d come to Zen­e­fits to present the re­sults of a three­month in­ves­ti­ga­tion the com­pany had ini­ti­ated. Sacks knew it doesn’t take five lawyers to de­liver good news.

Zen­e­fits had hired Coo­ley, a law firm, along with con­sult­ing firm PWC, after Buz­zfeed pub­lished a se­ries of ar­ti­cles about Zen­e­fits’ use of un­li­censed bro­kers. Wash­ing­ton state’s in­surance com­mis­sioner had al­ready opened a for­mal in­ves­ti­ga­tion into the com­pany; ac­cord­ing to Buz­zfeed, 83 per­cent of all Zen­e­fits sales in the state were made by un­li­censed bro­kers. The com­pany could be fined as much as $20,000 for each vi­o­la­tion. If this were true in other states, Zen­e­fits was look­ing at mil­lions of dol­lars in fines.

The lawyers laid out a more damn­ing sit­u­a­tion. In Cal­i­for­nia, they found, some of the sales team used Con­rad’s macro to sys­tem­at­i­cally cheat on the state’s train­ing course, which in­cluded a sec­tion on ethics. “As far as a com­pany do­ing what Zen­e­fits has done, I don’t know that we have seen this be­fore,” says Nancy Kin­caid, press sec­re­tary for the Cal­i­for­nia De­part­ment of In­surance, which has also opened an in­ves­ti­ga­tion. In March, Mas­sachusetts’ divi­sion of in­surance opened a third. Zen­e­fits con­firms that other states have since fol­lowed but won’t say which ones or even how many.

Sacks says he knew of the macro but didn’t know its sig­nif­i­cance or about Con­rad’s in­volve­ment un­til the lawyers ex­plained it to him in Jan­uary. Coo­ley con­firms Sacks’s ac­count in a memo ob­tained by Bloomberg Busi­nessweek. The memo also says that dur­ing its in­ves­ti­ga­tion, “Mr. Con­rad ac­knowl­edged that he had au­thored the macro.” Mean­while, a per­son close to Con­rad claims he had told one of Zen­e­fits’ lawyers about the macro more than a year ear­lier. Some of the Zen­e­fits em­ploy­ees who weren’t prop­erly li­censed worked as ben­e­fits ad­vis­ers, not sales­peo­ple. They re­ported up the chain to Sacks. Sacks says he wasn’t aware of their li­cens­ing prob­lems un­til ev­ery­thing else came to light.

On Feb. 1, Zen­e­fits held an emer­gency board meet­ing. The li­cens­ing prob­lems and the macro were dis­cussed. Dal­gaard sug­gested to Con­rad that, as the per­son who cre­ated the pro­gram, he needed to leave. Con­rad re­signed from Zen­e­fits on Feb. 8; since then he’s spent part of his time at home binge-watch­ing Star Wars: The Clone Wars, ac­cord­ing to a friend. A per­son close to Con­rad says he re­grets re­sign­ing and is al­ready work­ing on a new com­pany.

Sacks be­came CEO and is guid­ing Zen­e­fits through its cri­sis cleanup. He has banned al­co­hol at the of­fice and changed the com­pany motto from “Ready. Fire. Aim.” to “Op­er­ate With In­tegrity.” In Fe­bru­ary the com­pany laid off 250 em­ploy­ees, in­clud­ing the en­ter­prise team. Sales Vice Pres­i­dent Blond, Se­maan’s boss, and any ex­ec­u­tive or man­ager known to have helped dis­sem­i­nate the macro are also gone. Zen­e­fits says it has self-re­ported the find­ings of its in­ter­nal in­ves­ti­ga­tion to all 50 states and is work­ing with those that have opened for­mal in­quiries. Fidelity In­vest­ments, which owns a stake, has slashed its valu­a­tion of Zen­e­fits from $4.5 bil­lion to less than $2 bil­lion. There are rows of empty desks at the San Fran­cisco of­fice; the com­pany plans to down­size from four floors to three. The Star Wars- themed con­fer­ence rooms will soon be re­named after in­spi­ra­tional en­trepreneur­s. Kegs have been re­placed with cold-brew cof­fee. The stair­wells are con­dom-free. And yet, de­spite his down­fall, Con­rad is still a cov­eted name in Sil­i­con Val­ley. Peo­ple want to meet the man who cre­ated a $60 mil­lion com­pany in just three years and made good on his promise to shake up the in­surance in­dus­try. Dal­gaard says he’s been get­ting e-mails from peo­ple ea­ger to work with Con­rad since the day his res­ig­na­tion went pub­lic. Zen­e­fits might also sur­vive for the one rea­son that made its prod­uct so ap­peal­ing to busi­ness own­ers in the first place: Shop­ping for health in­surance re­mains re­ally frus­trat­ing. The com­pany says it now has 20,000 ac­counts. “As long as their prob­lems don’t af­fect our com­pany, we’ll stay,” says Todd Har­mond, vice pres­i­dent for fi­nance and op­er­a­tions of the e-book ser­vice Scribd, which uses Zen­e­fits to of­fer Kaiser Per­ma­nente and An­them health in­surance plans to its 85 em­ploy­ees.

“Un­less some­thing else goes re­ally wrong with Zen­e­fits, we’ll stick with them for a while,” says Blog­mutt’s Yates. “It’s too much of a has­sle to switch.” <BW>

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