Megaupload.com Shutdown Followed by Disruptions of Trade Group Websites

Megaupload.com, a file-sharing website, was shut down as part of an alleged $175 million copyright infringement conspiracy, triggering an online protest that disrupted websites of the U.S. Justice Department and movie and music trade groups.

Charges against seven individuals, Megaupload Ltd. and Vestor Ltd. were unsealed yesterday in federal court in Alexandria, Virginia, after four of the alleged conspirators were arrested in Auckland, New Zealand. Three suspects remain at large, according to the Justice Department.

“This action is among the largest criminal copyright cases ever brought by the United States and directly targets the misuse of a public content storage and distribution site to commit and facilitate intellectual property crime,” the department said in an e-mailed statement.

The Megaupload indictment was made public as the U.S. Congress considers anti-piracy legislation supported by the movie and music industries that has prompted a backlash from companies including Google Inc., the nonprofit Wikimedia Foundation Inc. and Web consumers. Opponents say the Stop Online Piracy Act in the House and the Protect IP Act in the Senate would promote online censorship, disrupt the Web’s architecture and harm their ability to innovate.

Search Warrants

About an hour after the indictments were unsealed, the public websites of the Justice Department, the Motion Picture Association of America and the Recording Industry Association of America wouldn’t load. The hacker-activist group known as Anonymous took credit for the disruptions, citing the Megaupload prosecutions, according to Twitter accounts used to publicize the group’s activities.

The sites were disabled by a so-called directed denial of service attack, which floods websites with so much traffic that they temporarily crash without harming network systems or giving attackers access to confidential information.

“These kinds of attacks take down a website so people can’t get there,” said E.J. Hilbert, a former cybersecurity specialist for the FBI. “That’s important if you’re a commercial site like Amazon.com. If you’ve got an information site like the Justice Department, it’s just a protest.”

‘Egging Your Car’

“It’s like someone egging your car,” added Hilbert, who is now a managing director at Kroll Inc., the security firm. “You wash it off and get back to business.”

The Justice Department is “working to ensure the website is available while we investigate the origins of this activity,” it said in a statement. The disruption is being treated as a “malicious act,” according to the statement.

The Motion Picture Association of America is “working with law enforcement authorities to identify those responsible,” according to a statement from the group.

Jonathan Lamy, a spokesman for the Recording Industry Association of America, declined to comment.

Investigators executed more than 20 search warrants in the U.S. and eight other countries and seized about $50 million in assets, the department said. Since September 2005, the conspiracy -- dubbed “Mega Conspiracy” by prosecutors -- generated more than $175 million in criminal proceeds by distributing millions of copies of copyrighted works, including movies, television programs, music, books, video games and software, according to the indictment.

Premium Subscriptions

Of that, more than $150 million came from premium subscriptions and $25 million from online advertising. A lifetime subscription cost about $260, according to the indictment.

The conspiracy deprived copyright owners of more than $500 million they were entitled to, the government said.

“This looks to be an overly aggressive prosecution,” Ira Rothken, a Novato, California, lawyer and outside litigation counsel to Megaupload, said in an interview. “The indictment appears to be wrong on the facts and wrong on the law,” he said.

He said Megaupload’s website was shut with no notice from the government and no opportunity to challenge it in court. Megaupload Ltd., registered in Hong Kong, is the website’s owner of record, according to the indictment. The locales of its computer servers with the allegedly illegal content included Ashburn, Virginia, and Washington, according to the indictment.

Hong Kong Enforcement

“People decide to do business in Hong Kong because it’s not heavily regulated -- it is easy to set up a company in Hong Kong,” said Benjamin Bai, a partner of intellectual property law at Allen & Overy in Shanghai. “Enforcement is quite strong” for intellectual property law in Hong Kong, he said.

“Hong Kong police have not received any report or request for assistance at the moment but will look into the incident,” Hong Kong police said in a faxed statement.

Megaupload is advertised as having more than 1 billion visits to the site, more than 150 million registered users, 50 million daily visitors, and accounts for 4 percent of Internet traffic, prosecutors said.

Megaupload paid millions of dollars in incentives to subscribers to the site, who were rewarded for uploading content that others could then use, according to the indictment.

A survey released in December of 1,600 corporate customers of Palo Alto Networks Inc., a computer security company, found 57 percent of the companies had workers who spent some time trading film clips and games on Megaupload.

The indictment contains one count of racketeering, one count of conspiring to commit copyright infringement, one count of conspiring to commit money laundering and two counts of criminal copyright infringement.

The racketeering and money laundering charges carry maximum penalties of 20 years in prison while the copyright infringement charges have maximum five-year penalties.

Conspiracy Leader

Prosecutors said the conspiracy was led by Kim Dotcom, a 37-year-old resident of Hong Kong and New Zealand, and a dual citizen of Finland and Germany, who had legally changed his last name. Dotcom founded Megaupload Ltd. and is the director and sole shareholder of Vestor Ltd., according to the indictment.

In 2010, Dotcom received more than $42 million from the conspiracy, the indictment alleges. Dotcom, who also goes by Kim Schmitz and Kim Tim Jim Vestor, was one of those arrested.

When police arrived at Dotcom’s Auckland home, he entered his house and activated electronic locks, Detective Inspector Grant Wormald said in a statement today. Police neutralized the locks and then had to cut their way into a safe room, where Dotcom was found with what looked like a sawed-off shotgun, Wormald said.

“It was definitely not as simple as knocking at the front door,” Wormald said.

Pink Cadillac

New Zealand police said they carried out 10 search warrants and seized 18 luxury vehicles, including a Rolls Royce Phantom Drophead Coupe and a 1959 pink Cadillac. The vehicles are valued at NZ$6 million. Police said as much as NZ$11 million in cash was restrained in various accounts.

In 2002, Dotcom, then using the name Schmitz, was deported from Thailand to Germany to face insider trading and fraud charges. He was a hacker who cracked the computer systems of banks and government organizations including those of Citibank Ltd. and the U.S. Pentagon, then fled to Thailand to avoid indictment in Germany, Deutsche Presse Agentur reported.

The other three taken into custody were: Finn Batato, a German resident and chief marketing officer, Mathias Ortmann, co-founder and director, and Bram van der Kolk, who oversees programming of the Megaupload websites.

Julius Bencko, a resident of Slovakia and graphic designer, Sven Echternach, a resident of Germany and head of business development, and Andrus Nomm, a citizen of Estonia and head of software development, were also charged.

The case is U.S. v. Dotcom, 12-00003, U.S. District Court, Eastern District of Virginia (Alexandria).

To contact the reporter on this story: Tom Schoenberg in Washington at tschoenberg@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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