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Dotcom to Unveil Megaupload Successor Amid U.S. Claims

Kim Dotcom, whose Megaupload.com website accounted for 4 percent of world Internet traffic before being shut down last year on U.S. copyright infringement charges, plans to unveil a new, encrypted file-sharing site in New Zealand in a snub to U.S. authorities.

Dotcom has scheduled a news conference on Jan. 20 at his NZ$30 million ($25 million) rented home in an Auckland suburb, promising to introduce a way to securely store and transfer confidential information.

“It is a little bit provocative,” Charles Alexander, a partner at Minter Ellison in Sydney, specializing in intellectual property law, said in a phone interview. “The U.S. may redouble their efforts to extradite him.”

The U.S. Department of Justice is seeking Dotcom’s extradition from New Zealand to face racketeering, money laundering and copyright-infringement charges. Prosecutors say his Megaupload site generated more than $175 million in criminal proceeds from the exchange of pirated films, music, book and software files. Dotcom, who has denied any wrongdoing, faces as long as 20 years in prison if convicted.

Peter Carr, spokesman for U.S. Attorney Neil H. MacBride, referred Bloomberg News to a statement Dotcom made in February to a New Zealand court, when he pledged not to resurrect the Megaupload site. Carr declined to comment further.

Secure Files

The German-born Dotcom, 38, who changed his name legally from Kim Schmitz, has suggested in postings on his personal website that his encryption will ensure the security of files in cloud storage and prevent governments from seeing any content.

A screenshot of the new Mega site shows an encryption generator, known as a 2048-bit RSA public/private key, that creates a unique alpha-numeric code used to unlock a file or a message. According to DigiCert Inc., the Lindon, Utah-based provider of Internet Security Certificates, cracking a 2048-bit RSA SSL code using a standard desktop computer would take 500,000 times longer than the age of the universe, which is about 13 billion years old.

The new site promises to allow users to encrypt and decrypt data in their Internet browser during uploads and downloads.

“I had a cool dream,” Dotcom wrote on Twitter Jan. 1. “All nations that are being spied on by the US govt started using #Mega & I won the Nobel Encryption Prize.”

Helicopter Raid

The U.S. government sought court approval in June 2010 to search Megaupload’s servers at Carpathia Hosting Inc. in Virginia, citing the existence of 39 infringing copies of copyrighted motion pictures. In January 2011, the U.S. courts issued warrants for Dotcom’s arrest and the seizure of the websites.

New Zealand police, cooperating with U.S. authorities, raided Dotcom’s rented mansion that month, using two helicopters and 27 officers, some armed with assault rifles and gas canisters.

Officers seized 18 luxury vehicles at his home, including a 1959 pink Cadillac, while Megaupload sites were shut down worldwide and his banks accounts were frozen in Hong Kong. Dotcom spent four weeks in jail before winning his release on bail.

Dotcom had filed a statement with the court before his release, pledging not to revive the file-sharing website.

“I can assure the court that I have no intention and there is no risk of my reactivating the Megaupload.com website or establishing a similar Internet-based business during the period until the resolution of the extradition proceedings,” Dotcom said in a Feb. 15 affidavit.

Lawful Business

Neither Dotcom’s bail conditions nor U.S. law precludes him from engaging in a lawful business, according to his lawyer Ira Rothken. The court was informed of the new website and no legal objections were raised, Rothken said.

The new site may antagonize U.S. prosecutors, Alexander said, although it won’t likely affect the extradition hearing.

“That’ll be for a New Zealand court to decide,” Alexander said. “This isn’t a matter for U.S. courts.”

Megaupload.com advertised that it had more than 1 billion visits to the site, more than 150 million registered users and 50 million daily visitors. U.S. prosecutors, in court filings, said the site accounted for 4 percent of Internet traffic.

“Megaupload’s and the rest of the defendants’ earnings were from businesses providing lawful cloud storage services and not from criminal copyright infringement,” Dotcom said in a posting on his website.

Hearing Postponed

The extradition hearing in Auckland was postponed last month from March to August. New Zealand High Court Justice Helen Winkelmann ruled on June 28 that warrants police used to search Dotcom’s home, ahead of his arrest, were overly broad and invalid. In December, Winkelmann granted Dotcom permission to sue New Zealand’s spy agency for intercepting his communications.

Megaupload is challenging the validity of the warrants that were used to search the Virginia servers, saying files were left there because the U.S. government told the company not to do anything to alert anyone of its investigation into the copyright infringement. U.S. District Judge Liam O’Grady hasn’t ruled on that challenge.

The file-sharing company’s challenge is “based on unfounded assertions regarding imagined violations of its rights,” MacBride, the prosecutor, wrote in a court filing last week. “Megaupload does not cite a single communication between the government and Megaupload or a single instruction from any member of the government to Megaupload; there are none.”

Criminal Behavior

The defendants also personally uploaded infringing content and ignored takedown notices, MacBride said.

The U.S. filing shows the government’s attempt to link Dotcom and Megaupload with criminal behavior, Adrian Lawrence, a partner at Baker & McKenzie in Sydney who advises on intellectual property and information technology, said in a phone interview.

“The closer you are connected with that content, the more likely it is that you will be held responsible,” he said.

The U.S. Supreme Court in 2005, in Metro-Goldwyn-Mayer Studios Inc. v. Grokster Ltd., held unanimously that file- sharing networks can be held liable for copyright infringement if they take “affirmative steps” to encourage breaking the rules.

Dotcom has to determine if what he’s doing is legal in the country he’s operating from, Lawrence said.

International Borders

New Zealand’s copyright law indemnifies Internet service providers from liability if users infringe copyrights. Merely because a person uses the Internet and infringes a copyright the service provider “must not be taken to have authorized” the infringement, according to the law.

“The U.S. imposes its laws further than its boundaries,” Lawrence said.

MacBride has said international borders won’t stop him from pursuing lawbreakers.

“I’m convinced that most e-mails in the world at some point transit through servers that sit somewhere in the Eastern District of Virginia,” MacBride said. “That gives us venue.”

The New Zealand case is Between Kim Dotcom and Attorney General. CIV2012-404-001928. High Court of New Zealand (Auckland). The U.S. case is: USA v. Dotcom. 12-cr-00003. U.S. District Court for the Eastern District of Virginia (Alexandria).

To contact the reporter on this story: Joe Schneider in Sydney at jschneider5@bloomberg.net

To contact the editor responsible for this story: Douglas Wong at dwong19@bloomberg.net

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