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Massive Hammer Falls on Megaupload

By Rachelle Dragani E-Commerce Times ECT News Network
Jan 20, 2012 10:52 AM PT

The U.S. Department of Justice on Thursday shuttered Megaupload, a popular file-sharing website, charging seven of its executives with engaging in an international criminal enterprise based on copyright infringement.

Massive Hammer Falls on Megaupload

Federal authorities called it one of the largest criminal copyright cases in U.S. history. Megaupload, its movie streaming site Megavideo, and its various sister sites were down at the time of publication.

Four of the seven execs charged are now in federal custody, including the site's founder Kim Dotcom (formerly Kim Schmitz). He and Finn Batato, Mathias Ortmann and Bram van der Kolk were arrested in New Zealand Thursday after authorities obtained about 20 search warrants around the U.S., New Zealand and seven other countries. Each of the seven accused, including the three others that remain at large, are charged with five counts of copyright infringement and conspiracy. If convicted, they could face 20 years behind bars.

They will be held at least until Monday, when there is a second hearing scheduled.

Mega Indictment

Megaupload and its corresponding sites had generated US$175 million worth of illegal proceeds, according to the DoJ, and the losses to copyright owners added up to more than $500 million. Kim Dotcom pulled in $42 million from the site in the past year, according to authorities.

The indictment, issued by a grand jury in Virginia, details some of the reasons the DoJ targeted Megaupload. It claims that the site facilitated the trading of some movies even before their theatrical releases, that the site ignored removal notices from rights holders, and that the site's executives were laundering money through a Megaupload rewards program that paid users to upload certain content.

In addition to the arrests, authorities also reportedly seized artwork, electronics, guns and millions in cash from the New Zealand home. Several luxury cars, including a Rolls-Royce Phantom Drophead Coupe and a pink 1959 Cadillac were also seized. As part of the other search warrants, servers, domain names and about $50 million in assets were seized.

The site will now be run by Kaseem Dean, also known as "Swizz Beatz," who is the CEO of the site but wasn't named in the case. His partnership with the site became more well-known last month when Megaupload released "The Mega Song," which featured heavy-hitting entertainment figures such as Kanye West, Will.i.am and Kim Kardashian voicing their support for the site despite its allegedly pirated material.

Some of Megaupload's fans appear to be retaliating. Late Thursday afternoon, websites for the DoJ, Universal Music Group, the MPAA and the RIAA were down, with the hacker community Anonymous claiming credit.

Representatives from neither the DoJ nor Megaupload responded to our requests for comment.

What's Up Next?

The arrests could be the beginning of a lengthy legal battle will likely ensue.

"The New Zealand authorities who arrested the Megaupload folks yesterday have promised cooperation with extradition to the U.S.," entertainment lawyer Gordon P. Firemark told the E-Commerce Times. "There will be lots of legal wrangling and motions to dismiss, to exclude certain items of evidence. Then, probably many months from now, the trial will be held, unless the parties agree to a plea bargain. Whether the defendants will be released on bail is anyone's guess."

For most of that time, the site will probably remain shuttered, and the legal plausibility of re-opening under a different domain name, one that's untouchable by U.S. regulations, is slim.

"At least in the U.S., it's likely that the shutdown of access to the site will continue. I can't say what will happen in other countries, but I'd guess that some of those who are signatory to the Berne Convention [international copyright treaty] will honor the U.S. takedown. It is certainly possible that the site could re-emerge under another domain controlled by another country, but the U.S. Courts could order U.S.-based DNS Service providers to block access there too," said Firemark.

Concerned over the international nature of the case, several privacy protection advocates, such as the Electronic Frontier Foundation, have condemned the arrest procedure that wound up placing German and Danish citizens residing in New Zealand in the custody of U.S. authorities.

Since the indictment was issued to protect the rights of U.S. copyright holders, however, authorities could obtain worldwide search warrants.

"We're in a world economy now," entertainment lawyer John J. Tormey III told the E-Commerce Times. "Our federal government knows how to pursue, and in some cases take possession of, off-shore assets and off-shore people. The feds may be thwarted trying to reach someone in North Korea, but my bet is that they can reach someone in New Zealand."

Another Privacy Battle

The arrests and seizures occurred in the midst of another federal copyright infringement battle: the fight over the Stop Online Piracy Act, or SOPA. The bill would strengthen the powers of authorities and rights holders to crack down on sites -- even foreign ones -- that are suspected of trafficking in copyrighted content. The bill's opponents say SOPA is too broad, however, and could hurt sites that aren't engaging in illegal activity at all.

The arrests came the day after some of the Web's most popular sites such as Wikipedia and Reddit blacked out to raise awareness of SOPA.

After the arrests on Thursday, the authorities involved said the two cases were not related.

"The timing is ironic, but the investigation has been going on for quite some time. Also, indictments don't usually happen on short notice. I suspect the FBI and U.S. Attorney's office have been planning this for months. But they may have timed the arrests and shutdown of the site to capitalize on the publicity connected to yesterday's site blackouts," said Firemark.

In zeroing in on Megaupload, the DoJ targeted a site with more than 150 million registered users and about 50 million daily hits. In addition, the site has the support of some big names in the entertainment industry, somewhat of a rarity for such an enterprise.

"The infringers just had a real long drink at the trough -- a real long swing on the pendulum. Now, we're seeing the pendulum swing back," said Tormey. "It's OK to start a new business. It's not OK to start a new business and pretend that the federal law governing the business does not exist. Pretending that the U.S. Copyright Act does not exist will probably turn out to be an extensive and expensive strategic mistake for the Napsters of our day."


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