Megaupload Execs Had Thing For Bling, Indictment Shows

Indictment in Megaupload case reveals intriguing details, including assets that could be seized by the Feds. For starters, think $8 million allegedly spent on yacht rentals, 15 Mercedes-Benzes, and a Rolls-Royce with this license plate: GOD

Mathew Schwartz

January 20, 2012

5 Min Read
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The Justice Department Thursday unsealed an indictment in Virginia charging seven executives at file-sharing site with copyright violations, racketeering, and money laundering. Four of the people charged, including 37-year-old Megaupload CEO and founder Kim Dotcom (aka Kim Tim Jim Vestor, aka Kim Schmitz), were arrested by New Zealand authorities, while the others remain at large.

The feds accused Megaupload of amassing $175 million "in criminal proceeds" since the site was founded in 2005, which they said was used for everything from leasing servers and rewarding uploaders to buying high-end cars and renting yachts. In 2010, according to the indictment, Kim alone earned $42 million, while Mathias Ortmann, a Germany citizen who served as Megaupload's CTO, earned over $9 million.

Having the FBI coordinate international anti-piracy arrests and 18 related domain-name seizures just one day after mass protests against SOPA and PIPA produced a predictable response: The hacktivist collective Anonymous retaliated by launching denial-of-service attacks against 10 websites, including those of the DOJ and FBI, as well as the Motion Picture Association of America, the Recording Industry Association of America, and even the U.S. Copyright Office.

[ Be more secure this year. Read 10 Security Trends To Watch In 2012. ]

But it's clear that the feds didn't build their case overnight. Indeed, the DOJ's indictment against what it dubs the "Mega Conspiracy" reflects an investigation that took two years to build.

If convicted of all five charges in the indictment, the defendants face up to 55 years in prison. But Owen Seitel of Idell & Sietel LLP, an entertainment and IP law firm, told VentureBeat that "indictments by their nature are overreaching," and to not expect that all of the allegations would stand up in court. Furthermore, a lawyer for Megaupload told the Guardian that the the company would "vigorously" defend itself.

If the defendants are found guilty of any of the five counts with which they're charged, federal authorities would attempt to recover all assets they'd obtained via illegal activities, or an equivalent dollar amount. As part of the indictment, authorities listed those assets, which include everything from fiberglass sculptures and a jet ski to televisions and Dell servers. Authorities also want to recover $8 million allegedly paid by Megaupload in 2011 solely for Mediterranean yacht rentals. Other interesting assets listed include numerous cars owned by Megaupload's executives, including a Lamborghini, a Maserati, as well as 15 Mercedes-Benzes bearing such license plates as "GOOD," "BAD," "EVIL," "STONED," and "GUILTY," and one Rolls-Royce Phantom bearing the license plate "GOD."

Megaupload billed itself as an online storage locker for movies, music, and other files. For example, in response to an email from a copyright holder in 2007--contained in the indictment--which warned CEO Dotcom that he legally couldn't profit from other people's copyrighted works, Dotcom sent back this message: "We are a hosting company and all we do is sell bandwidth and storage. Not content. All of the content on our site is available for 'free download.'"But authorities have accused the site of downplaying copyright violations that occurred on the site, while actively promoting those violations for their own profit, including earning at least $150 million by offering premium subscription services to its uploaders. According to one chat transcript from 2008 quoted by investigators, for example, Bram van der Kolk, a Dutch citizen who oversaw Megaupload's programming and network infrastructure, allegedly said, "We have a funny business ... modern day pirates :)." In response, CTO Ortmann said, "We're not pirates, we're just providing shipping services to pirates :)".

According to the indictment, "the site was structured to discourage the vast majority of its users from using Megaupload for long-term or personal storage by automatically deleting content that was not regularly downloaded." In addition, it said that Megaupload offered financial incentives to people who uploaded popular content, and even to "users whom they specifically knew uploaded infringing content." Uploaders could receive $100 to $300--or occasionally up to $1,500--for each month that they uploaded popular material, even while Megaupload paid little to the owners of the copyrighted works from which they profited.

Furthermore, authorities accused Megaupload of running a bait-and-switch maneuver when copyright holders requested that their material be expunged from the site. While the site offered copyright holders a tool to automatically do that, in fact the tool would typically only remove a single link to the file, while leaving other links to the same file intact. By not offering a public search function for all files that it hosted, and relying on third-party sites to list links, authorities said that Megaupload managed to obscure this practice.

Megaupload, at least at one point, considered itself the thirteenth-most-visited site on the Internet, and until its shutdown, was renting 525 servers in Virginia from Carpathia Hosting and 630 servers in the Netherlands from Leaseweb, amongst other locations and hosting providers. To support that infrastructure, authorities alleged that between 2007 and 2010, Megaupload executives used PayPal to transfer $13 million to the chief financial officer of Carpathia Hosting, and at least $9 million to Leaseweb. Numerous other payments were made via bank transfers.

Megaupload's executives appear to have recently begun pursuing a legitimacy campaign based on trashing their rivals. The indictment quoted an email from Megaupload CEO Dotcom to PayPal in October 2011, in which he said Megaupload was about to file suit against rivals over their practice of paying for pirated content. "They are damaging the image and the existence of the file hosting industry (see what's happening with the Protect IP Act)," said Kim. "Look at,,,, These sites pay everyone (no matter if the files are pirated or not) and have NO repeat infringer policy. And they are using PayPal to pay infringers." Interestingly, those are some of the exact charges that have since been leveled by authorities at Megaupload's executives.

Nominate your company for the 2012 InformationWeek 500--our 24rd annual ranking of the nation's very best business technology innovators. Deadline is April 27. Organizations with $250 million or more in revenue may apply for the 2012 InformationWeek 500 now.

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