Megaupload Shut Down, Operators Charged

Jan 19, 2012 1:45 PM PST

WASHINGTON — Cyberlocker site Megaupload.com has been shut down and its operators have been charged in the U.S. with running an international organized criminal enterprise allegedly responsible for "massive worldwide online piracy" of numerous types of copyrighted works, including porn.

The U.S. Justice Department and FBI announced the indictments today after a multi-agency, multi-country investigation. The agencies said Megaupload.com and other related sites generated more than $175 million in criminal proceeds and caused more than $500 million in harm to copyright owners.

"This action is among the largest criminal copyright cases ever brought by the U.S. and directly targets the misuse of a public content storage and distribution site to commit and facilitate intellectual property crime," the agencies said in a joint statement.

The individuals and two corporations — Megaupload Ltd. and Vestor Ltd. —were indicted by a grand jury in Virginia on Jan. 5, the agencies said.

Charges include in engaging in a racketeering conspiracy, conspiring to commit copyright infringement, conspiring to commit money laundering and two substantive counts of criminal copyright infringement.

The individuals each face a maximum penalty of 20 years in prison on the charge of conspiracy to commit racketeering, five years in prison on the charge of conspiracy to commit copyright infringement, 20 years in prison on the charge of conspiracy to commit money laundering and five years in prison on each of the substantive charges of criminal copyright infringement.

The indictment alleges that the criminal enterprise is led by Kim Dotcom, aka Kim Schmitz, and Kim Tim Jim Vestor, 37, a resident of both Hong Kong and New Zealand.

Dotcom founded Megaupload Ltd. and is the director and sole shareholder of Vestor Ltd., which has been used to hold his ownership interests in the Mega-affiliated sites, including Megarotic.com, Megaporn.com, Megavideo.com and Megaclick.com, the agencies said.

In addition, the following alleged employees of the alleged conspiracy were charged in the indictment, including Finn Batato, 38, a citizen and resident of Germany, who is the chief marketing officer; Julius Bencko, 35, a citizen and resident of Slovakia, who is the graphic designer; Sven Echternach, 39, a citizen and resident of Germany, who is the head of business development; and Mathias Ortmann, 40, a citizen of Germany and resident of both Germany and Hong Kong, who is the chief technical officer, co-founder and director.

Also charged were Andrus Nomm, 32, a citizen of Estonia and resident of both Turkey and Estonia, who is a software programmer and head of the development software division; and Bram van der Kolk, aka Bramos, 29, a Dutch citizen and resident of both the Netherlands and New Zealand, who oversees programming and the underlying network structure for the Mega conspiracy websites.

Dotcom, Batato, Ortmann and van der Kolk were arrested today in Auckland, New Zealand, by New Zealand authorities, who executed provisional arrest warrants requested by the U.S. Bencko, Echternach and Nomm remain at large.

Today, law enforcement also executed more than 20 search warrants in the U.S. and eight countries, seized approximately $50 million in assets, and targeted sites where Megaupload has servers in Ashburn, Va., Washington, the Netherlands and Canada.

In addition, the U.S. District Court at Alexandria, Va., ordered the seizure of 18 domain names associated with the alleged conspiracy.

According to the indictment, for more than five years the conspiracy has operated websites that unlawfully reproduce and distribute infringing copies of copyrighted works, including movies — often before their theatrical release — music, television programs, electronic books, and business and entertainment software on a massive scale.

The conspirators’ content hosting site, Megaupload.com, is advertised as having more than one billion visits to the site, more than 150 million registered users, 50 million daily visitors, and accounting for four percent of the total traffic on the Internet, the agencies said.

The indictment states that the conspirators conducted their illegal operation using a business model expressly designed to promote uploading of the most popular copyrighted works for many millions of users to download.

The indictment alleges that 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.

The charged further allegedly offered a rewards program that would provide users with financial incentives to upload popular content and drive web traffic to the site, often through user-generated websites known as linking sites. They also allegedly paid users whom they specifically knew uploaded infringing content and publicized their links to users throughout the world.

The indictment charges the defendants with conspiring to launder money by paying users through the sites’ uploader reward program and paying companies to host the infringing content.

Megaupload currently is engaged in a lawsuit with Universal over the promotional video and Universal’s efforts to have it removed from YouTube.

In November, adult company Perfect 10 and Megaupload reached a settlement agreement in Megaload's $5 million copyright infringement suit.  Details of the settlement weren’t disclosed at the time.

Adult industry attorney Marc Randazza called the indictment "pretty damning."

"If the government can prove these claims, which seem pretty difficult to refute, these guys are going to have an uphill defense," Randazza told XBIZ. "I think a lot of content producers are going to be toasting this indictment tonight."  

In reaction to the government's charges, Pink Visual's Q Boyer told XBIZ that Megaupload's business model has "always been a dangerous game to play."

"[T]hey do things that could be construed as providing an incentive to commit piracy on the part of Megaupload's users," Boyer noted.

"This indictment underscores the importance of developing your business on a legally-sound model; if you don't, no matter how popular your sites and services become, your empire can come crashing down in a heartbeat,"  he said.

PornGuardian's Dominic Ford called today's announcement of the indictment a positive move for the adult entertainment industry, saying that file-sharing sites are the biggest facilitators of piracy.

"Our hope is their days are numbered," Ford told XBIZ. "The indictment of MegaUpload is not only good for the industry, it is a clear warning to similar sites that this behavior will no longer be tolerated.

"At PornGuardian, we have recorded literally millions of infractions against MegaUpload and similar sites on behalf of our clients. In fact, while Megaupload is in the top five worst-offending sites, it is not the most egregious in terms of the adult industry. We are actively gathering evidence on these worst offenders that will be used in similar legal battles against them.

"It is very important to realize that pirates rely on these sites' affiliate model to make money via piracy. A prolific pirate can earn up to $200,000 per year based solely on money coming from this filesharing sites. And they have no production costs because all the content is stolen. It is crucial that this practice of rewarding downloaders for popular files stops."

Megaupload attorney Ira Rothken did not immediately respond to XBIZ requests for comment by post time.

UPDATE (4:27 P.M.)

The websites of the Justice Department and Universal Music Group, which had been involved in litigation with Megaupload, were allegedly taken down by hacker group Anonymous. The sites reportedly were attacked in response to the actions against Megaupload.

UPDATE (8:17 P.M.)

Gizmodo reported that, according to network data assembled by security vendor Palo Alto Networks, Megaupload usage accounted for 25 percent of the corporate network traffic it monitored. The security company monitored the gateways of 1,636 businesses worldwide and recorded traffic numbers over a week's span. "The key point is that this is real network traffic, it's not a survey. It's not speculation on anyone's part," said Matt Keil, Palo Alto senior research analyst. The company did not break down how much of the material in file sharing involved adult content.

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