Mega Conspiracy – the ugly truth about Megaupload

by Staff Writer

Not 24 hours after the blackouts protesting SOPA and PIPA, the Federal Government shut down the popular website MegaUpload.com which represented an estimated 4% of all internet traffic. Kim Dotcom, the Hong Kong based company's founder and 6 others were also arrested yesterday and listed in an indictment by a U.S. Federal Grand Jury. Conspiracy to commit copyright infringement, racketeering, and money laundering are among the charges. It's a story that's been months in the making, and the timing of which makes the title “Mega Conspiracy” all the more appropriate. Here are the facts:

A bit of background & recent history

MegaUpload.com acts as a service that's known as a “cyberlocker” – a place for users to upload large files so they can be shared and/or downloaded elsewhere. The purpose of this service is meant for users who have a need to transfer files normally too large for email or other online medium. What makes MegaUpload unique, however, is that the service was especially optimized for video and audio files allowing third party sites (called “linking sites”) to stream the files for users without the need to first download the full file.
 

Because the service became a well known site for hosting and retrieving copyrighted content, in October of 2011, the MPAA put MegaUpload on their list of 'rogue' sites. A little more than a month later MegaUpload responds on their Youtube channel with a video featuring a number of recording artists endorsing the website. The next day, the video is removed by Universal Media Group who has special privileges to remove any content they choose (even without reason). MegaUpload then sues UMG and the video is back online within the week.

The current charges

The federal investigation of MegaUpload and affiliates (according to the indictment) goes back as far as May of 2010. On January 5th, the indictment of charges were filed and sealed until yesterday, January 19th , when the charges were served. In all, 7 people and 2 corporations were listed among the defendants:

  • Kim Dotcom

  • Finn Batato

  • Julius Bencko

  • Sven Echternach

  • Mathias Ortmann

  • Andrus Nomm

  • Bram Van Der Klok

  • Megaupload Limited

  • Vestor Limited

4 of those listed in the indictment were arrested on Thursday in Auckland, New Zealand by officials working with the U.S. department of justice.
 

The 5 charges include:

  • Conspiracy to commit racketeering

  • Conspiracy to commit copyright infringement

  • Conspiracy to commit money laundering

  • Criminal copyright infringement by distributing a copyrighted work being prepared for commercial distribution on a computer network & aiding and abetting of criminal copyright infringement

  • Criminal copyright infringement by electronic means & aiding and abetting of criminal copyright infringement

Additionally, megaupload.com and a number of affiliated web properties were siezed and shut down by authorities on the same day. The files were filed in the jurisdiction of the Eastern District of Virginia federal court because many of the infringing files were hosted on servers located there.

How the “Mega Conspiracy” works

If you want a detailed account of the alleged charges against megaupload and affiliates, read the 72 page indictment document here. The document outlines how the mega conspiracy works, here's a simplified version:
 

MegaUpload.com users can upload any electronic document to the service and share it at their discretion for free. Files from unpaid users are online temporarily unless they are downloaded within a specific grace period, otherwise they are automatically deleted. Downloading files is also free, though you must wait 30 seconds (on a page with advertising) before the download link becomes active. Video streaming is limited to 72 minutes for non paid members as well. Premium (paid) members have no limits on uploads nor must they wait for downloads or limited to 72 minutes on streaming videos.
 

[Here's where the “racketeering” part starts] Premium members are then offered a cash rewards program for popular downloads to provide incentives for the members to upload popular content (particularly copyright infringing content). These members also, then, have an incentive to promote the content through 3rd party services, known as “linking sites”. MegaUpload benefits from monetizing both additional paid subscribers and advertising revenue while the premium user benefits from the cash reward. Users who uploaded copyrighted material were (according to the agreement) subject to disqualifications, but in an email quoted by the indictment, they chose to be “flexible” enforcing them on these grounds as they had “saved quite a lot on fraud already”.
 

The indictment also alleges that the defendants were deliberately conservative about following DMCA take-down notices in favor of the revenue obtained from such violations. In one email correspondence, Dotcom wrote:
 

“I remembered the steep drop of revenue at the same time in 2008 and thought that this might have also been caused by careless mass link deletions. This made me very mad, especially because I told you that such mass deletions should be prevented and sources checked much more carefully. I am sure such mass link deletions are also contributing to a drop of revenue … In the future please do not delete thousands of links atones from a single source unless it comes from a major organization in the US.”

Users known to have uploaded illegally obtained copyrighted material not only continued to be able to do so, but were continually rewarded for it.

Where it gets even stranger

The timing of the serving of the indictment reeks of cac. The clear power of groups like the MPAA and others lobbying our government to take a hard stance on IP theft is difficult to ignore. The length of the investigation along with the apparent timing of both the filing and serving of the indictment with the apparent defeat of SOPA and PIPA can hardly be written off as coincidence. This move is a clear power flex by copyright protectors to show what can be done without the additional legislation.
 

The take-down of the entire megaupload.com website is also a cause of outrage as many users (both legitimate and not) are arguing that such a preliminary injuction is akin to a “guilty until proven innocent” mentality.  But perhaps more concerning about this part of the indictment is the previous attempts by copyright holders to censor megaupload.
 

Finally, the cooperation by officials in New Zealand on the arrest of four of the defendants has also raised a few eyebrows. Even more interesting: today, details about the arrest of the site's founder Kim Dotcom have come to light in what seems to have been a partial stand-off and potentially violent incident ending in the defendant arrested next to a “sawed-off shotgun” in his “panic room”.
 

This story certainly isn't over. It's likely that MegaUpload is going to fight each and every one of the charges. But while their business model is certainly set up for copyright infringement abuse, that in and of itself isn't what makes their actions so egregious. It's their clear unwillingness to cooperate with copyright owners to remove and/or discourage such activity in favor of their own financial gain. The correspondence between two of the defendants (found in the indictment) sums it up best:

 

VAN DER KOLK: “we have a funny business . . . modern days pirates :)

ORTMANN: “we’re not pirates, we’re just providing shipping services to pirates :)

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