The case against Kim Dotcom, finally revealed

Nearly two years after Kim Dotcom's New Zealand mansion was raided by police, US authorities have made their case as to why the man behind Megaupload shouldn't simply go bankrupt like previous copyright violators before have—he should go to jail, they argue.

In a 191-page "Summary of Evidence," (PDF) government lawyers marshal Skype chats, financial data, and dozens of e-mails to make their case that Megaupload was a criminal network designed from the start to distribute copyrighted material. It discusses the payments made to heavy uploaders to encourage them to drive traffic to the files of movies and TV shows they hid online.

Megaupload built a wall of plausible deniability, prosecutors claim, by disabling any internal search of files stored on Megaupload, meant as a "cyberlocker" site. But its administrators, who include the men behind Dotcom's new site Mega, traded e-mails that show the real strategy. They monitored and drove traffic to third-party linking sites through which Megaupload beamed its advertisements. They guided users about how to use the site in e-mails that clearly reference movies. Finally, and critically, they provided cash rewards to their best uploaders; in their e-mails they negotiated how to control such awards and get the most bang for their buck.

At one point, Megaupload officials discussed moving some pornographic content from Megaupload to Megarotic, which was Megaupload's racier sister site. They needed to explain the move to users, but it was complicated.

“[W]e could, however, also be shooting ourselves in the foot with this, as it proves that we looked at the file... and therefore are not the dumb pipe we claim to be," wrote Megaupload CTO Mathias Ortmann. "[C]opyright owners may use this against us."

Much of the information is likely what was gleaned from the servers that were copied, searched, and ultimately seized by US law enforcement. But prosecutors have also convinced several heavy users of Megaupload, identified so far only by initials, to testify against Dotcom and his comrades about how they used the system.

The purpose of the massive evidence dump is to get Dotcom extradited from New Zealand, where he has been wrapped up in legal proceedings for the 23 months since his mansion was raided. The US hardly got the quick handover they wanted—not only is Dotcom out of jail, he's free to do business. This year, he launched a new site simply called "Mega."

The next extradition hearing is scheduled for July 2014, and the evidence published Friday will be front-and-center in the government's case.

The government's 191-page "Summary of Evidence" also details the stunning sums that Dotcom and his colleagues made running their site. Dotcom, who owned 68 percent of Megaupload and all of sister site Megavideo, made more than $42 million in calendar year 2010. CTO Mathias Ortmann, who owned 25 percent share of Megaupload, made more than $9 million that same year; designer Julius Bencko (2.5 percent) made more than $1 million, and programmer Bram Van Der Kolk (also 2.5 percent) made more than $2 million. Chief Marketing Officer Finn Batato, who was not a shareholder, made $400,000. And no perk was too excessive: the company spent $616,000 renting Mediterranean yachts.

Megaupload lawyer Ira Rothken has said the document is being used to mislead the public.

"We think it’s 191 pages of meritless criminal allegations," Rothken told Variety. "The allegations seem to revolve around Megaupload’s discussed policies related to user infringements, takedowns, and things like reward programs. All those things are civil in nature and can never be considered criminal in the United States." At most, it's "secondary copyright infringement," he said—not a criminal matter.

Love means never having to say “delete”

It complied with the requests by disabling the specific URLs that pointed to accused files—all while keeping the actual infringing files undeleted and accessible

Megaupload was the storage side, while Megavideo was a site that allowed users to watch stored videos without downloading through an embedded Flash video player. The public fronts of both sites were scrubbed to look clean, but prosecutors allege that was all to hide the real strategy revealed in internal e-mails: getting users to find the content they want through third-party search sites then encouraging them to buy premium subscriptions by cutting off their viewing after 72 minutes of video: just enough time to not finish watching a feature film.

Megavideo also carried ads, but premium subscriptions were the main revenue source. The Mega sites together generated $25 million in ad revenue, but they're estimated to have received more than $150 million from premium subscriptions.

Like many sites, Megaupload was deluged with thousands of takedown requests from copyright holders. It complied with the requests by disabling the specific URLs that pointed to accused files—all while keeping the actual infringing files undeleted and accessible. Megaupload users could create many URLs pointing to their files, making it trivial to keep the files available. At the same time, Megaupload principals would send e-mails to copyright owners implying they had actually removed the files.

They also didn't terminate the accounts of "repeat infringers," some of whom had their content subject to tens of thousands of takedown requests.

Having set up a system that proliferated millions of links to forbidden content, Megaupload then complied with takedown requests—on a sharply limited basis. Dotcom set strict limits on how many files should be removed and scolded his subordinates if they removed too much.

In 2009, Ortmann e-mailed Dotcom about Warner Brothers' request for an increase in their "removal limit," which was set by Megaupload. "They are currently removing 2,500 files per day," wrote Ortmann. "A cursory check indicates that it's legit takedowns of content that they own appearing in public forums," meaning third-party link sites. "We should comply with their request—we can afford to be cooperative at current growth levels.

Dotcom OK'd the increase; Warner could take down 5,000 links per day but "not unlimited," he stressed.

But often, they wouldn't comply. Megaupload never deleted files, and sometimes Dotcom balked at even removing URLs. After getting an e-mail listing 6,000 links from a representative of "various copyright owners," including the big four movie studios and Sony BMG's Mexico division, Dotcom actually scolded his underlings for complying. 

"I told you many times not to delete links that are reported in batches of thousands from insignificant sources," wrote Dotcom. "I would say that those infringement reports from MEXICO of '14,000' links would fall into that category. And the fact that we lost significant revenue because of it justifies my reaction." 

“They have no idea that we're making millions”

“If copyright holders would really know how big our business is they would surely try to do something against it...”

Megaupload staff kept a clean facade, creating a "Top 100" list that consisted of movie trailers, game demos, and other legal content, but prosecutors maintain this was a sham to hide the truly popular content. Now, they've showcased some of the e-mails they captured to show there was a "wink wink, nudge nudge" attitude toward copyright violations on the site.

And some of the e-mails do look damning.

In March 2009, Dotcom asked Ortmann over Skype (in German): “Have you got a minute? Let’s talk about how we should prepare for lawsuits, should they ever happen.”

"We need to take a look at how YouTube has dealt with that so far," said Ortmann. "Promise some kind of technical filtering crap and then never implement it."

"We should already be hiring an attorney now, perhaps an in-house one, to get us prepared for anything," responded Dotcom.

Van Der Kolk was more explicit in his discussions with Ortmann. "yep :) the MU business model works very well for online video (private links)," he wrote. "Now we’re doing exactly what I foresaw in the beginning – innocent front end, private backend :)."

Two days later, he Skyped again to Ortmann: "If copyright holders would really know how big our business is they would surely try to do something against it... they have no idea that we’re making millions in profit every month." Ortmann responded, "Indeed."

The men who ran the Mega sites passed around customers' e-mails with reactions, complaints, and compliments, many of them mentioning obviously copyrighted content. For instance, in May 2009, Batato sent an e-mail to Ortmann with a customer note reading: "We watched Taken successfuly [sic] and then tried to watch the Alphabet Killer a day later and got the message to upgrade if we wanted to continue watching."

Another user in 2010 e-mailed Batato asking, "where can we see full movies?" Batato answered, “You need to go to our referrer sites. Such as www.thepiratecity.org or www.ovguide.com[.] There are the movie and series links. You cannot find them by searching on MV directly. That would cause us a lot of trouble ;-).”

In 2008, a user wrote directly to Dotcom complaining about video problems. "I’ve been trying to watch Dexter episodes, but... the sound doesn’t match up with the visual," he wrote. "I didn’t choose to use your site, you seem to dominate episodes 6 and 7 of Dexter on alluc[.org, a linking site]."

Dotcom forwarded the e-mail to Ortmann, writing: "on many forums people complain that our video / sound are not in sync... We need to solve this asap!”

In 2008, Van Der Kolk sent an e-mail to Ortmann entitled "funny chat log," showing an earlier chat in which Van Der Kolk had said: "we have a funny business... modern days pirates :)." Ortmann's response was a smiley-faced embrace of the gray area of the law he and his colleagues sought to occupy. "we’re not pirates, we’re just providing shipping services to pirates :)," he wrote.

In a 2007 Skype chat, Van Der Kolk had used the "modern pirates" in a different chat. "We're pretty evil, unfortunately," responded Ortmann. "but Google is also evil, and their claim is 'don't be evil.'"

"yes!" wrote Van Der Kolk. “the world is changing, this is the Internet, people will always share files and download their stuff for free... with or without Megaupload.”

So what's a copyright owner to do? Just join Megaupload, apparently. "the content providers should just get a producer account and sign up for rewards," quipped Ortmann.