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2/20/12

Kim Dotcom, Pirate King - BusinessWeek

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Features February 15, 2012, 11:45 PM EST

Kim Dotcom, Pirate King
Is Megaupload's founder a criminal mastermind, or the world's most entertaining scapegoat? A file-sharing wizard's ridiculous rise and fall
By Bryan Gruley, David Fickling and Cornelius Rahn After renting an $18 million estate in the emerald hills of Coatesville, New Zealand, Kim Dotcom emailed his neighbors. The mastermind of Megaupload, one of the world's most popular file-sharing sites, introduced himself as a convicted computer hacker and insider trader and listed some of the perks of having a "criminal" down the block. "Our newly opened local money laundering facility can help you with your tax fraud optimization," Dotcom wrote in the Apr. 21,2010, e-mail. "Our network of international insiders can provide you with valuable stock tips." Also, Dotcom wrote, his acquaintance with "far worse" crooks "can help you whenever you have to deal with a nasty Neighbor." Then he added "in all seriousness" that he and his family loved New Zealand and had "come in peace." He invited the neighbors to stop by for coffee, adding, "Don't forget to bring the cocai ne (ioke )." At around the same time, the U.S. Justice Dept., acting on a complaint by the Motion Picture Association of America, had begun an investigation of whether Megaupload had profited from the illegal distribution of copyrighted films, songs, and other digital material. U.S. authorities worked on the case for close to two years with counterparts in New Zealand, Australia, Germany, Hong Kong, Canada, Britain, the Netherlands, and the Philippines. Four weeks ago, two helicopters landed on Dotcom's vast lawn, near the garden labyrinth and giraffe sculptures. Local police scrambled out bearing Bushmaster M4 rifles, Glock pistols, sledgehammers, and saws. While three FBI agents advised from a nearby police station, the cops arrested Dotcom-aka Kim Schmitz, Kimble, and Kim Tim Jim Vestor-after breaking into a panic room where he'd sealed himself. They found him sitting cross-legged near a safe from which they confiscated a loaded pistol-grip shotgun. Police also seized three passports under different names, 25 credit cards, a bulletproof wristwatch, and an actual-size statue of the creature from the Predator movies. Tow trucks hauled away a pink 1959 Cadillac and other vehicles worth a combined $5 million. Some of the license plates read GUlLTV, HACKER, MAFIA, and GOD. No cocaine was found.
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(According to Ira Rothken. and data files too big for e-mail. said the bonuses encouraged the funneling of pirated content costing copyright holders more than $500 million. Dotcom stood in an Auckland courtroom. The hacking underground launched attacks on U. Cary Sherman. photo. a pear-shaped man the size of a refrigerator. Dotcom's attorney in the U. He told the judge he didn't mind people taking photos "because we've got nothing to hide. and reduces the incentive for artists to create.html 2/8 . which contend that infringement takes money out of their pockets. Megaupload's Web-hosting partners have agreed not to permanently delete files through February.S. Dotcom and his lawyers describe the company as a cloud-storage site. already battling the RIAA and MPAA over copyright legislation in Washington.BusinessWeek Later that day. reacted with outrage.2/20/12 Kim Dotcom. His New Zealand lawyer said he was innocent and that Megaupload was no different than YouTube.S. video. Internet libertarians. where the cousin could then download it for viewing. Premium customers could also earn cash and rewards tied to how much material they supplied and how often it was downloaded. mugging for the gallery. Or a Sao Paulo drummer could record a track and upload it for a bandmate in Montreal." Dotcom turned 38 in jail and awaits possible extradition to the U. unlimited access. government websites. the site was gone along with his video. "premium" users could get faster.businessweek. but when he tried downloading later. Megaupload says it had 150 million registered users and averaged 50 million daily visitors. A bride in Chicago wanting to share a high-definition wedding video with a cousin in Bangkok could put it up on Megaupload.) www. costs jobs. Lawyer Michael Weinberg of the consumer advocacy group Public Knowledge says he uploaded a video of a congressional hearing to Megaupload. says the Megaupload prosecution sends a "powerful message" to infringers: Steal and risk jail time. the Justice Dept. chairman and chief executive officer of the Recording IndustryAssociation of America.S. Sites such as Megaupload are the bane of Hollywood and the music industry. and money laundering for running a business that allegedly grossed $175 million over seven years from stolen digital content. The online privacy group Pirate Parties International began recruiting Megaupload users for a possible class action against the FBI. Megaupload was ranked among the 100 most popular websites in the world by Alexa Internet. Pirate King . For a fee. Critics of the shutdown say it unfairly punishes people who made legitimate use of the site. Dotcom.." used to store music. racketeering. a Web-traffic analysis service. Megaupload offered these services free of charge. or "cyberlocker. facing 20 or more years in prison on charges of copyright infringement. towered over a glass enclosure in a black zip-up vest. In a 72-page indictment. Until authorities shut it down in January. conspiracy.com/printer/magazine/kim-dotcom-pirate-king-02152012.

good-natured person. these things are all cleared with attorneys." he told the Telegraph. $175 million. In a 2001 interview with London's Telegraph newspaper. than the animated film Rango grossed worldwide in 2011. for about two years." Schmitz attended the Heinrich-Harms vocational school in Pion." says Kevin Suh. chubby cheeks.com/printer/magazine/kim-dotcom-pirate-king-02152012. "Many of my friends said they never heard of this site before. Schmitz was claiming he'd hacked into computers at the Pentagon and Citibank (C). "He was an intelligent student." When he got caught. Rothken declined to make Dotcom available for an interview but calls his client "a really smart version of John Candy-an articulate.html . a company of just 30 employees. If he did. he said he was the third of three children ofa cruise ship captain and a cook. Unfortunately it may not be legally sanctioned either. "he was friendly and polite. a friend of Dotcom who manages the bar at a Munich disco. I think it's cool. not at all. But this is at the tip of the piracy pyramid-one of. I know that. and he could sell himself and talk himself out of trouble extremely welL" When he was 18 he appeared as "Kimble"-a The Fugitive-in name he borrowed from the protagonist of the film a Forbes magazine article about hackers. He said he had his first PC by the age of nine and later sold copies of computer games to friends. "There's nothing illegal about what I do. says he often asked Dotcom about the legality of Megaupload." Keiwan Mir Heidari. infringers in the world. In 1998 he was convicted of fraud and www. and odd fashion sense-he often wore black suits and white-on-black wingtip shoes-he looked like he should be setting up a magic table." Dotcom was born Kim Schmitz in 1974 and grew up in Kiel.businessweek. "I have a huge ego. Germany. But German authorities did nab him 3/8 profiting from a run-of-the-mill stolen-phone-card scam. I have a lot of fun. nobody owned up to catching him-or even noticing that anything was amiss. Killig says. Sure. You know I'm not stupid. Mir Heidari recalls him saying." Dotcom didn't look like a criminal genius. had appeared in disguise on German television. Forbes said he led a global hacker group called Dope. the MPAA's chief of Internet content protection. leaving without a high school diploma. Megaupload. had less revenue in seven years. and had hacked into hundreds of company phone systems. a port city in northern Germany. says Gabriele Killig. since it's a gray zone. he got along with other students because he was a jokester. He wasn't very interested in companionship. "You really wouldn't have any reason to hear of Megaupload. "Do I worry about it? No. but he didn't really do anything for the community and rather incited mischief. he just didn't apply that intelligence in the right places.BusinessWeek The years-long tension between online freedom and the rights of intellectual property holders has pitted MP3-swapping geeks against the record industry. Within a few years. and Google (GOOG) against Rupert Murdoch.2/20/12 Kim Dotcom. Pirate King . a former principal of the school. if not the largest. With his ginger hair. none of them named.

2/20/12 Kim Dotcom. A Lufthansa spokesman said the company has no record of any business relationship with Schmitz.html 4/8 . as his companies-DataProtect KimVestor-were and privately held. Gates urinates in his pants while "Kimble Special Agent" blasts bullet holes in a wall.BusinessWeek received a suspended two-year jail sentence.com. the year he won the Gumball3000 international road rally. sports cars. He declared publicly that he was ready to plow in more. A photo released recently by Hong Kong's Customs and Excise Dept. Less than two years later. Schmitz then went relatively dark. Mir Heidari says Schmitz "doesn't really care about money" and "manages like few others to mesmerize others with his ideas. who went on that Monaco trip.4 million in today's exchange rates). touching off litigation between TOV and Schmitz. Schmitz has claimed over the years that his business interests were worth as much as €200 million ($262. including with the German airline Lufthansa (LHA:GR). His legend spread as he began appearing as Kimble in online photos and videos years before many people had realized their viral potential. The deal didn't go well. the consulting business filed for insolvency. spelling "LlNUX. the stock surged-and Schmitz sold his stake at a profit. shows Megaupload's office there with a glass wall entrance emblazoned with big blue and black letters spelling "MEGA. In 2000 he sold an 80 percent stake in DataProtect's consulting business to German engineering services provider TOV Rheinland. Schmitz invested several hundred thousand dollars in LetsBuylt. describes Schmitz as someone who loves to have fun with friends." Then came a pair of videos of Schmitz and pals on a junket to Monaco involving a party on a yacht and an impromptu chat in a disco with Richard Branson." In 2001.com/printer/magazine/kim-dotcom-pirate-king-02152012. Pirate King . Mir Heidari. receiving another suspended sentence. Speeding through the countryside in a black Mercedes. private jets. he's said that helped him land jobs as a computer security consultant. and helicopters were frequent props-with little clarity as to whether Schmitz actually owned them-along with Gitta Saxx. Shotguns. Sometime in the 2000s he legally changed his name to Kim Dotcom and shifted his operations to Hong Kong. where he confronts a petrified Bill Gates." Comparing him to the late Steve Jobs. a dark-haired Playboy centerfold. a struggling e-tail site. Schmitz sings along to the R&B hit Rescue Me and laughs in a high-pitched cackle. Records there list him as a director of 10 companies.businessweek. saying he is "sometimes like a little boy who's stuck in the body of an adult. In interviews." www. It's not clear how much money he was earning back then. An online cartoon showed a gun-toting James Bond-like character driving a "megacar" and "megaboat" to Microsoft (MSFT) headquarters. In 2002 he was convicted of insider trading. including Megaupload.

000 for uploaders who generated the most downloads. created an intellectual property task force to ramp up enforcement. they'd find one of those third-party sites.000 downloads within three months. If someone did a Google search for Taken.S. says Megaupload's true competitive advantage was making "a robust cloud-storage infrastructure available to the masses for free or low cost. say. Megaupload made a splash in September 2005 with the announcement of its "Uploader Rewards" program. the U. It wasn't that obvious. Dotcom himself made more than $42 million in 2010.com/printer/magazine/kim-dotcom-pirate-king-02152012. according to court documents. One uploader made $55. The U.000. After movie and music companies complained.html linking site used 5/8 . There the user could access a Megaupload download page where the movie was ready. Megaupload assigned the file an Internet address. His attorney. which gave enormous productivity to consumers and small businesses. The site was one of several file-sharing services started in the early 2000s. Pirate King . "You deliver popular content and successful files.BusinessWeek Megaupload went live in 2005.net-a www. more than 15 million files were deleted-some taken down by copyright owners. offering money and cash prizes to people who uploaded content to the site. To earn rewards. People wishing to download material wouldn't find it at the Megaupload site. When a customer uploaded.000." In New Zealand court filings. Rothken. Dotcom says Megaupload explicitly prohibited uploading of stolen content and provided a tool for copyright holders to remove such material." Megaupload said at the time.2/20/12 Kim Dotcom. some by Megaupload itself. including Pirate Bayand TorrentSpy.org. users had to put up files-and the material had to be popular enough to generate at least 50. Downloaders could grab stuff for free but were encouraged to buy premium memberships for faster service. "This makes Megaupload the first and only site on the Internet paying you for hosting your files." he says. We provide a power hosting and downloading service. On June 24 of that year the government informed Megaupload that investigators armed with a search warrant had found 39 copies of allegedly purloined movies on servers the company leased in Virginia. The company discontinued the uploader rewards program last year. later increasing it to $10. the feds shut down NinjaVideo. the movie Taken. the company collected more than $150 million in paid subscriptions and more than $25 million from ads placed on the main Megaupload site and download pages. In early 201 0. Six days later. The company then encouraged the uploader to distribute that URL to friends and post it to third-party linking sites such as thepiratecity. and "not in the position to be the arbiters of whether other people are using it for good or bad reasons. government says the system was "expressly designed" to encourage copyright infringement. Let's team up!" These premium users first had to pay Megaupload a subscription fee ranging from a few dollars a day to $260 for lifetime membership. From 2005 to 2012. the indictment says. Megaupload initially offered cash bonuses of up to $5." Megaupload was "copyright agnostic. according to the indictment.businessweek. Justice Dept.S.

and a worldwide backlash was gathering steam. but he's certai nly no fool. "He said.2/20/12 Kim Dotcom. upload to me today." Dotcom wanted to buy the mansion outright. says Dotcom invited him to lunch at the mansion and later lent him $1 million. To speed the process. but my intentions are good. In an interview with website TorrentFreak. and I would like to see New Zealand flourish. All he will say of life inside is that "it's still pretty normal.' " Blackmore recalls. He describes Dotcom as "very engaging and witty" and suggests his public image has been skewed by his looks. telling TorrentFreak that the music and movie businesses "want to censor the Internet and bring innovation to a standstill by having their rip-off monopoly protected by www. Instead he rented the mansion and moved in with his pregnant wife and three children. "M-E-G-A. "He was a relatively shy sort of person.BusinessWeek by Megaupload-and eight other sites for allegedly distributing pirated movies and television shows." says David Henderson. Those who approach the main gate are greeted by a guard clad in black who politely turns visitors away. a service that would let artists sell songs direct to consumers and keep 90 percent of earnings. Megaupload. On July 8. four-minute paean to Megaupload performed by Sean "Diddy" Combs. another developer who shares Dotcom's love of fast cars. but nonresidents need government permission.am. a real estate developer who lent Dotcom his apartment atop an Auckland hotel for a party to watch a holiday fireworks display last year. "I might be one of the most flamboyant characters New Zealand has ever seen. Pirate King . claiming he had releases from the artists." In December. partly because officials decided he didn't meet the country's "good character" test. Jamie Foxx. send me a file . He was denied permission to buy.html 6/8 . New Zealanders who've met Dotcom say he's different from the character cavorting on YouTube. a catchy.businessweek. Dotcom e-mailed two Megaupload associates about the government crackdown. wiILi. Dotcom said Universal was reacting to Megaupload's plan to introduce MegaBox. "This is a serious threat to our business. had the video taken down.. The video reappeared. David Blackmore." he wrote. and security cameras perched high on poles scan entrances. the Stop Online Piracy Act was winding through Congress. "He might be obese. Dotcom sued. according to court documents. and Dotcom himself.) At the time." he told the NewZealand Herald last June. which represents some of the participating artists. Dotcom chimed in. "Please look into this and see how we can protect ourselfs [sic]. Universal Music Group (VIV:FP). Alicia Keys. Dotcom posted a YouTube video of the Mega Song. A stone wall runs along the perimeter of the property..com/printer/magazine/kim-dotcom-pirate-king-02152012. 'Do you want some money? I've got some. (Universal did not respond to requests for comment." The Dotcom mansion sprawls across a bluff in a semi-rural area north of Auckland. he applied for a special visa for people making large investments in the country and bought $8 million in government bonds." went the chorus.

That issue has arisen in previous cases involving online copyright violations." The legislation died on Capitol Hill the third week of January.html 7/8 . In a July 9.'s ability to prove that he and his co-defendants willfully sought to profit from pilfered digital goods. exchange between two employees. trial of Dotcom could take months." In addition.S. a U. But the arrests are already having an impact.net to 14 months in prison for conspiracy and criminal copyright infringement. a federal court in Virginia sentenced a co-founder of NinjaVideo. cites internal company e-mails that suggest Dotcom and his deputies knew they were doing something illegal. notably MGM Studios Inc.S. says Christopher Sprigman. "Using helicopters and knocking down doors." Rothken says. That was a civil case. "The core of all the government's claims is based upon a concocted theory. It was early morning on Jan. Pirate King .. arresting Dotcom and three other Megaupload employees (two of whom had appeared in the Monaco videos). where the U. the Megaupload defendants are likely to argue that they did what they could in their "agnostic" way to deter infringers. two others remain at large. Should he be extradited. a law professor at the University of Virginia. They're working to harm innovation and consumers and www. even years. Grokster Ltd. by coincidence. Attorney Julie Samuels of the Electronic Frontier Foundation. though. v. says content producers want to "stem the growth of new business models instead of using their time and energy to compete. The indictment. Less clear is what that proves: Has the case discouraged infringement or innovation? Media companies have hardly led the charge to develop convenient ways for the tech-savvy masses to watch movies and listen to music whenever and wherever they want. The laws say nothing about "secondary infringement": someone inducing another party to abuse a copyright.2/20/12 Kim Dotcom. And no one doubts Dotcom can afford good attorneys.BusinessWeek Washi ngton. The next day. 20 in New Zealand when more than 70 local officers raided 10 properties. Dotcom attorney Rothken and other experts have stressed that criminal copyright laws don't recognize secondary infringement. one joked: "We have a funny business . which uses the phrase "Mega Conspiracy" 154 times. Another suspect was arrested in the Netherlands.. we're just providing shipping services to pirates :). Other file-sharing sites such as Uploadbox and FileSonic have shut down or altered the way they operate. Supreme Court concluded the filesharing site was liable for secondary infringement. this appears to be more politically driven than substantively driven.2008. modern days [sic] pirates :).com/printer/magazine/kim-dotcom-pirate-king-02152012." Copyright laws are explicit about primary infringement: Knowingly copying and distributing protected property is illegal. Does a similar fate await Dotcom? The answer probably lies in the Justice Dept.businessweek. Officials in Hong Kong froze accounts with around $40 million in assets. . a nonprofit that advocates for digital rights." The other replied: "We're not pirates.

BusinessWeek artists who are trying to fi nd new ways to connect with those fans." Dotcom. the Herald questioned the aggressiveness of his arrest. he'd be safe from extradition to the U. Rahn is a reporter for Bloomberg News in Frankfurt. He'll always get back up. He's simply too clever.html BIB . and a year later you'd hear that he's taken the president suite on the top floor of a Dubai luxury hotel and is making deals. 29 editorial. saying he was "entitled to our protection against unreasonable harassment by foreign jurisdictions. His friend Mir Heidari says: "You could offload Kim naked in the Sahara desert. www. a columnist has asked readers to suggest who should play Dotcom in the inevitable made-for-lV movie.2/20/12 Kim Dotcom. Fickling is a reporter for Bloomberg News in Sydney. partly because if he fled to Germany. Mona. is expecting twins in the spring.S. whose wife. 22. has gotten some sympathy in New Zealand.com/printer/magazine/kim-dotcom-pirate-king-02152012. Pirate King . He has been denied bail." Dotcom is in a New Zealand prison awaiting a hearing scheduled for Feb. Candidates mentioned include Jonah Hill and Jack Black. With Bruce Einhorn and Karin Matussek Gruley is a reporter-at-Iarge for Bloomberg News in Chicago.businessweek." Meantime. In a Jan.