U.S. accuses website of copyright infringement

WASHINGTON (Reuters) - A major Internet content hosting website, Megaupload.com, its founders and several employees have been charged by U.S. authorities for a massive copyright infringement scheme, the latest skirmish in a battle against piracy of movies and music.

The indictment and arrests of four company executives comes as debate in Washington reaches a fever pitch over online piracy as lawmakers try to craft legislation cracking down on it while trying to avoid censoring the Internet.

The group, dubbed by prosecutors as "Mega Conspiracy," was accused of engaging in a scheme that took more than $500 million away from copyright holders and generated over $175 million in proceeds from subscriptions and advertising, according to the indictment unsealed on Thursday.

"In exchange for payment, the Mega Conspiracy provides fast reproduction and distribution of infringing copies of copyrighted works from its servers located around the world," the indictment said.

U.S. Justice Department officials said that the estimate of $500 million in economic harm to copyright holders was on the low end and likely significantly more.

A federal court in Virginia ordered that 18 domain names associated with the group be seized. Further, some 20 search warrants were executed in the United States and eight other countries and about $50 million in assets and targeted sites were also seized.

The founders of the company - Kim Dotcom, who is also known as Kim Schmitz and Kim Tim Jim Vestor, and Mathias Ortmann - were charged. The company's chief marketing and sales officer, Finn Batato, head of development Sven Echternach and other company officials were also charged.

Dotcom, Batato, Ortmann and another individual charged were arrested in Auckland, New Zealand, by local authorities on Thursday and will face extradition hearings, the U.S. Justice Department said. Echternach and two others charged remain at large.

The allegations included copyright infringement as well as conspiracy to commit copyright infringement, conspiracy to commit money laundering and conspiracy to commit racketeering.

If convicted, the maximum penalties are 20 years for conspiracy to commit racketeering and to commit money laundering and five years for each count of copyright infringement and five years for conspiracy to commit copyright infringement.

The companies charged, Megaupload Ltd and Vestor Ltd, were both registered in Hong Kong and owned either in large part or solely by Dotcom. A lawyer who has previously worked with Megaupload was not immediately available for comment.

The charges emerge as the U.S. Congress is struggling over legislation sought by the movie and music industries to crack down on Internet piracy and theft of content. Major Internet sites like Google (GOOG.O) and Facebook complained that such legislation as it was drafted would lead to censorship.

A Justice Department official said the timing of the arrests and unsealing of the case were not related to the battle in Congress. Hours after announcing the indictment and arrests, the Justice Department's website was inaccessible.

Megaupload has boasted of having more than 150 million registered users and 50 million daily visitors, according to the indictment. At one point, it was estimated to be the 13th most frequently visited website on the Internet.

Users could upload material to the company's sites which then would create a link that could be distributed. The sites, which included video, music and pornography, did not provide search capabilities but rather relied on others to publish the links, the indictment said.

Users could purchase memberships to the site to obtain faster upload and download services, the primary source of revenue. Material that was not regularly downloaded was deleted and financial incentives were offered for popular content, according to the charges.

The web page with the link to the copyrighted material would include advertisements, another source of revenue.

If copyright holders complained about a specific link to the website, prosecutors said that Megaupload.com would remove that link but scores of others existed to the same material, according to prosecutors.

Other material found uploaded included child pornography and terrorism propaganda videos, according to the indictment. The U.S. government's investigation began in March 2010.

(Reporting by Jeremy Pelofsky; Editing by Gary Hill, Phil Berlowitz)