U.S. Urges Federal Judge Not to Unfreeze Megaupload’s Assets while It Fights to Extradite the Site’s Founder

The U.S. is advising a federal district court judge to reject Megaupload’s attempts to get its assets unfrozen while the site’s founder, Kim Dotcom, fights extradition from New Zealand. Megaupload’s argument is that having its assets frozen is causing it irreparable harm. The U.S. countered by arguing that even if it were to regain control of its assets Megaupload would not be able to resume its business operations. The freezing of Megaupload’s assets raises due process concerns and may lead to the firm going out of business regardless of whether they are found guilty of the charges alleged by the U.S.

Megaupload.com was a 50-petabyte online file storage website. It was a free online storage solution in the “cloud” for files that were too large for email. Megaupload generated about $25 million a year in revenue from ads and $150 million from its paid premium service. At its peak, 50 million people visited Megaupload each day. Megaupload handled about 4 percent of global Internet traffic. The company maintains that it was a legitimate data storage business used by millions of individuals including employees of NASA and the FBI. However, the Department of Justice (“DOJ”) maintains that the legitimate storage business was a front. The real money was made providing a virtual fence for $500 million in pirated material.

The DOJ further maintains that Kim Dotcom, Megaupload’s founder, ran the criminal swap meet with impunity from the safety of his $24 million New Zealand mansion, protected by guards, guns, and CCTV. New Zealand Special Forces carried out Operation Takedown, which was overseen by the FBI via video link. Operation Takedown was a dramatic raiding of the Dotcom Mansion via helicopter. Dotcom was captured by the New Zealand Special Forces in a panic room hidden behind a secret door located in one of the many closets of Dotcom’s mansion. If all goes according to federal prosecutors’ plan Dotcom and his six executives would be extradited to the U.S. to face a Virginia judge and the possibility of 55 years in prison.

Megaupload argues that by freezing its assets the government is subjecting it to ongoing irreparable harm similar to a criminal conviction following full criminal process. The company further argues that because it has not been convicted of anything the freezing of its assets violates its right to due process of law. The U.S. has countered this argument by saying that Megaupload and Dotcom have contradicted each other because Dotcom has stated on several occasions that he has no intention of re-launching Megaupload. Even if Megaupload regained control of its assets the site would have many issues trying to operate with a possible prosecution hanging in the air and would require years to regain the market position it enjoyed prior to the arrest of Dotcom and the freezing of the company’s assets.

The U.S.’s seizure of Megaupload’s assets raises fundamental due process issues. Without access to its servers Megaupload cannot maintain a steady cash flow. Companies cannot survive without a constant cash flow. Megaupload will likely not be able to recover from the criminal proceedings even if the company and its executives are acquitted of all criminal charges. Although it is likely possible at this point, regaining its previous market share would take many years for Megaupload as many customers have likely migrated to other file-sharing services and are likely wary of going back to a service that they see as vulnerable to prosecution. This is concerning because it raises the question of what is stopping the government from shutting down other businesses through freezing their assets rather than actually bringing a valid claim against them. The result appears to be the same whether the government can prove its claim or not.

For more information: http://arstechnica.com/tech-policy/2012/10/us-slow-legal-proceedings-are-megauploads-fault-dont-unfreeze-assets/