The bureau had acquired communications in some instances without statutory authority.
Key said he was shocked by the revelation. So, too, will be the New Zealand business sector.
No matter what many think about Dotcom - and I personally do not like the buffoonish way in which he makes sport of our politicians - he does have New Zealand residency.
He was allowed into New Zealand to pursue his business endeavours.
If the authorities are so supine in their relationship with their US counterparts and so eager to corral an alleged copyright criminal - allegations which Dotcom is strongly contesting - that they don't check the basics before mounting their interception, what guarantees do other businesses have that this is a one-off affair?
Panetta would have been ideally placed to answer some tough questions. He is third-ranked in the Obama Cabinet behind Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner.
Panetta has deservedly won a huge reputation in US governmental circles for his previous service as director of the Central Intelligence Agency, where he oversaw the military operation that took out Osama bin Laden, his time as chief of staff for President Bill Clinton's White House, his period as director of the Office of Management and Budget, and as a political representative in the US House of Representatives.
As a high-ranking member of Obama's Cabinet he would inevitably have faced questions from the local press corps over what role federal agencies played in the request for the GCSB to intercept the communications of Dotcom and his co-accused Bram van der Kolk (if the disclosure had been made once Key had been informed some 10 days ago).
Panetta would inevitably have sidestepped the questions. But it would have been an embarrassment for the Government, which is basking in the deepening bilateral relationship across several fronts.
Key hasn't been totally direct.
But the Herald confirmed yesterday that court documents showed the GCSB asked the Organised and Financial Crime Agency (Ofcanz) to confirm if Dotcom and van der Kolk were foreign nationals, and Ofcanz "gave that assurance" when the pair had New Zealand residency.
Dotcom is trying to stave off a US attempt to extradite him to face potential criminal charges over copyright infringement and money-laundering to the alleged tune of US$500 million in respect of his Megaupload website, charges he strongly denies.
There is debate whether this week's revelations will scuttle the case.
What will also dismay business is the obvious implication that the Government's senior ministers have not kept one another informed in this developing case.
On balance it would appear that the case will proceed.
The fact that the Megaupload millionaire had "form" before he arrived has been lost in this bumbling fracas.
An information gap between Key and Finance Minister Bill English is a rerun of the absurd pantomime over Dotcom's application to buy the Coatesville mansion which he rents. Former Cabinet minister Simon Power declined the application just days after Crown Law started work on the FBI case. His colleague Maurice Williamson had already approved the sale but changed his mind after Power jumped in.
This political theatre obscures changes under way in our own intellectual property framework which have yet to be appropriately debated.
Labour MP Clare Curran has highlighted a change to the Patents Bill which has the local software industry up in arms.
At issue are changes made by Commerce Minister Craig Foss to a key clause in the bill.
Curran said it seemed like an ill-conceived decision that would affect the local software industry adversely.
She said that by moving away from a position which blankly said a software program could not be patented, Foss had qualified this hugely by adding a change which opened the door to multinational corporates being able to take advantage of an ambiguous clause to dominate and stifle smaller innovative software developers in court.
Curran can over-egg things.
But local software companies such as Orion Healthcare are up in arms. So too are Xero and Jade Software.
These companies are concerned that lobbying by US multinationals has resulted in the change.
Says Curran: "Somehow the language used in Craig Foss' amendment is precisely that requested by those lobbyists.
"This ... language both undermines the software exclusion to the point where software is, in fact, patentable, while at the same time it's asserted to be the best language to implement a software exclusion?
"One of those positions is false.
"We know - and the pro-software patent lobby's support for it is ample verification - that the ... wording will rapidly be used to circumvent the software patent exclusion."
These are the real sovereignty issues that affect New Zealand's developing software industry.
But the Keystone Cops antics in the Dotcom case are obscuring this.
As for Curran - she is off on a US State Department study tour.
