Kim Dotcom allegedly made millions of dollars from copyright infringement and gave cash rewards to those users of his website who were the most prolific offenders, a court has heard.
His extradition hearing began this morning after nine previous hearings were abandoned amidst three and a half years of legal wrangling.
The FBI laid charges in January 2012 when the internet entrepreneur and three others - Mathias Ortmann, Bram van der Kolk and Finn Batato - were indicted on 13 charges including copyright infringement, racketeering, money laundering and fraud.
In Auckland District Court this morning Christine Gordon, QC, on behalf of the US government said the case was essentially straightforward.
"In the long prelude to this hearing much has been said about the novelty and technicality of the case," she said.
"When distractions are stripped away it boils down to a simple scheme of fraud."
The US case is that Megaupload was set up to operate like a large hard drive connected to the internet.
Users would upload content, the vast majority of which breached copyright laws, Ms Gordon said.
At its peak the site was attracting 50 million unique daily visitors, accounting for 4 per cent of all internet traffic.
They made US$25 million from advertisers but Ms Gordon said their main source of revenue was small fees paid by the huge numbers of users, which totalled more than US$150 million.
The Crown said some of those proceeds were used to reward people who were responsible for directing the most traffic to the site, while publically they tried to convince copyright holders they were doing all they could to remove the offending material.
"We have the incredible spectacle of processing take-down notices while at the same time paying many of those same repeat offenders," Ms Gordon said.
The deliberate misleading proved they know what they were doing was wrong, she told the court.
She pointed to communications between the men as underscoring the point they knew of the illegality of their actions and "sometimes they enjoyed the fact they were making money by breaking the law".
"At some point a judge will be convinced about how evil we are. Then we're in trouble. We have to make ourselves invulnerable," Dotcom allegedly wrote.
He also showed concern about the conversations being intercepted.
"Don't log our chats. Too much shit in there," it is alleged he wrote.
In further messages Ortmann told van der Kolk he was surprised the venture had lasted more than a couple of months without authorities shutting them down.
"If copyright holders would really know how big our business is they'd surely try to do something against it. They have no idea we are making millions in profit every month," van der kolk told him.
For the quartet to be surrendered to the US, Judge Nevin Dawson must be sure the alleged offending was covered by the extradition treaty between the two countries.
He must also believe there is a prima facie case - enough evidence for an answerable case - against the defendants.
Ms Gordon emphasised the Crown did not have to prove the offending beyond reasonable doubt.
The hearing is set down for four weeks.
Who they are (according to the Crown)
• Kim Dotcom
Title: Chief executive officer and latterly chief innovation officer at Megaupload Ltd.
Roles: He allegedly supervised development of the company's websites and had a responsibility to make all major decisions. He negotiated contracts with internet service providers, servers and advertisers and all strategy and policy decisions went through him.
• Mathias Ortmann
Title: Chief technical officer
Roles: He oversaw the company's use of software programmes and funds from the alleged "rewards scheme" were distributed by him. He has known Dotcom since 1989 and is a 25-per-cent shareholder in Megaupload Ltd.
• Bram van der Kolk
Title: Programmer in charge of Megaupload.
Roles: He oversaw the software programmes and administered the alleged "rewards scheme" with the websites most valuable users. He has known Dotcom since 2004 and is a 2.5-per-cent shareholder in Megaupload Ltd.
• Finn Batato
Title: Chief marketing and sales officer.
Roles: He sold advertising space and supervised the company's international sales team. He has known Dotcom since 1992.
How Megaupload worked:
The website was like "a hard drive connected to the internet", according to the Crown, containing millions of illegal videos. It is alleged that Megaupload's "front page" was purely window dressing to make it seem like a legitimate website. Christine Gordon, QC, said the top 100 most popular videos list on the home page was contrived to only contain legal material. A real top 100, she said, would reveal the extent of their offending and their knowledge of it "and that would never do".Megaupload users who directed the most web traffic to the site were allegedly plied with "rewards" of cash and website privileges. Ms Gordon said this was done in the face of hundreds of thousands of "take-down notices" issued by the copyright holders. Users would upload hugely-popular, copyright-infringing content which could be found via internet search engines. Some content on the site was available for free but users had to pay membership fees for full access.