In what likely could become the largest-ever federal investigation into software piracy, authorities in Kansas City quietly have moved over the last year to seize more than $18.3 million in cash and real estate from those who allegedly profited.
Since January 2014, authorities have frozen the assets — including silver ingots, jewelry, luxury automobiles and collectible coins — of a network of online software vendors with hubs in Kansas City, Nevada, Colorado, Maryland and Washington state, court records show.
Those vendors sold counterfeit and unauthorized computer software and stolen activation key codes that they had obtained in Singapore, China and Europe, authorities alleged in civil court filings.
The criminal investigation, which still is underway, easily could become the largest software piracy case ever pursued by U.S. authorities.
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Prosecutors estimated the alleged participants in Missouri, Nevada and Washington reaped about $30 million in profits, selling tens of thousands of stolen software activation codes and counterfeit and stolen software products, court filings show.
Figures in court paperwork suggest that customers paid, conservatively, about $90 million for the pirated software, far less than the software would have cost had it been purchased on the legitimate market.
It could exceed a 2013 case in which a man pleaded guilty in Delaware to operating a website that distributed more than about $100 million worth of pirated software around the world.
No one yet has been charged criminally in the far-flung Kansas City investigation, although prosecutors have told a federal judge that charges are possible.
Some of the probe’s targets, including some Kansas City-area residents, are identified in civil court records, but The Kansas City Star is withholding their names because they have not been charged.
Seizing property before criminal charges are filed is a regular feature of large fraud investigations, experts said. Doing so ensures that assets are available for restitution later.
Federal law does not require criminal convictions, or even charges, for courts to take the property. Prosecutors must only prove to a judge that the assets were derived from a “specified unlawful activity,” in this case fraud and trafficking in counterfeit products, court records said.
Such investigations can be long and painstaking, said Keith Kupferschmid, senior vice president for intellectual property of the Software and Information Industry Association.
“In a criminal case, it’s not unusual to proceed in that fashion,” Kupferschmid said. “You make sure all the evidence is collected.”
Software company officials cooperate with such probes, Kupferschmid said. Microsoft officials are working closely with Kansas City investigators, reviewing software gathered by Homeland Security Investigations agents and identifying counterfeits, according to court records.
Lawyers representing the government and potential defendants in the cases declined to comment, citing the ongoing investigation.
But in court filings, Kansas City defense lawyer J. Justin Johnston criticized the prosecutors’ allegations as too broad and unspecific, saying he could not discern how “the government knows or plans to prove that all products bought and sold from 2009 to the present were, in fact, counterfeit products.”
Counterfeit and stolen products can expose users to hacking when fraudsters add malware to the programs, a Microsoft executive said in a written statement commenting on the investigation.
“The real victims in these types of cases are consumers who may unknowingly download software they think is legitimate, but instead end up exposing themselves to spyware, malware and viruses that can steal their data, their identity and in some cases render their computers completely inoperable,” said David Finn, executive director of the Microsoft Cybercrime Center.
About 18 percent of the software used on U.S. business computers is unlicensed, and the use of such products has cost manufacturers more than $60 billion worldwide and can stifle innovation, according to the Business Software Alliance’s Global Software Survey released in June.
Criminal penalties for software piracy can be severe, prosecutors noted. In 2013, a federal judge in Delaware sentenced a woman to almost five years in prison for selling about 24,044 copies of unlicensed software through her websites.
The current investigation began in April 2013 when Kansas City Homeland Security Investigations agents received a tip that a Northland man was selling unauthorized and counterfeit Microsoft products.
Agents watching his house soon recovered counterfeit key codes nearby, although records don’t say where. The codes authorized access to Microsoft Office products, court records said.
That vendor’s website, which is no longer in service, had earned an F rating from the Kansas City Better Business Bureau after consumer complaints.
Bank records showed that the vendor had reaped more than $2.6 million from the sale of those key codes over a five-month period in 2013, court records said. The vendor obtained the codes through contacts in China, prosecutors alleged in court records.
Prosecutors filed a civil suit in January 2014 to take his home and three other properties he owned in Gladstone and Raytown. Neither the vendor nor his wife contested the forfeiture, which became final with a judge’s order four months later.
With the Kansas City property under federal control, prosecutors moved in July to begin seizing Nevada real estate, automobiles and about $269,000 in cash controlled by a Las Vegas man who also operated a website selling software. The man, prosecutors alleged, had purchased unauthorized Microsoft key codes from the Kansas City vendor in 2013 and also had sold counterfeit software, including Adobe products, online since 2009.
Over that period, the Las Vegas website operator purportedly grossed more than $4 million by selling suspected counterfeit software. He and his wife were natives of India who had overstayed their visas and had not been authorized to work in the United States since 2006, prosecutors alleged.
Court records showed that Adobe’s lawyers previously had sent a cease-and-desist letter to the Las Vegas man, ordering him to stop selling the counterfeit products. A search in 2011 uncovered that 95 of 97 copies of Adobe software products in his home were counterfeit, court records said.
Unlike the Kansas City vendor, the Las Vegas man and his wife contested the seizure of their property. Those forfeitures remain in dispute.
Kansas City investigators and prosecutors took their biggest step thus far in the case Dec. 8 when they moved to seize $2.3 million in bank and investment accounts and 21 pieces of real estate, worth at least $8.6 million, in and around Seattle.
The action targeted three firms that allegedly did business with the Las Vegas and Kansas City vendors. Although one of the firm’s websites now says it is closed for “maintenance,” agents in November noted that the company offered Microsoft products at discounts of up to 60 percent off.
Together the firms grossed more than $22 million from software sales over a 16-month period ending in April 2014, prosecutors alleged.
The owners of the Seattle companies poured money from the sales of counterfeit software into a network of 13 other companies that purchased real estate. The properties ranged from luxury condominiums selling for well over $1 million to a rustic fixer-upper in Tacoma, Wash., they bought for $65,000.
Like the vendors in Kansas City and Las Vegas, the Seattle companies used suppliers in China and Singapore for some of their counterfeit software, prosecutors alleged. Customs inspectors also intercepted unauthorized Microsoft products in shipments to the company from Germany, court records alleged.
Late this week, prosecutors filed records showing their latest seizure haul, which came from search warrants served in Damascus, Md., Seattle and Denver in December.
In that blitz, investigators froze bank and investment accounts totaling $7.4 million, silver bars worth at least $50,000, Bitcoin and other virtual currency worth about $26,000, plus 3,545 U.S. and Canadian coins and silver pieces, four Rolex watches and two white gold diamond rings.
On the transportation side, investigators seized a ski boat and four luxury cars: a 2013 Acura, a 2010 Lexus, a 2013 Tesla and a 2014 Porsche 911.
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